CPG Exit Strategy: How to Build a Consumer Brand Strategics Will Acquire | Keith Levy Part 2

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Now back to the episode.

I'm Kison Patel and you're listening to M&A Science.

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Day-to-day for me is not nearly what it is for the partners. I get to go kind of have my happy life and they sweat over some of the details and the notions of paid to be paranoid or whatever the Silicon Valley mantra is around that. But my life is pretty good as it relates to that.

How about when you dig into the companies, you have these companies that are taking off, and then you have other ones that are in trouble and you have brand new investments where you're doing early diligence between that matrix. What does that look like?

[Speaker:TIM_FERRISS] It's all part of it, right? You want everything to be up into the right, but the reality is it's never going to be that way. So the companies that are doing the best probably require the less involvement from us, and the ones that are maybe struggling or at an important fork in the road are the ones that require our time and energy. Or like, you know, we're ready to sell one of our portfolio companies right now. So I spent the last couple weeks on the phone with different banks interviewing them and what is their strategic sort of approach to selling this business? What's the valuation they think? Who are the relationships?

[Speaker:TREY_LOCKERBIE] You help them to pick the banker basically.

[Speaker:ELLIOT_BISNOW] Absolutely. Yeah. Like who are the people that they know in industry and what are the relationships they developed over time? What's their track record of selling businesses in this particular sector? I can help with that. I'm just one of a bigger team, but everybody's opinion matters and everybody's experience is informative. And if you're smart enough to bring the right people around the table and realize that not everybody's going to agree, but like diversity of thought will get you to a better outcome. That's a really good recipe for success.

What have you learned from your experience when you should lean in versus when you should lean out?

Yeah. I mean, I think I lean in when I either have a really strong opinion about something or a real track record of success or experience in a particular area that I think will be beneficial. And when I feel like I'm in a zone where I don't know this product, I don't know this market, I really don't know this problem that they're dealing with, I'm just going to shut my mouth. I don't need to be the loudest voice in the room. That doesn't matter to me.

Yeah. Well, I don't understand that take of operating a $700 million business to advising workloads that are probably $10, $50 million brands. What are those lessons learned over that transition?

People are wired in different ways. I'm actually, I never ever thought I was the smartest guy in the room. That helps It worked to my advantage because you appreciate everybody's approach and opinion and experience. If you're the boss, at the end of the day, you take that in and you make the decision, you own it. With a thoughtful approach and a real curiosity in terms of your ability and desire to learn and then come to a good outcome, that's a really good thing. That served me well. I felt like I've had good success in my career. I haven't done everything right, but I felt like I really appreciated people. I appreciated diversity. I appreciated people that I knew were smarter than me and I needed to listen to them at a time. And I also appreciated the fact that even though I was hearing a lot of good advice and a lot of good perspective, that I knew in my gut we needed to turn left instead of right. And I went left and I told them, I appreciate everything you're bringing to me. And I know you guys are probably smarter than me in this particular discipline, but something tells me we need to go this way. And that's where we're going.

There's something there. Like you got this operator institution that you knew how that played out. That when you're working with these companies at an earlier stage, you acknowledge that and know, "Okay, let me teach you some lessons, son, from my experience." But then at the same time, this guy's got some intuition on what he currently knows in that point, which is, "I have answers for everything." [Speaker:TREY_LOCKERBIE] In a diplomatic way.

It's all about, in some respects, diplomacy. Leadership's about, you've got a vision where you're going, but not everybody is right there with you. So how do you bring them along in a way that makes sense for them and they see the pot of gold at the end of the rainbow and they want to get there with you? You care about them, you give them what they need to get their job done, you help them achieve the things they want to get out of life as well, and then it works. But you have to be a little bit senior in your career to understand those things. When you're younger, you're knocking elbows with everybody and you want to be the biggest and baddest in the room. And once you realize that, okay, you've achieved enough and real success depends on getting these people to achieve their own personal level of success and getting them to feel good about it and what we're all doing together, And that's when you got a— there's sort of a magic in that. I've experienced that. I've had a great fortune of being surrounded by teams that get that. And we've done some cool stuff together and that's created value for everybody.

When it's time to like do a hard bailout, which obviously can happen at any point in the deal lifecycle, hopefully earlier than later.

You mean at a particular portico or— Yeah.

Yeah. They brought you in, they're like, hey Keith, we got a company we're looking at. We want you to bring it in. It's one in one of your expertise realms.

Oh yeah.

Pet food. Beer, snacks, something. You know, you sort of go through that, the Keith Lavi CPG framework, the founder, product market fit, go-to-market, how they make it. Where would those landmines land? Is it like, hey, we really want to see them at manufacturing control based on what we're seeing, trends and blah, blah, blah. Is that kind of like where you lean in? It's like, ah, this is probably one of these optics, one-page teaser, right? One-page teaser looks great. And then you click in Is it that? Is it the product market fit? Digging in, let's find out. Like, where do you typically see these landmines that blow up the deal pretty early?

So just so I'm clear, you're looking for me to answer, like, where does the deal fall apart for you and what are the things that create—

like preliminary diligence, like before LOI, where am I? My landmines are going to blow up a deal. Like, we shouldn't do it even though the one-pager looked great and we signed the NDA and got the financials and we dug in before we set out for an LOI. What's going to break that deal?

