Corporate Diversification Through M&A

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I'm Kisan Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Hello M and A Scientists. Welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. If you're interested in learning more about how to optimize your M and A practice, or want to get involved with our community of forward thinking M and a practitioners, visit Masscience.com and subscribe to our free weekly newsletter for the latest industry trends, insightful content and community events. If you want to keep up with us on the go, head over to LinkedIn and follow M and A Science. I'm your host, Kisan Patel, CEO and founder of M and A Science. Joining me today is Tyler Rodwald, VP M&A at EIS Holdings. EIS is a leading provider of mission critical environmental and infrastructure services including abatement, decontamination and remediation. Today we're going to talk about corporate diversification, specifically moving away from your core business. Tyler, how are you doing today?

Hey. Q's on. Good. How are you man?

Great, thanks for taking the time. We're here live in Dallas, got a beautiful conference room set up. We're actually going to host a roundtable event with some other corporate development leaders. So this is a little bit of a pregaming for us.

Yeah, it's a good pregame. Second best thing to drinks.

There we go. We should be getting to that as well. Can we kick things off a little bit about your background?

Thank you. So I'm a cpa. Started work with Deloitte, went over to a private equity group where I started getting transaction experience on the buy side. From there had an opportunity with a company called Marion Technologies that with their diversification strategy and eventual exit, as well as EIS holdings helping with their diversification strategy and then hopeful exit on the backside.

I like it that you came from the finance background on the accounting side went to private equity and then been a few different corp dev roles. Can we talk about what diversification strategy means for a company?

So obviously you have your core business and it could be service lines, it could be end markets or whatnot, and you're moving away from it for whatever reason. In both instances at Marion and EIS holdings, our core business didn't provide the most value while harnessing our knowledge of the services we offered. And so in each instance so far, we've diversified and are still working on diversifying into more attractive markets for the private equity space as well as institutional investors. And in public markets.

What would you say are the main drivers for a business to want to diversify away from its core? You mentioned attractive business. So it could be getting into more growth oriented segments really for us, value.

Creation, where can we put capital to work that's going to have the best return metrics on that? For instance, both at Mariana and EIS as well, very similar plays here. The core business might trade at one multiple for us. However, there's horizontal acquisition opportunities in the space that'll allow us to trade at a much higher multiple when we eventually go back to market. It's one deal. The other deal is the growth trajectory. So when we're thinking about EIS holdings, we started as an asbestos abatement company. It's a great business from institutional investor perspective. From low Capex, we have a lot of reoccurring business with different customers. However, the growth trajectory on it is a little bit lower single digits. On top of that, asbestos is a finite material in the world. There's only obviously we quit putting as much asbestos in the world today as we did it 30, 40 years ago. That being said, there's still a tail on there. We're thinking of 20 to 30 years, if not longer, at least 20 to 30 where we can continue the growth trajectory we're on today. However, there's other markets out there that we've identified to where it's a stronger growth opportunity and a longer growth opportunity, creating more value for the shareholders at exit.

So we got a range of things and it sounds like a lot of it at the end of it is the value you're going to ultimately create. I like the example too of positioning the valuation of the company. We had a similar exercise where I started seeding some new business lines and brought in a new leadership team and we killed some of those things because we wanted to really focus on SaaS as our core business. Big part of it was the ultimate valuation. We Wanted to be in that category. We didn't want to be in the services side of it. We want to be specifically software as a service. Can you talk to me about the stakeholders? I almost feel like as a company going through the decision process of, oh, we're going to diversify, get away from the core, who's all involved with that. And I feel like ultimately you got to get everybody involved. But how does that timeline trickle out?

Yeah, it starts with the board and the executive leadership team of identifying. First off, you have to understand that we are going to diversify so everybody gets on the same page there. Now the next question is, where do we diversify? And so at that time, the leadership team will go out and identify markets that are potentially more attractive than what we're currently in. Today. At AIs, a big deal for us was how do we capture additional wallet share of our customers? What are adjacent services that we can offer to expand our wallet share with our customers and cross sell between the core business and the new business. Once we identified the area that we wanted to go to, we brought it back to the board, did the market research and today this is what we're thinking. This is why once we got their approval, all right, we're ready to roll from the messaging down to the employees at the last stage. It's a very sensitive topic, the diversification, because you're telling your people that you've invested in already, at least in a buy and build strategy. Yes, we gave you money at one point. We still like you, we still want you to grow. But we're going to be taking the big dollars now and allocating those to an adjacent service line. It doesn't mean we don't love you, but this is where capital's gonna be allocated. And that message is very important from a standpoint. And you don't want to discourage your existing core business and you want to keep fighting for growth or having them fight for growth. And so the message that we like to share is, hey, again, here's the value creation opportunity of if we just continue to invest inside the asbestos abatement business. Here's where we might be. However, if we can get on board with this and diversify and have strong integration between the two entities and cross selling opportunities. Here's the value creation that we can get there and has a new capital allocation. If you can take a dollar and turn it into two, that's fantastic. But if you identify an opportunity to take that dollar, turn it into three or four, that's where you should be investing at that's the message to the shareholders who aren't on the board of directors. Jlt, you have an investment in this company and instead of just turning it into two times, we can turn it into three or four if we diversify correctly and get on the same page with this.

