Episode 29: Kevin DeSanto On Due Diligence and M&A Transactions and Trust Based Networking

Informing your decisions with intelligence analysis and insight brought to you by the team@ooda loop.com.

Hello, I'm Bob Gourley, the Chief Technology officer of OODA LLC. On today's Oodacast, Kevin DeSanto of Kipps DeSanto. Hello Kevin. Welcome to the Oodacast.

Hey Bob, thanks for having me.

Yeah Kevin, I really appreciate this and what I'd like to do is give people a little bit of your background from my perspective and why we think you're such an important thought leader to have on the oodacast. And Kevin, Kevin DeSanto, founder of Kipps DeSanto and your business, as I came to understand it, is providing advice and execution help when it comes to mergers and acquisition and financial transactions in this space around the D.C. government activities, especially around government contracting, aerospace and defense and technology companies. And that's what you had done before Kipps DeSanto. You mastered that at Kipps DeSanto and continue to do that. Did I get that about right?

You got that about right. That's pretty good for a techie.

Good.

And I would love to talk about some of the lessons learned through all of that. And I did want to say that in everything I've ever done, you have been one of these guys that's just not just great at trust, but you're an interesting person who can talk about just about anything and that's always been appreciated. And you've also been open to people like me and others coming to you for advice on any aspect of business and that's most appreciated.

Well, I appreciate the opportunity to talk to you today and hopefully I'm not one of those folks that is a mile wide and an inch deep in being interesting and being in that moment. And I like what you said earlier about the trust based networking.

I think that is really something that.

Resonates with me and is something that I really, really believe and buy in. And I think that there's an element of what my job is every day that really facilitates that. I sit in a position today where I'm trying to figure out how to get our clients to this penultimate goal of raising money to build and grow their business or in merging or in acquiring other companies or being acquired. And when you're doing that, these are complex transactions that take many, many, many months to put together and oftentimes come together over years of relationships and industry perspective and strategic considerations. And they involve hundreds of people at the end of the day, whether it's the employees of the business or the advisors and the deal teams that go through it. Or folks like you and Matt that are working hard on the diligence side of things. There's just an incredible ecosystem that we have to work within and we need everybody to be rowing in the same direction in order to get them across the finish line. And it usually culminates with a pretty significant wire that has a lot of money changing hands. So you can just imagine all of.

The emotion and all of the psychology and all of the analysis and technical.

Aspects of what it is. And so I really like that idea.

Of trust based networking that you characterize because I think that's a pretty important.

Part of us being in a position.

To quarterback these big transactions through the.

Many, many iterations and many, many ups.

And downs that they go through. And is something that I try to.

Try to do as great a job as I can. And you can't make everybody happy in every situation. And it's certainly not our job to be appeasing everybody.

But when you can build relationships, you can have difficult conversations or you can.

Help people make really good decisions or.

Informed decisions, at the end of the.

Day, we tend to be in a.

Position where we see things to be very successful.

And so I really like that idea and the way you characterize that.

And it's definitely that I embrace.

Well, thanks. And I think what you just said there kind of answers my next question. But I want to ask it in a different way. I wanted to ask you what Kipps de Santo is and what your vision is when you founded it and what you guys do. And I recognize you just gave me the deep insight of your spirit there. But formally, what is Kipps de Santo and what would I come to Kipps de Santo for?

In its simplest form, our firm is an investment bank. And in its more detailed form, we are a financial advisor to companies that are going through meaningful corporate transactions that involve outside debt or equity partners or strategic buyers or acquisition candidates. And so when folks talk about mergers and acquisitions or M and A or investment banking, that typically is the role that we're in and playing in. And it is an advisory business. So we function as the financial advisor to one of the parties that is.

Typically involved in those types of transactions.

It could be the buy side where we're helping somebody buy a business or get debt financing or equity financing to.

Be in a position of growth.