Trust and transparency are big things. If you find that things that people are telling you aren't exactly the truth, or there's some things that are they're being hidden or they're material in terms of the ability to actually get this deal done. That's a big thing. Data rooms sometimes are like, man, there's a lot of mess in that stuff. And trying to get at the real financials is difficult at times. And when you find, again, some numbers that just don't add up and you've asked the questions over and over again, you still can't get to a coherent answer, those are red flags. Conversations with team around consistency of story, vision, ability to believe in what's possible. Those things, if they're not coherent, cohesive, and aligned, can unravel something for me. Those are probably the big things. I mean, most of the other stuff is going to be somewhat obvious. Begin to look at a product, a business, a margin structure, a P&L, a leadership team, but those kind of intangibles that you might sniff out through more conversation or maybe pouring a couple bourbons or whatever it might be, and then the lips become a little bit more loose. Those are the things that could be important material and perhaps red flag for this is something we shouldn't go do.

It's not a saturation, like one specific area. It's actually this storyline. And then all these elements tie to the storyline and it could be any one of them.

Yeah.

That sort of breaks it and becomes enough to definitely not do the deal.

As I said, I went to a business last week on the East Coast. We're looking at some others, but we have conversations, very candid ones. Like, okay, John will ask me like, "I really like this business, this brand, these people, but I'm also trying to think of all the reasons why we shouldn't do it." And that's a really healthy attitude because you can become very enamored with stuff very quickly and you got to be really realistic about saying, "Yeah, but am I being smart here? Am I looking under every rock? Am I thinking about all the things that could go wrong here?" That shouldn't be your guiding light, but it should be part of your process to say that I have understood, or I've at least looked hard where this kind of ball of yarn could unravel.

The devil's advocate. You got to play devil's advocate on these deals.

Amen, brother.

You play your own. You got to— you have the devil and angel.

Yeah, I do. But I don't— it's funny. I had this consultant tell me this one time. So like, you don't want dragons waiting in their lair at every opportunity to flame out. 'Cause that could just be unhealthy, but you do need that kind of level of, yeah, healthy devil's advocate to say like, hey, this all looks great, but what are we missing? What are we not thinking of? Why shouldn't we do this? Where's the fly in the ointment that we haven't quite understood yet? If you think about all those things and yeah, you're going, by the way, none of those questions you're going to have 100% certainty to. At some point with 80% of the information, you're going to have to make the leap and just go because you've done it enough, you believe in it. And you're just going to go do it. And yeah, every deal you do should be that way. And guess what? Some aren't going to work, but that's the game and you got to be okay with that.

Have a tight story, back it up. If you're struggling with your data room, highly recommend checking out Dealroom. Go visit dealroom.dev.

But of course, absolutely.

Best product to manage, especially buy-side.

Come on. How many of you guys are still using Excel spreadsheets?

Like, terrible.

Get in the real world. Get organized here.

That's my product placement in the podcast. I don't— I get indirectly paid for every time.

Yeah. Hell yeah.

I appreciate it as a CMO. There you go. I thought it'd be fun to talk through from the business perspective. If we went to the portcô and thought through the life cycle of a CPG brand, you think about from early traction to getting exit ready, the stages that they go through, where do they accelerate? Where do they stall? What does that look like in your lens?

Yeah, that's a great question. And it's part of the fun of what we do because you do see that on every single portfolio.

I love the stories of like, I made this in my kitchen or garage, or I went to the local festival and started peddling this out of a jar.

Farmer's market. Oh yeah.

Exactly.

100%. There are strategic forks in the road along the way at every stage of a business's development. It's like you've got an idea and all of a sudden you're getting some notoriety and some success, and then you're hiring a team, and then you're finding a way to make it, and then you're getting distribution, you're getting people talking about it, and then, oh, we had a quality problem. What happens now? Or "We had an important player in the business leave. How do we deal with that?" Or, "Crap, man, we're selling a lot of product, but we're doing it at an awful big expense. How do we get leaner and make sure that this business has strong fiscal guardrails around it?" It happens in every portfolio company. There's very few that just, again, go up into the right without any assistance from us. Again, that's what we're there to do. We make an investment. We have smart people that have experience that can help them, that take board seats, that coach them, that are available by phone, they're available to make visits, available to make relationships. Hey, you want to get in Target? We know people at Target. You need a good distributor to get into Whole Foods? We know UNFI. You need somebody to make this product? I've got a whole list of comans, some of which you should stay away from, some which you should lean into. That's where we bring the value. Again, it's the check that you write and then what sits behind the check. The way we approach it is that there's players on the team that play a very important role, that have a skillset that can help a lot of founders in areas where they're either uncertain, struggling, or at that important fork in the road. And maybe they want to go left and we're going to say, "I know you want to go left. I've gone left before and you need to go right. Here's why." That's what we do.

[Speaker:TIM_FERRISS] There's this experience, connections, value add that you bring. And then there's the lifecycle of CPG brand and their capital needs as they grow. Can we talk through how does that differ between the guy making some nut bars and honey or maple syrup together and making bars in the kitchen and getting that business going to the cosmetics, the chocolate brands? How does the capital requirements differ as they build that out in terms of how long can you really go before you "Need to start talking to people at your company," versus, "Hey, the capital needs are maybe further out, but there's the benefit of the value-add, value-creation approach that we can partner with." Give me for both lenses, yours and the portcos.

[Speaker:TREY_LOCKERBIE] There's a whole host of needs in terms of where you may need capital or where you want to deploy capital and how much do you need to go do that. So there's the people equation, Do I need— Is it a husband and wife team? They're doing everything by themselves.

They're doing everything by themselves, but how far do they get? Do they get like $5 million revenue?

I mean, look, I mean, I've sat with a company recently that's doing $80 million with a husband and wife doing pretty much everything.

No outside investor?

No.

Wow.