So I like you're getting ahead of me on this stuff. From the top, there's the executive team makes this decision with the board and then they clarify that strategy with the research. Now we're getting into the other stakeholders, your team members, different function leads, business unit leaders. It's interesting how you mentioned that right away there's a big change and you got to be really careful about the considerations with that. Maybe you can give me a little bit of almost like a, give me like a guide, like a step by step of what are those key things. And then the capital allocation piece seems to be a big driver of it because you mentioned that you're going to be shifting the way the company's investing in different areas, which may mean less capital for some of those business units. How do you break the news? You mentioned that you got to be really careful. But what is like the right way to do that?

The number one step that we found most helpful is to show on the value creation of diversification, people care about themselves. You got to care about what people care about and a lot of that is their money. And so now the second thing is what does this opportunity mean for you besides just the value creation? The message we've identified to them was, hey, this will open up additional opportunities from the standpoint, it's going to expand your service lines that you can offer to your customers is one, now two additional opportunities from a standpoint. The new targets that are coming in from the diversification strategy, they're going to have a different customer base, most likely. And so that provides us another opportunity in the core business to start cross selling into their customer base as well. So now we're cross selling service lines, cross selling customer bases, and it creates more opportunities for our guys in the field to make money and make commissions on their projects that they're selling.

Do you ever do deals where they're away from the core and you don't see any overlap of customers?

No, our strategy is based on cross selling and revenue synergies. And that's what we're highly focused on. We have a very focused strategy. There's really two slides that I go off of. We have our whole investment deck and whatnot, but the two that mean the most from a preparation Perspective and out to the shareholders, not just at the board level, but also the individuals, our boots in the ground. The first one's going to be, it's called an acquisition sweet spot template. On this template it has everything we're looking for between total enterprise values, EBITDA margins, gross margins, service lines, end markets. We have bonding in our deals now for some of the projects we're working on safety and a few other key metrics that we're looking for. It's about 10 to 12 items in each of those categories. There's anywhere from three to seven different options within those and so each one's labeled as either sweet spot, opportunistic or avoid. For every deal we look at, first thing I do is fill out the sweet spot slide. How does this fit in there? And one of those is again is back to cross selling revenue synergies. And so is that going to drive value for the company is one. So having a very focused plan on that, we don't stray from it. If it's not within our windows, we're not going to do it. Thanks for your time. Thanks for your call. But we're going to end the call pretty quickly. Then the second deal is going to be our geographic footprint. We have targeted certain regions that we're based in today and adjacent markets in those regions we have stars on a map for. Here's our current offices, here's our regional HQs, and then the third one is going to be new target markets. If it's within there and it can service those, fantastic. If it's outside of it. Again, super disciplined strategy here on what we're doing. And this all ties back to discipline, ties back to the communications between the boards and the employees. If they notice that we're being disciplined and sticking to the strategy, not straying from it, there's going to be more buy in from all parties. But with any employee, if they spot a weakness, they're going to exploit it. And once that happens, it becomes problematic. Yeah.

Not swimming the same direction.

No. And that's for the diversification strategy. It's the discipline and going the same direction. Having everybody go there and understand why you're doing it are the two most important factors.

Yeah, it's like you really built a program around it where you've created this matrix to assess and make sure that it's fitting into the strategy in that way and that you're going to see some of those specific value drivers which in this example is a cross sell.

Absolutely.

Good stuff. Talk to me about the capital Allocation. I'm always curious about it because that's a big shift in where you're placing your bets.

We know where we're going to go. We talk about our maps and the sweet spot, whatnot a little while ago. But we're still going to do some abatement deals that make a lot of sense. But when we talk about capital allocated to it in the private equity world, it's all about the multiples for us and some of the arbitrage we can get on there too. When we think about buying in our core business, we're not going to pay that as much from a multiple perspective as we would as we're diversifying into those adjacent markets or service lines.

So there's an expectation you're going to pay a premium to get in the door.

That's correct. When you're first starting on this, getting in the door is tough. As we get into the door again, it's a very delicate situation, just like it is with your own employees. The first question I'm typically asking, it doesn't take very long to get to this question on our introductory calls either you guys are doing X, Y and Z. I'm offering B. What are you doing here? Why are you calling me? Again, we talk about our discipline and staying focused. We'll deliver the message of what we're trying to do. We're trying to capture additional wallet shares with our customers and cross sell these service lines between both parties, creating an end to end environmental services solution for our customers rather than just being able to offer a couple pieces and not being a value add for our existing customer base. And so when we explain this to these guys in a very clear and concise manner, it clicks. They understand it quickly because they do know about the market with us, but they hadn't thought about it in the same manner all the time. Some people have, honestly, but they want to hear it from your mouth as well. The crisper and cleaner the message is to them, the more they're going to relate to it and be able to understand it. And typically, probably 80, 90% of the time, yep, they get it, it clicks, we're good to go. And it's probably a five minute conversation on the front side of the introductory call. Now, as we continue to move through the different stages of the deal, you get more questions. Integration is a big thing. And being able to describe that, how are you going to integrate my company into yours and being a little bit different whatnot. But again, it all just comes down to being prepared, disciplined and focused. On what you're doing and if you keep a consistent message, it will flow to the target company. But they'll also get those same responses from internally as well. And they'll understand that, hey, everybody's on the same page here. And that'll ease some concerns.

When you're bringing this up with the target company, are they more proprietary deals or bank processes?

We see them all.

I'm just trying to think, I feel like a proprietary deal, it's easier to get the FaceTime to bring that narrative and that angle. Maybe it's not that competitive, but then if it's a bank process, does that pitch really stand out? How does that get perceived? Especially when they got a professional advisor coaching them one way or another?