Or it could be in the sell side where we're helping a client achieve liquidity or divest a portion of their business, or to be in a transaction where an outside partner is coming in to gain some level of control in that business. The typical transactions for us are in the $25 million to $500 million enterprise value range. So think about that as kind of in our sort of normal day to day lives that would be the value of your home. And so we think about enterprise value.

As the ultimate value of a business in these transactions.

And that sub $500 million range is typically characterized as the lower middle market. It tends to be the most active part of the market when it comes to the volume of transactions that occur each year. There are clearly more $100 million businesses that are out there than there are billion dollar or $10 billion businesses. And there are larger investment banks, some.

Of the Wall street banks that focus on those larger cap transactions. We tend to be in that lower.

Middle market where a lot of the activity is. And our focus is really in four critical areas or areas that we think are very critical. Aerospace, defense, government and technology. Those are the industries that we've spent our entire careers working in and building some of those trust based relationships that we talked about earlier and have built a transaction track record where we've done hundreds of deals within that space or.

Within those sectors and have a lot.

Of buyer relationships, investor relationships, industry knowledge, or know how to that helps us de risk the complicated transaction on behalf of our client, helps them avoid mistakes or get valuations right or deal structures right, or helps them think through what the strategy might be and what some.

Of the right moves might be in terms of companies that they want to acquire or partners that they would want.

To be in, or who the ultimate.

Buyer might be for the business and.

How to build value in a business. So we've taken the path of trying to be what I would characterize as narrowly focused in those four sectors and in that lower middle market. And that's proven to be a great tool for us. Sometimes I wish we were able to go a little bit more broad or you could take advantage of some opportunities.

That come across the transom. But the discipline and the focus has been something that has really helped us.

Time and time again. And it's been interesting this year to kind of experience it because we, when we started 2020, we were going like gangbusters and the deal volume and our business was at record levels. And as the pandemic really snuck into our world in February and then obviously hit us hard just as a country and an economy in March, it was interesting to watch the sectors that we focus on really stay stable, stay in a position of relative strength to the broader economy. And we Always have to caveat in this aerospace, because that's been one of the industry sectors that's been most impacted by the shutdowns in our economy and.

The challenges that we face here as a country.

But within defense, within government, within technology, our ability to stay focused has led to continued activity, despite what we're seeing.

In other parts of the market or other sectors of the economy.

And so, you know, some of those days when you're missing out on something, you're sort of, you know, you just. You feel like you'd rather get there. But when we're in a situation like this, it makes you really appreciate the.

Discipline that we've had. And our ability to stay focused, really continue to grow our business during this time has been something that I wouldn't.

Have predicted, and I would attribute solely to the focus and that narrowness of what we've done over the years.

Another thing that has been clear to me watching you over the years is the service you deliver is something that people really need. Because a CEO will spend years building up a capability to deliver services to others or deliver a product to others and grow their business. And now all of a sudden, the CEO is expected to be an expert in finance and mergers and acquisition, and they can't be. They need a trusted partner who really knows the ins and outs of this. And I just wanted to say that as a way of segueing to the.

Next question, which is, all right, if.

You are a CEO, when's the right time for that CEO to reach out to someone like you to start building a relationship?

There really isn't a situation where I would characterize it as too early. I think that. And I can put myself in these shoes, having been in a leadership capacity within our firm and one of the co founders of the business. Every single business decision that we make, everything that we do, should be geared towards building value. Whether it's for your customers or your employees or your management team or shareholders, it really is about building value. And that's what we think about every day. And so when I think about it, I would say it's never too early.

To start those conversations.

You could have an idea, and you can gain value from building a relationship.

With investment bankers that understand those sectors, because they can help you understand where.

You might invest your time or your energy or your brain power or the money that you have to be able.

To allocate to that.

And ultimately, the investment banker's role is typically very finite in that there's a transaction where you raise capital or there's an M and a transaction that occurs and ours is a success fee business. So we're good investing a lot of.

Time and energy into situations over time.