But they're at a point where it's like going, man, I like, in order to really get penetration in retail, I need a head of sales. It's almost a Yeah, it's an inflection point. And then there's another situation that says, yeah, in order to really be able to be confident that I could go sell Walmart or sell this guy, I need to invest in capacity, whether that's their own or through a co-man. Or is it, I've got a great innovation idea and I know this will be successful. It's an extension of the current lineup that we have today, but it's going to require XYZ in terms of marketing, innovation, R&D, whatever. Those are the things that are the areas where when they come to you and go, "Hey, we need another infusion of capital." As a growth capital company, this is also what we have learned is that you have to reserve capital in your funds for follow-on rounds because we've gotten caught where in earlier funds where we've said, "We've put enough in this business. Oh, we like this shiny object, so we're going there." And all of a sudden this business comes back that we really liked in the beginning that needs that capital infusion, people, production, R&D, whatever it might be, and we just don't have it. We might have it in the next fund, but the next fund isn't there. We've gotten smarter about saying, let's make sure that we only deploy X amount of capital so we have X amount of reserves so that when these guys come to us, we can be there. Because there's two reasons for that. One is you don't want to suffer dilution as an investor. But the other thing is it's hard on the entrepreneur. Let's say you're the biggest investor in them. You believed in them, their Series A, and they're raising money and you're not in. That's a big old black eye. Why aren't they in? What happened? They'd lose confidence in the business. So as an entrepreneur, you're doing the tap dance trying to answer all that. It's difficult. So for both sides, we have to be smart about reserving capital and knowing that there's going to be needs that arise that are going to be important to the growth lifecycle of that business, either in top line or bottom line, and/or in people or in whatever it might need. Those are the things where people come to you and go, I need money, or I need to go do a raise, and here's why I need it. Like in the original pitch decks, Kison, you look at it and says like, sources and uses of capital.

I'd say once you have that, once you have a strong compelling case of why you need the capital and what it's going to go towards and you're confident—

Exactly.

Because you obviously want to see ROI and capital get deployed. Where does the money get wasted? If you think about these stages, the money really gets wasted. Yeah.

You know what's interesting? Somebody said to me this early in my journey, only raise the amount of money you truly need because the more money you raise, you're going to spend it.

Is that thing— there's a certain stage in the business life cycle where you just raise too much at the wrong time and then You're inevitably going to waste it. You kind of need to spend it.

It's not across the board, but there's some businesses that have made that mistake and they just spend it and they find themselves in a problem. You got to be smart and diligent about only raise what you need and deploy it in very specific ways that are very convincing of why you need it. And then your investors will come to you with the capital you require, either in a follow-on round or a new investor that wants in. You prove to them by deploying it properly and create the growth or profitability that you said you were going to create. And that just builds confidence in the machine. And then you come back to them 2 years later, say, I need a Series C or D, and here's why, because I want to do an acquisition or I want to go do XYZ. It's like, yeah, you've done it well the last 2 times. There's no reason why I shouldn't believe in you this time. Let's go do it.

So there's essentially assessment on how well the entrepreneur is allocating capital.

For sure. Unfortunately, we've had some portfolio companies have wasted a lot of money. They've rolled out products that had no path to profitability. Or had just all kinds of issues around the belief that this thing would really be meaningful.

[Speaker:TREY_LOCKERBIE] It's not so much the stage that you waste capital. It is more on the executive management team and how well they execute capital allocation fundamentally. That is more of the reality.

[Speaker:MICHAEL_GAYED] 100%. We haven't talked a lot about this in this conversation, Kison Patel, but a lot of these businesses, early stage or late stage, have great ideas, Have great people, have resources, may have created a great brand with connection with consumers, or they fail most of the time, execution. They don't execute. You can do everything right, but where the rubber meets the road is just executing, doing what you said you were going to do. Sometimes people overcomplicate business. If I tell you I'm going to do something, I'm going to do it. If I told you I was going to meet a particular deadline by this date, I'm going to do that. Come hell or high water, because your word is your bond and your proof points about delivering on your promises are important. And like, for me, like a business plan, to me, that's a promise. I said, I'm going to generate 30% growth this year. I'm going to create X amount of EBITDA or whatever the metrics are going to be. And I don't do that. I've broken my promise to you. I teach my son, man, like above anything else, just honor your promises, be impeccable with your word.

Does it all show up in the financials? Like when I think about you're measuring me as a capital allocator and how well I am, is it purely you hit your numbers on the quarters and that signals that you're a great capital allocator, or is there something underneath the financials?

No, I mean, I think it's that simple. Like you deliver your numbers.

Michael used to tell me, he said, the only thing that matters is your bottom line net income at the end of the year.

I mean, yeah, if you deliver your numbers, like I'm not going to get in your face. You said you're going to do this. We gave you money to go do it. You did it. Great.

Fair enough.

I don't need to make it no more complicated than that.

Fair enough.

We get soft touchy about people stuff and there is a point when like the numbers do matter. And I'll acknowledge that right here, that you're right.

The numbers matter.

We agree on something. We don't agree on the frog commercial, but life is imperfect. That's all.

Okay.

So before I switch topics, I want to get to something good here. Let's clear the air on CPG. Define it. How do you define that category? Because we should have probably addressed this earlier.

Consumer product, to me, what you call consumer product goods, you can call it consumer packaged goods. Depends on your definition, but for me, it's oftentimes food, a beverage, cosmetic, nutraceutical. It's something that's going to be in a package. You can go in a retail environment or an online environment and buy and consume. It's not a service. I'm not buying consulting service. Dealroom is a product. You're buying a physical product that actually does something for you, but it's not a consumer product. I'm not eating it and I'm putting it on my skin. I'm not doing something like that with it. For me, consumer products, have those ingredients. But so it's a wide variety, man. It's drinks, it's snacks, it's pet food.

A lot, huge market.

Nutraceuticals, it's cosmetics, it's clothing to some extent.