Proprietary deal is easier in some instances.

On the bank more than often than not.

Yeah, usually We've all had our challenges with a lot of the guys we're dealing with are founder owners. And it's just a different. It's a completely different process. I think every deal is tough and you're dealing with different obstacles, but within the bank processes, we do a really good job of reaching out to people or maintaining those relationships with different bankers. So we don't miss deals. I'm sure we've missed one or two of them. It happens, especially in the diversification play. But first off, I always have a very clear message for the bankers. Here's what we're trying to do, here's what we're interested, whatnot, and then we are going to talk to management team. That's not really an option if that's how it's going to be. We're not going to invest in our model here. We don't have a plug and play model. We're not big enough. And so we need these individuals to continue to work for us for some period of time. If they want to transition out, we can build a succession plan with them. But if not, you're plugged into company, focused and willing to work. And so we have a little bit different touch on that of we're in this together. It's a partnership, not just an acquisition. We're going to talk to the owners of the business, or at least the CEO of the business and presidents, financial guys, whoever we need to, from the app side to understand what are their personal goals and professional goals, but also to make sure our message comes across to them on what we're trying to do and why we're at the table. If we don't have access to them, we're just not going to do the deal. I can't underwrite it is an important.

Part is that narrative of your strategy and being on the same page with this target company's management team.

Oh, absolutely.

How do you source these deals? Because you just listed a pretty comprehensive market map there of all these areas they could potentially move from the core. How do you go about sourcing them?

Three avenues. First one's going to be your sell side. Investment banks. Reach out to you, make sure to stay in contact, be buddies with them. If you're in town, grab coffee or something. The second way with source deals, we do have a buy side advisor too. We'll help out with some of that stuff. And then. So we'll split duties between cold calling, cold emails and helping our refiner strategy there. But the one that's worked the best for us has been our internal referral program. And we've honestly taken off from it. Our pipeline's ever been more full since we implemented this.

Tell me more. I'm trying to fill up my pipeline. How do I do that?

So our internal referral program is for the employees. And that being said, if they make a warm intro to us to a target, we have an introductory call and we end up closing on it. They'll get a bonus if it's greater than a million dollars of EBITDA. $40,000 bonus. If it's less than a million dollars of EBITDA, it's a $20,000 bonus.

Pretty good.

These are guys that it's meaningful cash to them.

It's new car money.

Exactly.

More motorcycle money. Take your pick.

Whatever you want to do with it, it spends. You can save it too. Hey, don't forget about that investing. Whatever. But cars and motorcycles are more fun, at least in the short term. Sits on our funds flow right at closing, comes to the account. If we close on a Tuesday, I can have it in their bank by Friday. It's been one of those programs where it's cultivated a lot of leads for us and a lot of introductions. You got to be a little patient with it, especially in diversification play because these guys are trying to figure out where we are going and what we're trying to do. It just takes a second to communicate the message and have them understand it. At this point, we've got them honed in pretty well on what we're looking for. And these are guys that are out in the field. They're doing environmental services work for us with hard hats and boots on. And so there's nobody better that knows the market and who's good to work with and who's not than these guys. They bring us great leads and it's worked out extremely well for us. We have probably 10 deals we're looking at that are talking within every week or two. Over half of them are internal referrals underneath that program.

Wow.

Yeah.

You give me some ideas, I'm going to have to this up.

It has been honestly off the charts for us. We had several deals come through last year where we had a good shot at them and closed on one, and we closed on one in June. That was an internal referral program. Then hopefully here in the next couple months we can get another one or two of these close as well.

So that's pretty cool. I like that approach. I'm definitely going to give that a try at some point. Do you ever get resentment or skepticism from some of these companies where they were maybe anticipating on selling to a direct competitor or somebody like really close to the space? And then here you're coming in with this story about we're diversifying and we're gonna cross sell your product to our customers. What is your challenge with that pitch?

Comfortability. To be very honest, we've lost deals because it is more comfortable for these individuals to go work a company that is like them and like minded. It's just part of the process.

Is that like purely a culture thing where they're just like, hey, I'm more comfortable with this company. I know them and they're in space. I've known them a long time, I understand their culture.

That's it. And in both instances, money was the same. It's just change is tough. The guys we're looking for in the diversification strategy need to be in both right now. Both of the companies we have, they've been great operators, but that being said, they're very ideas driven, very open to new things and they embrace it. That's just not always the case. These guys have taken on the challenge of hey, I get the opportunity to come inside the EIS platform and help create this consulting remediation business from the ground up. My company's the first one in, my company's the second one in. We're on the ground floor now. Those are the type of guys we want to bring in who will continue to drive the company and grow it, but bring new ideas for us. And if you want to go the comfortable route, I understand it, it's easy, you're going to get your money. You can probably float out of there a little bit sooner if that's what you're looking to do. And it's not going to be as tough of an integration process. So it's really just what kind of comes down to one of the questions we ask on the front side is, what are your personal goals? What are your professional goals? And that question will weed a lot of answers out on if they're going to be a fit or not pretty easily.

How do you blend the cultures together? How do you bring those two together? Does that come easy?