That will lead to that success fee opportunity. And it's a little bit like gambling. The risk that you're willing to take.

Is what determines what the reward is.

So for us, we love having those conversations early help shaping people's view of.

How they're going to build their business.

Where they might target the growth or the opportunities or how they allocate their capital. And again, it can start from the idea. These are sometimes conversations with people that have companies that have 10 people in them and others, it's six weeks before they're ready to make a decision. So it definitely happens all across the spectrum. But I would argue that there really isn't a time that's too early or.

A company that's too small to be in the ecosystem and gaining value.

And you and I both have seen this over the years.

Right.

One of the things that we've partnered on in the past was the Mission Link forum. And you would see companies in there that were $150 million a year in revenue and others that folks had started six weeks before we met them. And each of them can gain value from these conversations.

And.

And so I'm a firm believer that.

Building those relationships early is incredibly valuable.

And gives people a chance to have another voice at the table. And as an executive, as somebody that's trying to make big decisions, I've always found that if you look outside for.

Input, that your ability to make decisions is much greater. Right.

If I had to rely on only my knowledge and my instincts and my experience, I'd be half the investment banker I am today or half the company executive that I am today, because I just don't have the capacity for all of it.

I can't live all those lives and go through all those decisions and learn.

From mistakes the way that others can. And so I value sharing those experiences.

And getting them from others as well.

So I would just argue that it's never too soon.

Great.

Great.

And I want to ask another question from. I would love to talk about due diligence because we hear that word a lot in M and A and I participate in a lot of due diligence. And from a CEO's perspective, what's the definition of due diligence?

I put it into three distinct buckets. One is strategic. When you have the ability to make a significant corporate decision, you really want to handle and package and work through the strategic due diligence in a very organized and professional way. This could involve outside consultants coming into the business to help you think about what the 5, 10, 15 year types of opportunities are. It could be having or bringing folks in like you and Matt to help think about technology trends or where things are being driven to with respect to the intellectual property or just how the market is shifting in its use of technology. And then ultimately that gets packaged together.

With what the company or what the.

Management team's strategy is for that year, for that next five years. And really pulling all of that together.

To make sure that there's a coherent.

Strategy that is going to drive any.

Corporate decision that it might, that might.

Involve somebody like us or a financing source or an acquisition that might be considered, or a decision to sell a company or to be acquired by a larger strategic buyer. The second bucket to me is financial due diligence. And this is, I think, what most people think about sort of the most common and maybe the most voluminous part of any situation that we work in is the financial due diligence where you're ticking and tying every number. You are trying to figure out whether or not there are any issues in the company, you're understanding how they bill their clients and what the cost structure is of the business. And you know what that future holds, financial projections, budgets, et cetera.

Right.

Where's the pipeline? How realistic or how meaningful is it? It tends to be that everybody's honing in on and focusing on that financial piece of it. And that can involve accountants, it can involve outside consultants that understand the markets, it can involve investment bankers that are.

Helping you dig through all this kind of things because of their experience.

It's a pretty comprehensive part of it.

And tends to be what most people think in terms of diligence.

And then the third bucket is what I think about as really more of the technical side of things. And as we look at where the diligence is occurring today on the technical side, it is really trying to understand how well positioned the company is to operate in today's environment.

What's their cybersecurity posture?

What systems are they leveraging? How much can they continue to push.

Into those systems to optimize or grow the business?

Where are the investments that are going to be needed to move a company to a cloud based infrastructure?

Right.

So the internal technical operations of the business and, and then the other part of the technical diligence is intellectual property and how significant of an opportunity is represented by the IP that the business owns or what type of R and D are they doing and where are they driving the business in the future? And so we see a lot of that being done today. And I would say that the technical.

Components of this have become much more.

Significant over the last 10 or 15.

Years than they were before that.

As you know, we live in a, unfortunately for us today, a virtual environment. You know, the reality of business is that it's moving fast and it's spread out and it's global. And the more efficient and effective the technical side of things are, the technology side of things are, the better a.