Now we're in like the trillions market cap because it covers everything.

Yeah, you want to put the TAM to that. It's pretty big. Okay.

Now we switch gears. Let's talk about exit. How do you position a CPG brand for exit? What makes it acquirable versus just another funding opportunity?

For CPG Brands that are positioned for exit, they have to meet a couple of important criteria. One is, do they have a brand out there that's unique, that's engaging to consumers, that stands for something? Do they have a product that sits underneath that brand that's delivering something that is important to a consumer, a want or a need that's maybe unmet by some other companies out there? Thirdly, does it have a level of scale? And that's a very, I guess, arbitrary noun. My idea of scale could be very different than yours. From my experience, like with consumer product goods, a minimum threshold is probably $50 million in top line. And then hopefully you're generating close to double-digit EBITDA around that. If not double-digit, high single digit with a path to certainly double-digit. The bigger you go from there, $60, $70, $100 million, $200 million, and you get to 20% EBITDA, you become more attractive and your multiple goes up. When we're working with companies, we want to get them to a threshold of top line and a profitability point that we think is both repeatable and expandable to where a strategic will come in or a financial investor, like a PE or somebody that say that, "Yeah, there's blue sky here that's yet to be uncovered." From a strategic mindset, it's putting on my Mars hat, Okay, where can I take this around the world? Where can I put in my procurement leverage to buy better and improve margins? Where can I use my route to market strength to be able to make this more physically available? From a marketing perspective, how could I create more noise around this, create more awareness or more connection? Those types of things. When I look at a brand that's positioned for exit, it's got to meet a lot of those criteria for a big strategic investor. For the most part, we're looking to sell to strategics. We'd welcome financial sponsor for sure. But most of our companies are going to be smaller, growing fast, profitable, meeting or exceeding some need in the marketplace that's either unmet or disruptive.

[Speaker:TREY_LOCKERBIE] How do you change how you would position a company specifically to exit to a strategic knowing you've been in that seat before?

[Speaker:BRYAN_LAWRENCE] I know what big companies do well and what they don't do well. What they don't do well is they don't incubate brands well. The best R&D capabilities in the world, but every product that they create looks and smells like came out of a big company's R&D lab. It's not interesting to consumers. So when I position it to a strategic, it's, look guys, let's just agree on something because I spent 30-plus years doing this. You guys don't do this. You don't. Let's just be honest. Okay. This founder has done it well. They've engaged with consumers in a way you can't. They've met needs in the marketplace that you've yet to meet. They're profitable, they're growing, and they've got energy around it. and it's exciting. You need that in your portfolio. You haven't been able to do it. That's how I would talk in very candid brass tacks.

Straightforward. That's what you're buying is a brand name.

I've done it. I've sat with my R&D guys and go, "Look, there's great product out there. I know you can make it." And what would they do? They'd put some glossy package on it. They'd go on air 26 weeks on television and consumers would go, "Eh, not interested." I like it.

So there is a bring it direct. Here's a brand that's proven out. "Just doesn't happen in large companies. Good opportunity to take it, scale it." It's like you don't even have to paint that detail of a picture. You're going to get these kind of synergies from doing this kind of deal.

[Speaker:KEITH_SULLIVAN] The other thing is it's important to get an audience beyond corporate development.

[Speaker:TREY_LOCKERBIE] Oh, the actual business operators?

[Speaker:KEITH_SULLIVAN] Yeah, because corporate development looks at it, it's an equation and it's IRR and it will fit in the— Trust me, I've worked with a lot of great smart corporate development people and they're really good at what they do.

[Speaker:TREY_LOCKERBIE] It's all right if we bash them, half of our listeners, but that's all right.

[Speaker:KEITH_SULLIVAN] No, again, they're not going to have the level of—

[Speaker:TREY_LOCKERBIE] This is what they need to hear, Keith. Let it out.

Sorry, guys, but they're not going to have the level of understanding that a business operator is sitting there going, I got a big problem in my business plan. And the only way to fill that hole is by getting a product or a business that addresses that need over a period of time. And again, the corporate development guys are great. They have a discipline that they execute, but somewhat limited in terms of the strategic importance of a particular acquisition. So you got to get to both. You got to get to the operators that have a need. Then you got to get to the corporate development people that are going to actually execute the deal. It's going to make sense financially and strategically for the overall business, but you got to get different audiences. For me, that's critical.

Yeah. So it's more than just the corp dev folks. Forget detention. Maybe get the sponsor from the business that understands why the deal would make sense.

And good corp dev guys know that, man.

A good corp dev person listening to this podcast, would partner with their business unit leaders and bring them right in and work in partnership with each other.

It's like, hey, look, Kison, I've got an idea. I've seen this business in the marketplace. I know you have an opportunity to want to create X, Y, and Z. This can help. Let's have a chat.

At the end of the day, there's a business case that is to be made on doing the deal. And there is a point on your role where you can be proactive or encourage the founder to be proactive. To be able to get that business case, get the conversation that leads to exploring building a business case on doing the deal. And fundamentally too, like in terms of optimizing for exit, the more options the better. And I'm curious, more options you curate proprietary as a principal and founder and you as an operating investor versus hiring the banker to go do it in terms of a, hey, we want a compressed timeline and get this deal done.