No, it's not easy. Very important rule is you got to listen. Obviously, people are going to tell you what their pain points are and what you can and can't do. And as we're moving into these different service lines and diversifying here, you can't use the same processes, 100% blended between both and just shove it into a box. And so it's really about communication and listening more so to the new targets who just come into you. Here's how things work, here's how things operate in our side of the business, here's why we do it this way, and pull that out of it. You can get some of that done during diligence, but people only know what you tell them. So once you get in, you can start figuring a lot of that stuff out on the ground a lot better. You got to make sure they're being listened to. If you try to just shove the square peg in a round hole, it's going to piss a lot of people off because the newly acquired target ain't going to want to do it. You got them upset since they're saying no, you got your corporate team upset. So it just creates that friction. And so if you can sit back and listen and understand the processes and then come up with solutions together on the same page by communicating, brainstorming, and doing it thoughtfully, it's gonna create a much better outcome. Now, the downside of that integration's gonna take longer. We all wanna have our integration done, especially in these smaller deals. For us in the private equity space, it's the same thing. How do we get this done in 90 days? I want an integration plan done. 90 days. 90 days. 90 days. But as you're moving into these, especially in the first one or two of them, it's gonna be a little longer. It just is. Because you're gonna find out different processes and different systems, different regulatory matters they have to follow by licensing, permits, everything and processes. And so if you just take a step back and say, hey, it might take a little bit longer, but let's understand this together. And come up with a solution. It'll help blend that culture a lot better and give a culture of inclusion rather than just one of those us versus them.

Makes sense to me. Listen, can really understand their view and just give them a say at the table. And then the actual nuts and bolts of doing this integration. There's a learning curve to it. Things might go awry and you should expect that. Especially being a different business than what you're used to acquiring.

To use a keystone word, you gotta be agile and check your ego out the door. It's people's livelihood. They've been running these businesses for a long time. You gotta be willing to make changes quickly and responsibly. But not just for the sake of making change either. You need to make sure it is the best solution for the company as a whole. And whatever you gotta do to make sure that outcome happens, it's what you do.

Do you get resistance? I feel like you get resistance from a lot of areas. Be hard to imagine that everybody just gets on board. You got to have somebody that doesn't agree with it.

Oh yeah. Kind of goes back to just being agile and checking the ego out the door.

But can you sense it? Can you sense like here's somebody in the leadership team or even department head that's just not about it.

Yeah. And you got to get them on the same page quickly.

What does it take to do that?

A lot of conversations, a lot of data. And patience as well. Which is interesting to say patience in a manner of where you're trying to do something quickly. But it goes back to always listening, which. What are your pain points? It's just like sales, where if you can have somebody tell you your pain points, you can address them. But if you want to be the guy that talks all the time, has to be seen whatnot. It's not the move. Because you need to understand these people have a problem which they'll tell you if you let them. And then from there you can address it and bring them back on the same page. Hey, let me track down data on why these companies sell higher. Here's 10 companies in this space that sold for X. And here's the other 10 in our core space that sold for. Yeah, X is greater. This is going to work. Or another example, your field guys and sales guys could sell one service. They could sell abatement, that's it. To whatever real estate developer you want to use. We can now offer soil and groundwater mediation as well on their sites. That provides more opportunity for the sales guy to Upsell his customer while using us. And the customer's benefit of that is they have one throat to choke if something goes bad in a project. They can call eis. They don't have to call EIS for the abatement over there and then AECOM for the consulting side of things. It's all managed by one eis. And so that makes it easier on the customer but also provides opportunities to their employees as well. Make more money and put it in their pocket and grow.

That's a good example of how to frame that. How do you measure success for us?

Cross selling.

Actual revenue from cross selling, that's what you would track.

That's our number one metric we're tracking.

On our side, actual synergy. Like here's an increase that our team was able to produce.

There's been projects, multiple projects on both sides of the businesses between the abatement and the consulting remediation side where we would not have seen the project from a bidding perspective. However, somebody had a relationship with the customer said oh we can do your asbestos abatement for you. Let me call these guys. We'll set them up. By the way, round two. Hey, let's the things we'll do is ust work underground storage tanks. There's opportunities too that the abatement guys see and understand. Hey, we have a group that can come to this. Well and we'll groundwater mediation on this site as well. Let's call them in. So far it's working out pretty well.

When you look at actually tracking financial result. I'm curious too of what do you forecast for synergies vs what do you actually capture? How accurate is it?

The forecasting part's tough.

Hey everybody to talk to. You make a model so you can get the deal approved. You can literally make a chart that goes up and to the right as far as you need to.

Yeah. And we don't really like doing it.

That's John, I was curious. Like you just fall short 50% when you look back at year out.

Or be very honest, we don't budget in many revenue synergies at all. Like looking at the core business, what it is today, that's what I heard.

Is like the best practice is to be very conservative about revenue synergies.

But that being said, where we can track them as our business development team and BU leaders all have targets in here for cross selling opportunities. And to make sure we're a training our guys, the sales guys into what the additional services lines are but then be executing on that as well, we Push those targets down to the BD leaders and the BU leaders to help execute on those. But even more importantly, we love bonuses. We have additional commissions on projects for our project managers. For if you refer the project to the other side of the group, you get X amount of the commission on a project. And the other, I think it's like a. The guy who performs it gets 75%. The guy who referred it gets 25% more referral bonuses.

I see how your company works here.

This is, as Rob Odom there says, pay all the good players. All right, hey, we're trying to get you guys to do something and it doesn't feel right not rewarding people for doing the right thing. They're creating exponential value for us and we want to make sure that they feel the same way.

I like it.

Our employees are very important to us.