Business is going to be.

And clearly there's a value proposition for a lot of the companies in the.

Sectors that we cover, particularly defense and.

Government, where intellectual property and enterprise systems that are going to change the way business is being done are going to.

Have a massive impact on the market, on the industry sectors.

There's a lot of work being done in that area and that's probably one of the areas that I think, I guess you think about it, but it doesn't really come to the forefront until you start digging in. You're like, all right, now I understand.

Approach, appreciate what that value proposition is. A lot of it has to do with the technology.

So, Kevin, for a CEO who maybe has built this growing company and maybe he hasn't paid enough attention to his technology and now he has a due diligence coming and he's got a couple weeks to get ready for it, he's got to gather up all his documents and hand that off to someone. And maybe it's a little too late to prepare, but, but for a CEO that's thinking about this stuff that maybe you're advising, what kind of things would you tell a CEO to help him or her mentally get ready for a technology due diligence, what kind of recommendations would you have for them?

The advice that I give holistically to our clients that really applies to your question as well, is to build the business as if you are going to own it forever. And if you do that, if you have that mindset, you will spend the time and the money necessary to build the infrastructure that will allow you to grow and expand your business into perpetuity or with a long term vision. You will invest in intellectual property, you will find ways to leverage technology to modernize or to enhance your business. You will do things that will position you for that due diligence without even thinking twice about it. Because you're building a business that you want to de risk, that you want to have sustainability that you want to have great value and that you're going.

To be on the hook for in.

Terms of the risk profile. So that long term mindset to me is something that I apply over the entire thought process, but really specifically to building the systems and the technology and.

Making the investments in intellectual property that.

Can really be significant value drivers for companies.

Great, good. That's great context. And I was going to ask you about cybersecurity, but I have a feeling you'd say a similar thing there too. Right. And that if you are building a company that you want to have long term value, you're already going to be thinking about your cybersecurity posture and de risking. There's.

I don't know how you can't in this environment. Right. And it's all about just being in a position to really deliver your product or your service to your customers.

Right.

You want no disruption. And if you want no disruption, you have to be secure and you have to be nimble and able to flex and move the way that we've again shown over the last 120 days or so that we have to. And I've really been very pleasantly surprised across our client base and across the relationships that we have as to how well folks have been able to respond.

To this remote environment.

I think my perception at the time, call it early March, was, boy, it's going to be rough. There's going to be lots of challenges.

And things that people haven't thought about.

But for the most part we've really been very, very impressed by how quickly.

People have been able to adapt to this environment.

Now I am not dealing with companies that haven't invested in a virtual infrastructure or sort of at least developed a hybrid or any. And so I haven't seen folks that have struggled with it, but I would say I think I anticipated more companies.

Struggling with it than what we've seen.

Been, at least from our vantage point, a very positive experience. And maybe one of the reasons or one of the examples is that we're.

Working with technology centric companies and a.

Lot of them have already had distributed.

Business models or distributed employee bases worked.

Across offices or across borders. And so maybe a little bit of that has to do with the clients that we focus on, but I'd say I've just been very, very pleasantly surprised.

With how strong the businesses have been able to continue to operate given the circumstances.

Kevin, I want to transition and ask you a couple other questions, really. I want to ask about books and what you're reading before asking that. I Wanted to say that those CEOs that I run into in your sector, when I ask them that question, almost all of them are reading something. Everybody's got a book they've gone through, and now maybe the topics vary. Some of them read about technology, and some of them read about reading ancient history, and some of them read about current events or politics or best practices, but everybody's reading. Do you see that, too, among these CEOs?

I do. I will say that I think that we're all looking for ways to stay relevant, looking for ways to come up with new ideas to help us grow or expand our business or the opportunity that we have as professionals. And I would say that most of the people that I interact with are folks that are not standing still. They're not content. They're not okay with what they've achieved. They're trying to push forward. They're ambitious. They are folks that will continue to drive even after they've had their business success or they've had their personal wealth event or they've been even into retirement. Right. They're just going to keep doing things because that's the type of folks that.