This isn't exactly related to that topic, but one of the things I was thinking about as we were talking here is deals come both ways. Corporate development guys go, hey, I got a call from a bank. That's shopping a brand or a product, and this can make sense for your business. Maybe the operator's interested, maybe he's not. The other way it goes is the operator calls up the corp dev team, "I've seen this brand. I was in wherever, Ecuador, and it's pretty cool, and you guys should take a look at it." There's times when both sides are helpful for the other. In other words, sometimes the operator has this idea and he sees this thing, and the corp development professional is going to be more adult supervision in the room going, "I know you like this, but here's why it makes absolutely no financial sense." And that's important. And then on the other hand, it's like sometimes the corp dev pipeline of things they're seeing is pretty limited to what's coming through bankers or different systems that are looking for stuff. And sometimes you just discover stuff because you're an operator and you're out in the marketplace, you see something no one else has seen, I need you to take a look at this. It's a great relationship. But again, why both audiences are important from when you're trying to position a business for sale. Who do I need to talk to?

Start building that appeal early and obviously have that business dialed in to be appealing. Your investments that work out the best, I want to distill what are those key characteristics that worked out well? Is it more in the founder, the category, the timing, the operational readiness?

Founder, still place a lot of value on that. They set the tone, they create the vision, they create the team, they hire the people they need to get, and they make shit happen. Number one. Secondly, how have they been able to create a story that's somewhat unexpected, either brand traction or incredible distribution and top-line revenue delivery, or maybe just a margin structure that's unique to any other player in the category? We've had some of those in our portfolios. A couple of them have been exited because of those very reasons. Again, you're asking me to draw on my experience, so I'm looking at these things and going, "Yeah." Those were some of the things that were difference makers for those particular companies versus maybe some others that are also ran.

Is this the pattern? There's like super strong founder and they crack the nut on something. They got this unique edge that sort of allows them to really win on it.

It has a lot to do with that. Look, I'm not going to tell you that we don't have constant arguments with founders about what they think and what we think. That just happens. That's business and that's part of it. At the end of the day, if the founder's passionate enough and they've just got the brute force strength to just overcome obstacles and push their team and their ideas through insurmountable circumstances, it's pretty cool when you watch that happen. You could see the value in that founder. Conversely, when you see a founder fold under the pressure or focus on all the wrong stuff or completely distracted with the next shiny object versus driving core business that's important to survival, you also see the differences in the really good founders and not so good founders.

What was the best investment Sonoma ever made?

That's still yet to come. We got a couple of exits.

You could pick one you're super proud of.

We have a couple exits that are on the horizon. Could be really big. To date, uh, is Touchland.

Okay. Touchland.

Yeah.

We brought that up earlier. Does that hold true? Founder and the key edge.

Why?

Explain why was it the founder that was instrumental in making that deal successful. And what was their key edge?

First, female founder in a cosmetic category, created a just great product with an incredible margin structure and forged a great relationship with Sephora. You got with the biggest player in that particular industry. You made your product physically available at point of purchase. You had a kind of charismatic female founder, which makes sense for that particular industry, and you just created a brand around it that people wanted to lean into.

And I'm imagining you're being very Type A, dialed in margins and boom, I know I need to get this big brand partnership to win, get it done.

Yeah. I mean, it was odd because I wasn't very involved in this business at all because it's not my wheelhouse, but the people that I know in the firm that were like blown away with how little they needed to engage with this group because everything they were doing was just right on point.

What was their key edge?

I don't know how to describe it. It's all those things I just mentioned. It's like a product that was unique. It was packaging, it was brand, it was Sephora, it was massive margin structure. And it was, I mean, we were in it like 2 years.

So, you know, I think there's a good point on it. Could be multiple factors that builds that guilloche. You got a few things that you really nailed and then boom, that's that. It's a great success. I want to talk about a little more sensitive. Yeah. The deals that fall apart.

Yeah.

And we'll be anonymous and we'll put you on the spot.

For sure.

You're in trouble with people calling, badmouthing me or you or, but I want to understand these deals, why they fall apart, especially after you did your diligence, you cut them a check, you got a lot of high hope, obviously, that you mentioned on your full confidence. That's why you cut them a check.

Yeah. I mean, look, founders that haven't actually lived up to what we thought they were kind of one of the biggest problems. I keep placing a lot of emphasis on the founder, but I'm being consistent in why I believe that. And the ones that have done really well have lived up to or exceeded expectations and the ones that haven't have fallen below. And why have they fallen below? Some were maybe more distracted than we thought they were and less focused on the things that were important. That's one. Secondly, maybe the level of understanding of the financial structure of what it takes to both develop, launch, and actually make money on things was probably disconnected than what we thought. And again, back to the ability we thought the founder and the leadership team in the business. And thirdly, it's just been some bad luck situations, maybe a quality problem, or you lost the ability to make product in a particular deal, which maybe you've compromised an important relationship with a retailer that was counting on you to deliver a certain level of inventory and you weren't able to do that. And that was a problem you can recover from, We've had those things. We also have had things where we've bet on some celebrity founders. There was a period in the 2000s in particular, whether it was George Clooney's behind the Casamigos or whoever, XYZ celebrity behind this particular brand that just made it seem like they were born on third base. They had those advantages that other people didn't have because they had notoriety and they could bring attention to the brand. And then what we found was that sometimes those celebrities weren't either as critical to success of the business or they weren't as involved as we thought they were going to be. That was kind of a bad assumption on our part, where we felt like we'd seen that formula work. Kobe Bryant with BodyArmor or George Clooney with Casamigos or Whoever. We kind of fell into that trap a little bit thinking that's very repeatable. And in some respects, there's a reason to believe that, but there's a whole lot of other things that have to go right besides that. We've had some failures with that assumption. We've also had some areas where we stubbed our toe or didn't reserve enough capital to do follow-on rounds, put money into businesses that needed it. That created some strain relationships and maybe some issues around where we wanted to go together. And I think there was some businesses we invested in early that weren't profitable, that never became profitable. That informs some of our current philosophy that says we're going to invest in businesses that have strong recurring revenue, strong growth, and profitability, or a very short window of path to profitability. Quite frankly, I think those have all been good lessons. Life and career, you make mistakes and you should be a curious learner your whole life and allow those mistakes to be things that inform better decisions down the road. They're actually valuable. Yeah, nobody wants to make a big clangor out there or a mistake, but they can actually be very good to your professional development and your personal journey and your firm and your philosophy and investing. I create success over long-term. That's trite, but most prolific business leaders will tell you most of the stuff that they learn, the most valuable lessons from the mistakes and the failures.