Yeah, I like the way you incentivize them. It's a good thing and it gets what you want accomplished versus coming up with all these trainings and things like that. And you just look. So what we're trying to do, put some carrot behind it and we're off.

You know, the private equity market, everything needed to be done yesterday.

You guys are PE backed. I want to talk about structuring deals. Are you doing a lot of earn outs? We got earn outs, we got equity and we got owner holding a note. We got cash.

Yeah, I'll start with the easy one first on the seller notes. Not going to happen. We got private credit behind us, too. Not going to go through that mess. Cash flows goes to the bank and that keeps them happy. Typical deal structure is going to be 20% rollover into the larger EIS organization, 80% cash. What it does is we talked to it a little bit earlier about keeping those owners engaged in the company because we need them. And so the rollover equity portion typically takes care of that. And so, hey, you grow your business, you're growing your investment on top of it. Right. And so the ideal situation is that 20%, they can 2x their money on it and take home another couple million bucks. Pretty good deal. We'll use earnouts occasionally, but I hate them. I think it's a common theme on here too. Pisses people off when they miss them. We love to pay them out because it means the company's growing. But that being said, the angst to just getting there between the document negotiation is paying.

Really?

The document negotiation gets slowed down extremely. We typically come out with pretty standardized documents where we try to acquire four or five, six companies a year if we can.

You're paying 80% cash on all these acquisitions. You guys operate like a public company. Just got a big balance sheet to work off of or something.

Yeah, we got good backers.

I'm on the other end my friend. I'm trying to get my deal 100%, 510% financed. I want to know I can probably let the equity owner sellers know.

You're going to get me in trouble. If anybody wanted to take an all stock deal, I'd do it. Anybody would. But the industry we're playing in right now, the environmental services is hot. Every private equity group and their mothers have some type of investment in the environmental services space or they want to get in there. And so playing in this competitive market, going into the competitive space we have to provide attractive options for these individuals. Especially for them stepping out of their comfort zones. With the basic 8020 start there and we've had more rollover in one or two deals and then we've had less rollover in some of the deals too. But that's always our starting point. What we would like to see and we just consider it kind of market. Yeah. With the earn outs man, that still just gives me the heebie jeebies because we can typically get a document negotiated in a couple weeks. Once you start adding that complexity in, double it. Honestly until the angst to get there and then they don't even get there. You got them all pissed off. And we want to keep things as smooth as possible if we can.

Everybody always says that on the earn outs like hindsight they're terrible, they're bad. But we do so many of them.

We've been avoiding them recently.

It's like cultural thing because I know other corp to have teams where they don't use them at all or it's opposite. They use them all the time.

I guess the other side of it too. Our lenders don't really like them either. They view it as debt sitting out there. Especially if they hit it. And we're not always deleveraging. We'll have some deleverage event a part of it.

But yeah. Are you guys debt on these deals?

Yeah, we'll use both debt and equity. Whatever we need.

Okay. So you're putting cash but you're borrowing a good amount of that cash. What kind of debt facilities do you get access to?

Typical private credit. That's it. We have a revolver with them too.

Do you usually do like bank banks or using these new private funds?

Private funds.

Really? Yeah.

And it's.

Are you Seeing good terms. I don't mean to pride your business.

Here, but there's a strategic reason behind this and I just, I know this more from my private equity days. The terms on paper aren't necessarily the best terms that you can go out and get. You can go to bank of America, Morgan Stanley, JP whoever, get yourself a 5% interest rate. But mistakes happen. And when you go with those banks, they're not as forgiving with those mistakes compared to a private credit guy. So we pay a little bit more in interest. But if we have a blip in the road, there's a deep relationship between our private credit and private equity group. We get them on the phone, talk through it, here's a remediation plan, here's what's happening and discuss a plan to go forward. Decide to plan for us to be owned by the bank. And so that's the trade off that we have right now with being a little bit smaller company. The private credit's just easier to work with us.

Well, yeah. Cause you brought up an interesting point I haven't thought about is that it almost lets you take more risk if you're going to have that relationship and be comfortable that you can navigate through a blip or mishap that makes a big difference. And all of a sudden you can be a little bit more risk appetite on some of the things that you're doing.

Absolutely. Earned leverage ratio is definitely higher than what we'd have with a traditional bank.

Any other terms on deals that are pretty meaningful time to close anything like that? What are you spelling out in your letter of intents?

60.

60 days?

60 to 90. Depends on who you are. No offense to anybody who watches this, but you can tell how quick we can get something done with the sellers just by the initial diligence. We do have a pretty strenuous upfront process compared to most. So by the time we do get into a deal were pretty big. I've got my investment deck ready. It's been not just through the executive leadership team at EIS holdings, but we'll present it all the way up to the executive leadership team at Sun Capital. And that's just to get to an loi. Now that being said, once we get to the loi, it's game time. In between that dating stage, I'll give sellers a little bit of space. Hey, we're going to move at your pace. You're comfortable and provide friendly reminders occasionally. How's it going? Just check in, keep a good pulse on them, but not push once it Gets to loi and we start spending dollars. You're playing my game at that time, that time we start pushing and say, hey, we need to get this done in 60 days. That's the target. I need you focused and help them manage through it. And whatever I gotta do, if I gotta be on a plane at 7 o' clock in the morning, go pull fricking documents. I've done it. I imagine most of us have at.