Become leaders in these businesses.

And one of the best parts about my job is that I get to spend most of my time with leaders inside of, you know, great companies and businesses that have been incredibly successful. And it's a. It's a great opportunity just to learn.

From them and the things that they're doing and why they've done them and.

How they make decisions and types of information that they ingest and the way that they process it. I mean, it's a fun experience to be around a lot of people like that. And I would say that I don't know that I could make a generalization about how many of them read for pleasure versus how many read for education or to try to stay up to speed on industry terms or technology topics. I don't know that I could really pin that, but I do know that they're all doing something in order to get better, and they're all investing in themselves in ways that will yield, you know, positive results down the road. And so I take that to heart. I think it's an important part of life. I think it's important to be interesting, you know, just at its sort of base level. And I don't know if I'm naturally interesting or if people care about anything that I'm saying here or in any conversation that I have, but I feel like I can have a dialogue and I'm curious about what's happening in the world and particularly things in our industry sectors, but really even outside of that. And I've, you know, when the, when I look at what I'm reading, it's an eclectic group of things. And typically what I'll do is when I'm in a meeting or I'm in a conversation, somebody will reference something, a book that they've read or an author that they like or something along those lines. And you know, needless to say, I always have my phone with me and Amazon's always only one tap away. And so, you know, I am prone to ordering books in the middle of phone calls or in the middle of meetings or right after meetings or discussions because you're like, oh, if that guy's reading it or if that woman is reading it, I'd love to get my hands on that. And I do have the time to do it. Outside of the kids and the family and work and other activities, you know, I really enjoy reading things that are, that are going to help me become more interesting. Some of them might help me be better at my job or become a better person, but some of them are just things that you never had thought about or might not be logical. The one book that I'm reading right now is a book called Deep Work, which is about focus and sort of intentional having purpose and the ability to concentrate on things.

I find that my world is just.

Overwhelmed with data and inputs and sources of information. And, you know, if you're not careful, you can sort of get caught up in just doing that. And, you know, the opportunity to think a little bit about how I schedule my day or how I focus or.

When I read things that are really.

Important is something that I'm, you know, curious and interested in getting better at that, if that's even possible. I just bought I Haven't Started Talking to Strangers, which is Malcolm Gladwell's most recent book. And I've just read over the weekend a couple weeks ago, a book called 1945 Countdown to 1945, which was Chris Wallace book that just came out about roughly 150 day period of Harry Truman being in a position to learn about the Manhattan Project and then ultimately make.

A decision as to what to do with the world's first atomic bomb.

And fascinating tale of events and stories and perspectives on what led up to that. And you know, that's just, that's neat in a lot of context. But one of them is just a decision maker, right? How do you grapple with a decision that complex and how do you ultimately decide to do something like that? I'll never be in a position to make a decision that important. But, you know, it's fun to read about it and think about it in.

My own little world.

Yeah. You know, Kevin, another thing I've noticed is leaders like you read a lot and have eclectic taste and you can read history and pull these lessons forward to today because back then there were humans also, and you can study their leadership traits and what worked and what didn't and apply best practices in this modern age. Another I want to mention to you is Brad Meltzer, who writes fiction and nonfiction, just published one called the Lincoln Conspiracy. A fascinating chapter of this story of Lincoln that I didn't know. When he was first elected president, people tried to kill him and there was a massive conspiracy. And as he was being brought into Washington D.C. for his inauguration, there were plots to assassinate him. But he smuggled himself in. And it was just a fascinating read that as I read this, I bring lessons out of leadership applicable to today. And so I really recommend that one to you and another that I want to mail you because you've been such a great friend of the the company is about Colonel John Boyd, the guy who created this concept of ooda. One of the best biographies of John Boyd is Boyd the fighter pilot who changed the Art of War. And it's a fascinating examination because not only does it talk about his military accomplishments and his creation of new strategies and this OODA loop model, but it talks about the human being and, and it's a full spectrum view, including the fact that he wasn't a perfect guy. So I will definitely be sending that to you because I really appreciate your thoughts. One other thing about books I wanted to mention, Matt DeVoe is one of the most voracious readers I know. He's reading at least a full book a week and he reviews those every week in a newsletter called Global Frequency. And if you're not on distro for that, please sign up for it because for me, it's a great source of books that I like to tap into myself.