Getting some good ones here. You listed distracted founder.

Mm-hmm.

The cost to execute was underestimated. Bad luck happens.

Bad market.

Damn. The celebrities, but I take that as almost copycatting models and then you have certainty because the model is successful somewhere else.

That's a good description.

The funding scenario could shift where you're finding add-ons, things change and that whole funding and just the market. Funding could rise up. It's hard to get subsequent funding rounds. The other was maybe the company's either too early or there was this unclear path to profitability.

Yep.

I already got some good lessons from your experience here. What was the most expensive lesson?

That one's hard to answer without revealing the identity of the particular portco.

Not even a broad nature of it. Was it the founder? Was it the—

Jesus, there's a whole host of like comedy of errors, quite frankly. Bad assumptions going in, founders maybe too high of evaluation expectation, going through potential processes to exit. It was bad timing of things like COVID. It was Too much money spent on a broader executive team than probably was necessary to meet the needs of the business. It was bad execution, which I talked about earlier, and it was bad margin structure. Those are the things that basically have unraveled certain investments that we had high hopes for.

[Speaker:TREY_LOCKERBIE] Okay. So we have multiple of these. You got in at a high valuation. There's this sort of operating cost model, essentially cost to execute. The uneventful COVID happens, that's bad luck. And then profitability, past profitability.

Yeah, I guess it's usually not one thing, man. You want me to call out one thing, but it's usually, like I said, a comedy of errors. We learned some good lessons from that stuff. The thing is that I've realized in my 40 years of business is that most mistakes are not fatal.

If you had to go back in time and rediligence that deal, would you do it differently?

Yeah, probably wouldn't do the deal.

Can you walk me through what that funnel looks like from the different stages when you're starting to look at deals and then when you start really getting more serious about it until you actually get one that's actionable? Kind of clarifying the funnel.

[Speaker:TREY_LOCKERBIE] There's a lot of deal flow that comes our way. For example, I've been involved with the funds for what, 6 years now, 7 years almost now. We've looked at hundreds of deals and as I said, we have 25 active portfolio companies. Think about how small of a percentage that is. So you're going to look at a lot and a lot's going to go right out the bottom of the funnel saying, "No, this just doesn't work," or out the side of it for a whole host of reasons. Maybe it's not big enough, maybe it's not profitable, maybe we don't believe that the product is that unique, maybe we're not in love with the founder-led story or the founder himself or herself. Those types of things will be a bit of a screening process. Let's say something does make it through the funnel, like, "This is interesting." All those things that I just mentioned that a rejected opportunity would essentially be rejected because of, those same things would be the ones that you would check the boxes, say, "Okay, now they're checking these boxes, so let's continue to pursue this." We have a couple of junior folks in the firm that are doing a lot of the sort of deal flow, if you will, and screening a lot of that stuff before they would bring it to the partners. But once they bring it to the partners, We get a little bit more serious about it, then we do a little bit of our own due diligence in terms of looking at their numbers, if they'll share them, sometimes making a visit, certainly having a meeting, whether that's Zoom or in person, and getting a feel for the people and again, the business you're hoping to do business with. And if you get beyond that stage and you're really serious about it and you want to make an investment, then it goes to the investment committee. We have an investment committee in the firm. It's at that point where we're going to try and poke holes in it. What are the things we're not seeing? What are all the reasons why we shouldn't do this deal? Versus all the reasons that we should do it. If it passes that level of scrutiny and all the partners agree that, yeah, this is something we should go invest in and bring it into the fund, then we do the deal. I'm condensing that a lot. That could be months of looking at something for where it became interesting to where you actually wanted to put some action against it.

[Speaker:TREY_LOCKERBIE] So you got some stages. You have this essentially like a real quick diligence pass, which you can tell, does this even fundamentally fit our criteria in terms of company size, category, and just is the company going up or down type of thing.

Yeah.

And then from there, and you've got teams that scout that out, you get a little more serious, like this fits initial criteria. Hey, let's sign an NDA. Let's start digging around. This is maybe when it gets brought up to the partners, when it, when there is a stronger fit, if it's sourced by the junior folks, maybe some of the stuff actually comes through your network. How much does it lean on this kind of broad funnel that the junior team brings in versus stuff that actually just comes through the network?

[Speaker:ELLIOT_BISNOW] It's a combination of all that. All of us have relationships and people throw stuff our way, and most of us are pretty curious. We want to look at almost everything, right? We've looked at enough things that we can quickly tell whether or not it warrants further discussion or further investigation or exploration. There's certain portfolio companies that have come through the main partners that'll get fast-tracked a little bit, but there are sometimes things that just come out of the blue through relationships and go, ooh, this is interesting. Let's dig deeper.

Got it. So it can come from multiple sources. And we get serious about it, sign an NDA, start meeting people. The Keith Levy diligence framework comes in play at this point. And then this investment committee, what is that comprised of? Is that all the partners there? What is— how big of a committee? Who's on there?

It's basically the partners, which in the firm are about 6.

So key stakeholders in the GP level, certain partners.