Some point, but I've chatted about this before. This whole idea. This is where I probably gotta put a disclaimer. Tyler's a deal room customer and I don't have a choice. More and more organizations are becoming deal room customers, so it's getting harder to find ones that aren't. But we were talking about one of the sweet spots in the product is combining diligence as a work stream with your integration planning as a workstream. You can do both in the same environment. I wrote a book on it called Agile M and A. Go check it out. But what's your take on that? Part of. Cause we're really talking about this point of combining these entities, but being able to execute and do that well.

So it's interesting. When I first started, all I did was data room and the request request is what brought me in. And too many nights at midnight with my computer in my bed and just updating stuff to send them back to people and. All right, that got kind of old pretty quick. From there we started building out on it. We have our requests and we have our data room and now the pipeline's integrated into there. And then the latest phase we just started to do is the integration with you. And so what this allows is for much quicker transition from the deal team to integration. I'm always happy to answer questions and help people along, but I'll get a little bit annoyed when I get the same questions from the same people over and over when there's information already available. And so that being said, what it allows us to do is I just click a button, take it from a phase of due diligence to closed, and then closed to integration. And once that happens, we have our whole integration checklist set up underneath on the request list. We have assignees to it. We've already been through the integration process with them, how this is going to work and every step they need to take, the timeline set, Whether it's week one, day 30, day 60, day 90, here's your responsibilities and when they can need to get done. But also it allows for everything we found out during diligence to be accessible by our integration team as well. And so it's not just in one Excel sheet that needs to go back and forth with a bunch of comments in it. Or the data room has been downloaded from whatever website into a shared drive on the server where you have to go map all of them back to what documents, what. And so it's allowed me and Rob to go do more deals instead of answering integration questions. And so those guys can execute on what they need to do. Laid out here it is. And then on the backside of it I can also monitor how the integration's going, what's getting done. You guys need to update your statuses, right? And the progress that you're making on these. And we can understand who's falling behind, who's going ahead. Rarely keeps a whole pulse on integration, which will allow us to get it done quicker and onto the next deal.

See, this is why I put the disclaimer in there because I knew you're going to talk about the product specifically Deal Room and the point around it too. It's like how else do you combine diligence integration without a tool to do that? And that's where I knew you're going to mention Deal Room. There's like no other way whether you're using Excel. Otherwise we designed it like that was by design. It's a constant feedback we heard was people in integration don't get involved with the deal early enough or they just don't have that continuity. There's a knowledge chasm between the handoff and the. And that was by design. How do we eliminate that? If you put both work streams in parallel with each other. Otherwise I don't know how you do it. Anyways. That's my other passion project of building the world's greatest platform to execute M and A. There's no other way. It has to be tech enabled.

I hadn't seen a tool that allows me to take it soup to nuts. Manage all of M and A in one place.

I get a lot of questions about is the seller. And I feel like this is something that doesn't get talked about a lot but that the seller controls the process, the seller sets up the data room, blah blah, blah. Especially a bank control process. Now I'll speak of my experience first. Roll up specifically will change that. Like they would be very buy because they have more people in the deal. They want to make this a familiar repeatable process so they can really scale it and they're putting up the money so they really run it and we've seen that time after time with any roll up that's doing 10 plus acquisitions a year. What's your take as you're in the middle of proprietary deals, auction deals, and again, it's like seller driven process versus a buyer driven process.

I run as much as I can.

You can legally get away with pretty much does the banker police.

I think one of the great points you just made there is we're putting the money up. There's an imbalance of exposure within these deals. Once you get into the diligence perspective. Unless you have a breakup fee or whatever, which, good luck getting that on a $10 million deal.

There's a whole sidebar about the funny things that happen in small private deals.

Yeah, we take on significant exposure here. We still the process. We have a QoE, insurance brokers crawling through there. Legal diligence. We'll do some customer diligence as well. That's outsourced lease diligence. If it's owned by the founder, just to make sure we're paying market rates and whatnot. And I'm sure there's some other things that go into it too, but we're spending dollars. And real quick, that qe, it ain't cheap. So boom, right of the hole. Two weeks in, I'm already deep in the paint.

You're putting up more money.

Yeah, exactly. And once I get deep into pain on the qe, well, I got to start my legal guys now. Now that's they're expensive. I don't know. That's what they do for a living is bill. And so the more of the process I can control and keep my finger on and push, the better I feel of getting the deal done. And so not letting things linger and whatnot and staying organized. Even if it's a bank led process, they just want to get the deal done too. They want to go on to the next thing.

How do you manage that? Usually bank led process. They set up a data room because they got a bunch of people they're entertaining.

I tell them we're using mine.

But even at the early stage.

Early stage, no. So what I'll do is pre loi. I'll just run into the data room myself. Honestly, we don't really use it pre loi. I'll use whatever. Fine. But once we're signed, here's the data room. Here's the process. I expect you to answer to these requests. I'm not going to respond to your Excel sheets. This is it?

Yep. You got a signed loi exclusive I take it. And so it's my way or the highway pretty much. What about the banker?

This is how it's going to be. And I will if I have to talk about the benefits to the seller on that. And really ties around the seamless integration transition of, hey, listen, it'll make your client's life easier going through here. It's all in one location. My people know where to go when it's done and he'll know where all the information is as well. Or she. And so this might be a little bit more pain on you guys. Really don't care. This is how it's going to be. This is what we have to do to get this deal done quickly and in a timely manner and then allow for successful integration and really just put it out there. It's not going to go any other way besides this way.