I just ordered both of those books here as we're talking. That's the secret, right? Don't hesitate. We'll go for it. I appreciate that. I particularly like the intel angle on it. Right.

The OODA loop.

And you know, when we think about TCPed.

Right.

Tasking, collection, processing, exploitation, dissemination, I think.

Of those in the context of how.

We do our business. Right. We're taking tons of data in and then having to figure out how to get it to something that's discernible or digestible or readable or understandable and then having to make decisions off of that. And it certainly is not life or death the way, you know, you and others have done in your career, but it certainly is a big part of how I think. And it's, you know, again, part of the fun in working with the type.

Of companies that we do is just.

To see and learn about those things.

And then try to apply them in our world.

Kevin, I want to ask you a couple thoughts on a related topic. And that is for the young businesswoman or businessman just at the beginning of their career, let's say they're going to have a career either trying to follow in your footsteps in the business and finance and banking world or perhaps create their own company and be a CEO. Do you have any advice or thoughts for that young entrepreneur best practices on business leadership?

Well, yes, and I mentioned this earlier, I have no idea whether these are good ideas or not, but they are mine. And so, you know, I'm passionate about a lot of it. One of the things that I think is interesting to really talk to younger folks about now is communication and the ability to build relationships. And I personally believe, and again, this sort of ties back to what we talked about earlier in this trust based networking. The ability to communicate and build relationships is something that I believe or I see folks waiting too long into their careers or too long into their journey to focus on. I would argue that whether I'm building a widget or I've got the best platform for doing intelligence analysis, or a services company or a bank or whatever the case might be, that every one of those businesses is going to end up being a success or failure based.

On communication and relationships.

And it might be the board of directors, it might be your employees, it might be your investors, it might be any number of customer or stakeholder constituencies.

That are out there.

But I just believe that you can't invest enough time and energy in building relationships and communicating with folks. And really there's a constancy to that. There's a consistency to it. There's a frequency that is at a significantly fast pace. And that is something that I think can be applied to any industry, any role, junior, senior, male, female, anybody can embrace that idea and you know, we'll see as time passes. But you know, our phones and all the different communication tools that we have create different methods for that. I just fundamentally believe that communicating and building relationships is something that will take you to significant lengths and levels and heights, irrespective of what the platform or.

What the system or what the business is that you're involved in.

And so I try to talk about that with a lot of folks and I try to apply it in my own day to day business life and really drive towards being very active in communicating and being very active in relationships. And a lot of the things that I do are very technical and it may not be obvious that communicating and relationships are a core part of it, but I find that every time we're making a hard decision, you're banking on being able to talk about it, to get people to buy into it, to build consensus, to deal with, you know, other opinions or perspectives and find the right solution.

And that that all comes down to communication, relationships.

Fascinating. That's a great way to put it. I really appreciate this, Kevin. I appreciate the whole time you spent with this, but especially that last part there, which I'll do my part to spread that widely. So thanks.

I appreciate that, Bob.

Kevin, thank you very much. That was all very insightful and much appreciated. Any final thoughts?

I would just say thanks for having me, Bob. I really love talking to you and appreciate the opportunity and if there's anybody that would love to connect and build a relationship as a result of watching this, I'm here and ready and look forward to that opportunity and just want.

To say thank you again for having me.

All right, thanks Kevin.

Take care.

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