Have different expertise and different backgrounds in terms of the deals that they bring more credibility to, let's say. So we have guys that have worked more in their career in, let's say, things like light manufacturing. We have some that work more on nutraceutical cosmetic. We have some like myself that work more on consumer packaged goods that people would put inside their body. They would eat them, they would drink them. And those voices get louder depending on what we're putting in front of them and how much expertise and experience they can bring to bear on the particular idea.

You're trying to kill the deals as quick as possible, basically. That's like initial, hey, does this fit our broad criteria? You go through your framework, essentially look for the red flags. It's not going to be a doable deal. You want to do it earlier. You get to LOI. I guess the painful is once you sign LOI, And they kill a deal post-LOI. That's when it starts hurting. What I'm trying to get at is the reasons you kill a deal through these different stages. Hey, obviously it's not even a fit. This isn't the type of deal we do. We are looking for whatever it is, 40% growth rate, something like that, or a certain revenue size. I understand that in the earlier stages, but then as you progress, and we talked a lot about the founder fit, that's one. But what are the other reasons that would come up, especially later where it gets more painful in terms of reasons you would kill the deal?

Maybe a competitive threat. That all of a sudden enters the marketplace that didn't exist when you started doing the due diligence. Ooh, they've got some company here. Maybe this isn't going to be as easy as we thought. There's no real moat here. So that happens. I remember we looked at a couple of deals during COVID that were really good, and today we regret not doing them, but we were just scared at the time. Everything was new and uncertain, and we just, we kept the deadbolt on the checkbook at that point. Whereas today, some of those products that we passed on are like, wow, wish we would've done that deal. But Those things happen. There's also some things at times that come out in the diligence process where maybe people haven't been completely transparent with you. And as you get to the end of getting ready to actually write a check and you start looking at the numbers a little bit closer, they didn't tell me this. This is a surprise. And that sometimes—

Surprises.

Yep.

—is a trust problem. And you can't go into deals with people that you don't trust. So those are just some examples that I've seen over time that could unravel a deal in a late stage.

Have you been part of a process where you champion a deal all the way up to the investment committee, the investment committee killed it? Like when the investment committee kills it, what do they see that you don't?

Yeah, I haven't had a lot of that at Sonoma. Typically when it gets there, we're pretty much going to do the deal, but I've had a bunch at Mars where it went through. We had stage papers. We had to write a stage paper. Even have a conversation with somebody, and that had to be approved by basically the board. And then once we got past that, stage 2 was like, okay, we want to enter into non-binding negotiations. And then stage 3, paper had to be written to say, oh, we're really serious. We want to bring this to the board and we're really interested in acquiring it or making investment or whatever it was. I'd say more often than not, things got shot down even when we got that far, for whatever reason, IRR isn't high enough. Maybe It was, in my case, I was looking after acquisitions and investments in snacks and treats and things like that. But we're competing with a pet care segment. We're competing with a food segment, and maybe they had a more attractive deal, in which case my particular deal got thrown to the bottom of the list and got rejected. So that happened a lot in March. Is it something just their intuition?

Because you're dealing with investment community that has so many years in the industry that they're just like, "No, this is—" You talking about at Mars? As an example in general, but maybe in that case, because that is a very well-established sort of family legacy business that may be different versus the PE firm is relatively a newer business.

Yeah. Yeah. And again, once it gets to the investment committee, we're looking for—

It's also like a PE versus strategic sort of— Yeah.

But again, when it gets to investment committee, you're pretty much— It's going to take a lot to unravel it once it gets that far, because there's going to be, whether it's John or myself or somebody championing a particular deal, And the investment committee's going to have difficult questions to answer, but we've thought through a lot of those. And oftentimes, like most things, you don't have all of the information. You got to be somewhat comfortable with 80%. In other words, don't let perfect be the enemy of good enough. At some point you have to move. That's the one thing that is great. A big difference from working with Sonoma Brands versus working inside a large strategic is that they move fast. They're nimble. Big machines like Mars or Mondelez or whoever that you might deal with, they take a long time to do stuff. There's lots of layers of approvals and oftentimes they lose deals because of that. But we don't want to be in a position because we moved too slow and we've lost a good deal.

[Speaker:TREY_LOCKERBIE] Two more questions and we'll wrap it up. [Speaker:BRYAN_LAWRENCE] Sure. [Speaker:TREY_LOCKERBIE] One, like you said, in every chair from marketing the brand to running the company, investing in them, sitting on the boards, and even stepping in when things are on fire, which seed taught you the most about what actually makes a brand last? Being a CMO.

Okay. Because you're very focused on creating brand health. Brand health is a metric of how many people choose you most often when they have lots and lots of choices out there. So I have to do everything in my power to make sure that brand is a trust mark that you trust impeccably, and that I engage you, I'm in front of you, and I'm delivering against your expectations day in and day out. I used to think about this framework when I was at Mars, which I actually thought was really genius. It was like this flywheel that we called Laws of Growth, actually officially created by a professor down in— it was Australia. But what it basically subscribes to is that you have 3 components of creating scale in a business. One is you need to create mental availability. I'm aware of who you are, what you represent, and I know your brand. Once I achieve that, that's first check. The second is physical availability. Once I know you, I'm going to be looking for you. And if you're not available and I can't find you, that's a problem. But if I have physical availability and nobody knows you, nobody's looking for you, that's a problem too. So you have to have mental availability, then physical availability. And then when you create scale, people know you, people are looking for, they're buying you on a regular basis. Now you're really spinning that flywheel at a rapid rate because you've connected those dots around it. Again, I learned that as a CMO, and I learned that as a president of different divisions of Mars, about how important that is to deliver upon those expectations you've set for consumers, be in front of them, be available to them, and deliver on those promises of the trust mark that the brand has said, "This is who I am." Great brands, they're really clear about who they are and what they stand for. They're also very clear about what they're passionately opposed to. [Speaker:TREY_LOCKERBIE] Interesting. [Speaker:BRAD_STONE] If you do that really well and really consistently, people will always know who you are. Guess what? I'm going to alienate some people because some people aren't going to like what I stand for, or they're not going to like what I'm passionately opposed to. Think about the world we live in today with politics. I'm okay with that because if you try and create a brand for everybody, you'll create a brand for nobody. You've got to create those boundaries around, this is who I am, this is who I'm not, this is what I stand for, this is what I'm passionately opposed to. And you do that well in every single touchpoint you show up in front of consumers with, you'll be successful. I'm convinced of that. I've done that successfully throughout my career. I manage multi-billion-dollar brands, some of the most valuable brands in the world, and I've done it with small businesses and brands that can learn from some of the things that we've done. Over time that have built a following that's hard to argue with. That's how I look at it.