All right, you're with the new school. For anybody listening, this is the modern new school way of doing M and A. It's buyer driven. You take control. Even if a bank process, you take control from loi the old school, it's a harder thing for the banker because I do think using a platform is going to be a lot better like on the buy side than using it for the sell side because you end up using spreadsheets. Yeah, I think that you, like literally defined it. You got new school, M and A. You're driving the process on the buy side. You're taking control. You're really putting integration thinking in the forefront and making sure you get this smooth transition between the stages. The old school is when the seller controls the data room. It's you're emailing an Excel tracker back and forth 13 times throughout the deal process. The seller, you're not really engaging with them on the integration path. And it just starts off to a rough start because the integration folks leading the integration are scrambling to rediligence the deal all over again. And then things get delayed. People on the other end are confused on what's happening. They get frustrated and then people eventually blow up.

It sucks. It's a painful process. There's too many tabs in those Excel sheets. They come at all times of the night, all times of the day.

I definitely feel strongly if you're using Excel, it's a handicap.

It sucks.

And now looking forward and what I see in the next 10 years with all this emerging AI, but it's so much about data. The more data you have, I'm even encouraging our customers now don't like, I'll cut you a deal and just store everything and archive it. Not only is it better archiving cause you get point in time access as opposed to static when you download it all. But you're able to harvest so much data that you're going to get some really rich insights. And how do you make your process more effective and efficient knowing that it's just like whoa. That's like a big blow to using Excel trackers because you don't get any of that golden rich data that looks lives in there.

No. And it just gets lost. You got to flip through all the tabs, read through all the comments. It just sits there in a file.

I like that we defined modern versus old school M and A. That's one of turn into a blog post and put out there. We drifted off. We diversified our interview here and went away from the core of the conversation.

Whoops.

Bring it back with any closing thoughts or advice for practitioners out there that may be going through the same thing maybe in their early introducing diversification as a strategy and executing on it.

Don't rush into what you're doing. Set out a plan and don't deviate. You got to trust it. It's going to work. If you show any signs of weakness, everybody picks up on it. You got to stay focused and stay disciplined and stay the course. It'll happen. It's tough. Otherwise everybody will be doing it. If you can have buy in from the company top to bottom and that's the most important thing. Make sure you're staying on top of people. You can tell your message very well and what you're trying to do and then that'll lead to success.

Awesome. How are you feeling about AI in M and A?

I love it. Oh God.

It's still early, but what are you doing? Are you using it for anything?

I mean I'm not some wizard yet, but we'll do a lot of deals in adjacent geographies. A lot of our projects are funded with regulatory money, whether it's from the state, federal whatnot. Each one. They'll typically fund a lot of our projects out of a trust fund managed by the state. That being said, we'll use that all the time. How does the state's fund operate? What's the rules that we need to know as investors? This little chatgpt stuff, what's the balance in the fund? That tough to answer a lot of questions and then just general regulatory questions through ChatGPT where I don't know. You go sift through the Internet for two or three hours and trying to find something and this brings it back to a concise manner. So really a lot around market research. Not just market research, but just research in general. And typical questions. Those are a lot of the uses I'll get out of it.

Yeah. Actually this really good example and I bring it up. Those of you listening, hopefully enjoy listening because you've gotten this far in this podcast. I am starting another series right now. It's called AI M&A Takedown. I don't know if I'm going to change the name at some point, but I actually teach some of these best practices of using AI. And then we actually plugged in OpenAI's API right into deal Room and then we're building a model fine tune for M and A on top of it. And then we are also creating these other AI agents. But if you're interested in learning more about AI best practices and just want to see under the hood of what we're actually building specifically for M and A, I recommend checking it out. You can probably find a link somewhere on our mascience.com website. I'm excited about this series because there's just so many things and even the roadmap we've built is quite extensive. It's a whole product line of its own. That's the big technological feat to overcome is most of these learning language models, especially the public ones, are not designed to ingest a lot of data. So you really gotta stack some technologies together knowing that there's a limit of how much data those learning language models can take in. So that's where it gets interesting to be able to find ways to scan through and pull the relevant information out of large sets of data. Yeah, you don't have to worry about that. The first one, I'm gonna get the box where you hit this button and it does what it wants you to. That's where we're good too, because the.

First thing I think of is contracts, standard identification languages, key terms.

Yep. The tests on single documents work well. The next stage for us is doing it across multiple documents. Especially if you need to run comparisons and things like that.

That'd be awesome.

We're working on it.

Yeah.

But stay tuned in the journey. I'm super stoked about AI for M and A. It's going to be a big game changer and going to feel so bad for people that still use Excel.

You know the story. But we were in deal room for the SPAC deal we did with Goldman Sachs at Marion.

That was like 2 plus billion.

Yeah, 2.6 billion. We had 30 offices, and I don't know how many countries we covered, but it's all across the U.S. europe, Australia, pretty big. Asia as well.

Was it better than using Excel? You can be honest right now, we.

Could not have got it done. There's no way. We just set it up to our age. We split it into divisions, and so each division. Here's your data request list. Here's what we need from you. Manage it through this. If it would have been Excel, I think there's probably 40, 50 people on a deal team, or not on the deal team itself, but pulling diligence. Between the QOE legal diligence contracts and everything else, there's not enough analysts in the world. Or maybe there are enough analysts in the world, but not at Marion to go cover that.

Yeah, it's a lot. You ran the whole thing. You just stole all the requests and everything through deal room.

It was two of us. I gotta give Alex Gaddy a shout out. He was the kingpin. And the two of us. Yeah, just knocked it out.

All right. We got a public deal, basically. IPO, SPAC deal, 2.6 billion. That can handle that. That's good. I actually like that feedback. I'm telling you, the dream has always been there to architect the best platform to do M and A in the world. But I'm glad that you shared that story, because I didn't ask you to.

That's funny. We've done it for $2.6 billion deals, and I've done it for a million. Or. Yeah, I think the deal was like a million dollars.

Work both ways.

Yeah.

I value it. That's how I could. I'm looking forward to growing this stuff in this next generation where it has a lot of the AI capabilities that are definitely what's cool about it. I'll, like, just be really straight up here. The AI capabilities runs across the whole life cycle. But, like, every Persona can benefit from it. If you're expediting diligence, it doesn't matter if you're doing hr, it legal. It really summarizes information in such a very efficient way that you're going to be a lot more sick of having this assistant. And it just. It can impact everybody working the deal. That's why I'm, like, super optimistic about it. It's just not some. A lot of stuff we create. It helps people really quarterbacking the deal. Like a lot of the examples you just shared just, hey, you don't have, like, dozens of people trying to quarterback a deal. You just use the software leverage and make it more efficient. But like all the actual work you do in M and A, finding the information, the summarizing it, just like the learnings that you need to take out and extract the core diligence. Yeah, I can help tremendously with it.

And it should provide a better diligence product too. I was talking with Brian Westland last night over at Danny Kevner. We all have our functional leads as well within a diligence process. To be fair to them, it's not their day job to do M and A. Right. And so we all see it. You get to your weekly meeting with them and you notice, oh, they just got into the data room yesterday and started pulling down some things real quick. And how do I get this out of the office, whatever. And I think if we can leverage AI and knock the human element out of it, we'll have a lot better results and data we can drive decisions off of than relying on humans who. It's not their day job. It's just the truth of the matter on our own.

It's actually really true. There's a lot of the experience you can transfer and retain through the way you engineer prompts in the product. I was also thinking about the financial modeling part of it. I get asked a lot about that automating valuation. But it's interesting when you think about models, over 50% of models have an error in them. They always do. Every time you go back to the model, you'll always find an error in there. So if you think about if you can fix that, we already know. So prone to errors and we're building pretty complex valuations around it. But anyways, before we wrap things up, Tyler, I got to ask you, what's the craziest thing you've seen in M.

And a craziest thing in M and A that I can think of right now? Story's been told before, but same deal has happened and we had gotten down to closing Friday morning. We'd like to do the close at 8 or 9 o' clock and just get it over with. It's typically been a long week. That week was extra long. Tuesday we went to Albany, Georgia for a deal we're looking at. Met with them dinner that night, drove from Albany to Tampa on Wednesday to go clean up some document items for another deal we're looking at too. So meet with the guys, whatever. And it just started getting a weird vibe. We're supposed to close. This is a deal we're supposed to close on Friday and the one in Tampa and we Start getting these weird vibes from the sellers. Something happened in his family, whatnot. And so we had a meeting with him. And our CEO drove down there, his CSO was down there and I'm down there. And even the sell side bankers were there. But the seller's missing and so he's out. He shows up three hours later. And we ended up sending our CEO home just to send a message to him. We're not really playing games anymore. It's Wednesday, we're trying to close on Friday. Shows up, have the meeting, goes fine. And then Thursday we had to go from Tampa to Charleston to go to a conference. We make it all the way up there. Thursday night we're going through the documents. It's at the point where everybody's accepting everything. We'll give this, we'll give this, we'll get this. And we're on there with our private equity group. They're doing their last document negotiation, our lawyer and everything else. And our lawyer messages us who we've worked with quite a bit and goes, hey, I just got a message from the seller saying, go pencils down. Oh, what? I was like, it might be a mistake. Let me just call them. We'll just hang up, whatever. And to this day, still I haven't heard from the seller. Not one word, nothing. It took him probably four weeks to respond to his sell side advisor and say, yeah, I'm just done doing the deal. All the information we got and then nothing.

He stopped, like during closing.

We got that text message at six o' clock at night on Thursday. I had everybody and their mother set up funds flows. Done.

Wow.

And I mean, he still hadn't talked to us today. I think he just got some cold feet.

And I would be pissed, man, I would be so pissed. I would be shaming this person every day on social media.

We hadn't been out to coffee since then. I'm usually a coffee guy or drinks or something. Yeah, we hadn't talked.

Do not buy this person's company. I would be plugging on blast every day. Do not buy this person's company.

Well, it's the whole Jordan Belfor deal, right? He's on social media and goes, hey, sell me this pen. The first question is, are you in the market for a pin? No. Okay, thanks. Next, these guys will either if they want to sell you their business, they'll sell it to you. If not, they won't. Now, he could have done it before. We spent a bunch of money on diligence and whatnot, but just cold turkey.

No breakup fees on that one.

Yeah, no, no breakup fees. And he just like an ex girlfriend, cut you off.

Tyler, this has been great. Thank you so much. Taking the time, meeting with me, hang out with me in Dallas, getting fired up for our roundtable we're going to have tonight and helping me become a better M and a scientist.

Thank you Kisan. It's been a pleasure and I look forward to our roundtable and happy hour afterwards.

Hey, those of you that stuck through, I appreciate you come say hi to me on social media and LinkedIn. Till next time, here's to the deal.

Thank you for taking the time to explore the world of M and D 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 and 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 a science.com or you can text me directly at 312-857-3711. If you just want to 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. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.