This might be the best takeaway from the podcast. So for me, I stand for learning from the best in M&A. That's always been the number one thesis of the whole podcast. Learn from the best, period. The counter to that is the bullshit corporate fluff, the conference that is just a bunch of talking head panels with super high-level topical and there's no depth in real tactical advice. I had to push you to the point where you wouldn't answer some of my questions. That's where I feel good. I'm like, I did my job.

No, amen. I hear all that and I agree with all of it as well. Comfort zone is one of those things that particularly as an interviewer, as a business owner, you got to push people beyond. You're leading people. They think all I can do is this. You got to push a little harder. So I think you can do more. I know you can do more. And same thing when you're trying to get to the root of the real answers. When you get the most out of yourself and get the most out of people is when you push yourself, you push others out of their comfort zone and places where they don't think they could go. And then when they get there, it's like, "Wow, I'm glad you did that." Or, "I'm glad I did that to myself because I don't think I would've gone there." I'm obsessed with Navy SEALs these days and listen to a lot of podcasts on what the body can endure that the mind will often give up on. And the same is true in business. If you can just see something in people or see something in your business that you think is really possible, but far out there, maybe feels somewhat unattainable. And when people get there and it's like going, "Whoa, it's a barrier we didn't think we could actually cross." And they get there, it's pretty cool. I've had a good fortune of having those experiences in my own professional career, both in the corporate world and even what I'm doing now. And it's what gets me out of bed in the morning to think about what's next and why I even spend time doing any of this. It's sort of part of the human quest, the human equation, and what's really possible in life.

Push yourself, push others, and learn to suffer.

Yeah, man. You won't know joy unless you understand suffering.

That is so true. What's the craziest thing you've seen in M&A?

This latest Mars deal to me, because I was close to it, was interesting to me. The Kellanova deal. Kellanova. Yeah. Huge. Big deal.

Huge. What is it? $10+ billion? Yeah.

But I get why they did it because they had a very small subscale food business with essentially Ben's Originals and Tasty Bites and a few not super well-known brands. So you're lost in food brokers and a subscale business that just doesn't add up to a whole lot. You look at Kellanova and go, "Wow, it's multi-billion dollars. I can just throw on the top line and now I'm a player in food." And I get that because there's only so many multi-billion dollar acquisitions for a company that's got a $70 billion top line that's actually going to be meaningful. But Back to why I joined Mars Wrigley when I did was that I believe that they had brands that weren't on trend anymore. Great brands. There'll always be a consumer for those, but if you want growth, you have to expand beyond those boundaries of the brands that you have. Kellanova, man, you got Eggos and Cheez-Its and a bunch of stuff that's not really much on trend. I don't know. You have scale. You've bought a big piece of revenue and certainly some household names out there, but are they going to grow? And can really look in the mirror and say, "Yeah, I'm tapped into the future of what consumers want versus what they wanted 20 years ago." And they're still buying, but maybe they're not buying at the same level they used to. So Mars is a phenomenal company. Paul Weihrauch is an amazing CEO. I mean, they've got really smart people there and I'm sure they probably know why they did it better than I do. But as an outsider looking in, I wonder, "Did that really make sense or not?" I had a lot of bankers call me, which I couldn't really talk to them about my opinions about what it was. I can talk to you, but it's just the deal's done and they're integrating and then they got to do what they need to do to realize the synergies and the value creation that they promised the board and Mars family. And they'll do their best to do that. But that one surprised me. It surprised me and it didn't. I knew they wanted to be player in food and this was out there. They did it. I just, again, take a step back and go, are these brands really better for you? Are they ones consumers want? They going to grow? Are they going to be the future? And the jury's out on that, at least for me.

Big mega deals that surprise you. Crazy. Keith, I appreciate taking time to have this conversation. Anytime, buddy. It was a lot of fun. I learned a lot through this conversation. You've helped me become a better M&A scientist. If you're still listening to this podcast at this point in time, one, I got to thank you, my fellow M&A scientist. Make sure you're a member of M&A Science because that's a seal that you're a true M&A scientist. And then we have all these things I'm continuously building on that. I want to get some feedback on this podcast. One, high altitude, we're 900 feet up. So I'm curious, that threw my voice off, I could tell a little bit. Two, bourbon conversation. Usually it's a coffee, but we've got A little later in the day, so he got us some bourbon. I just want to know what you like about the podcast. Reach out to me, connect with me on LinkedIn. I dropped my privacy thing so you can just connect with me, but put a little comment in there so I know it's not spam. You just generally want to connect, and I love to get feedback. If there's topics I haven't covered, bring them to me. I'm open to exploring and finding good SMEs, mostly operators, to put on the podcast, and also criticism. I'll take it. There's things you think I could do to make this podcast better, reach out. I love to hear the feedback. Till next time, here's to the deal.

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