Executing a Divestiture Without a Bank

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I'm Kisam 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.

Up first, Keeshan Patel will interview Russ Hartz about divesting a business line without a bank. Russ Hartz has been M and a for over 20 years and previously was VP of Corporate Development for SAP. So pay attention folks, and enjoy the event. And as always, here's the deal.

Hey, Joining me today is Russ Hartz, Vice President of Corporate Development at Ansys. Our discussion today is how to successfully execute a divestiture without using a bank. Russ, could you kick things off with a brief on your experience with divestitures?

Yeah, absolutely. And first, I have to say that was a great intro by Shyla. Thanks very much. Probably the best one I've had. My experience with divestitures basically spans you mentioned. I've been doing M and a for 20 years. It basically spans that entire 20 years, starting when I was first practicing law as an M and A attorney at a large law firm. Back then, I had represented clients on both the buy side and the sell side of some divestiture transactions. So I got my first exposure to divestitures on the legal side. I moved over to the business side of dealmaking in 2005 when I joined SAP's corporate development team and during my 12 years there, engaged in a number of divestiture evaluations, several of which ended up in closed deal deals, including one fairly large one that was announced publicly in 2009, where we sold what was basically an IT services business that SAP was running to T Systems. So two large public German companies in the deal, which led to some interesting leverage dynamics on both sides. But it was a pretty sizable deal in terms of the revenue at stake, the number of customers, and the number of employees that were part of that deal.

Since our talk's about divestitures, can you walk me through what should actually be divested? How do you assess that?

Yeah, absolutely. So first, let me start by saying, just to set the stage here, I think companies should be regularly evaluating whether any of their businesses could be divestiture candidates. For obvious reasons, discussions around whether to divest the business can be quite sensitive internally. It's scary for people that are part of that business that is being talked about for potential divestiture. But frankly, I believe that companies have a duty to their shareholders and to the employees and customers of a business that may not have a future under their ownership to at least consider whether a divestiture would help extract greater value for them and result in a better owner for that business. And the other reason to engage in a regular divestiture analysis is because successful divestitures require rigorous planning, and that could take many months. To accommodate all that planning, you need to identify the businesses that you may want to sell far in advance when you may kick off an actual formal sale process. So you should absolutely avoid rushing into a sale process. You should try to embark on a sale only after you've got your arms around what are you going to sell, what exactly you're going to sell, what are the implications of a sale to the remaining businesses that you may have? You need to identify all of the issues and risks that might pop up in a deal so you can anticipate those as you're reaching out to potential buyers. And you should avoid what is the common trap of waiting to sell a business after the wheels have come off and it's dramatically underperforming in both of those cases. If you're rushed to sell a business, it's going to significantly reduce the value of that business and it's going to probably limit your potential buyer pool. There are going to be less people interested in a lower value business, and so you may be left with a group of interested buyers that you may not want. How regularly do you evaluate whether to divest annually? Seems like a good cadence. You can wrap it up with your normal annual strategic planning and budgeting processes. You've got a fresh set of financials and other operational metrics that you can look at at the end of the year, going into the following year. And when I think about it, that feels like the right time to be taking a look. You know, are there any businesses in house that you should be considering for the best? I don't know that I answered your question, Keith. I mean, coming back to the question of what businesses should you divest? I'll be a little bit briefer on this point. You're looking at businesses that, for whatever reason, are no longer consistent with your strategic direction, no longer Important to the core of what you do. You're kind of your bread and butter and oftentimes that means underperforming businesses from a financial perspective. And we can talk more about each of those aspects as we go through the discussion.

I like your point on making sure that you are periodically making that assessment and evaluating what business lines could potentially be divested annually. At the very least, it sounds like is the ideal time.

Yeah, I think that's important.

Can you walk me through how you would run a divestiture without a bank?

I love the tagline through all of this without a bank. Be interested to hear bankers takes on this. And we're talking from the perspective of the perspective that I've had of being part of my second corp dev team for larger public companies. We have quite a lot of resources in house to be able to to run deal processes primarily on the buy side, but on the sell side as well. So we are walking through the process. You know, something I touched on before, which is the prep, the prep that you need to do and the planning that you need to do before you actually dive into a sale process itself. Because the ultimate key to success is the planning that goes in ahead of time. What are we planning? Well, for starters, you have to plan, as I mentioned, what are you actually selling? So what is the quote unquote business? What products are you going to sell? Is there intellectual property? You need to retain some license rights in that intellectual property after the deal, who are the people that you're going to sell as part of that business? What contracts need to go? Customer contracts, partnership agreements, office lease agreements? Do you need to retain certain rights under those contracts because there might be some co mingling with the businesses that are going to stay behind and what hard assets are you going to sell? So all that needs to be defined up front with specificity. You need to clearly define for potential buyers exactly what you're offering and you need to exhibit to them and be able to exhibit to them that this is all they need to be able to effectively operate the business going forward. Now, with respect to the people that you would propose to include, you need to plan not only who they are, but how you're going to keep them while you're evaluating a sale process and running through a sale process. Because at some point in the process they are going to find out what's going on and it may not feel good to them at that point that you're looking to sell the business that they're a part of and you can't lose Them, they're part of the value for the buyer. And so you may need to put some retention bonuses in place to keep them on board. And you should be open and transparent with them as they learn about what's going on. You, you're going to need at least the management of the business that you're looking at to be part of the sale process itself. Like they'll be part of management meetings, they'll be giving their take on the business and their pitch for why it's a good business to the sellers. So you need them on board. What other types of things you need planned? When is the right time for a sale process? You might need time to clean up some of the business that you're thinking about selling. You may find when you're pulling together, okay, what's part of this business? You may find some of the contracts are messy or they're unprofitable, or there are other terms that environment not like, well, you may need time to renegotiate those and clean those up. Or there might be a milestone coming up associated with the business, like a new product introduction or a new version of a product you're putting out. Well, maybe you want to wait until that happens and until that milestone is achieved to start a sale process so that you can show more value in that business. Before you start reaching out to buyers, you need to figure out and plan, what are we going to show buyers in the sale process? What information are we going to provide? That one's pretty easy in one respect because as a corp dev team, you should start with the due diligence request list that you would provide to a seller when you're the buyer, right? Pull out your own due diligence request list and say, okay, what do we ask for when we're buying a business? That's what we should expect. Any buyer interested in what we're looking to divest to want to see. The tricky part is when you think about, hey, we know what they're going to want to see. What can we provide? Remember, we're talking about a business inherently that operates inside of a much larger organization. So things like financial statements you probably don't even have because you're probably not reporting on that business separately from your broader business. So you got to create pro forma financials and you got to plan that out. You need to involve your finance and accounting team to help you generate those financial statements because that's first and foremost what a buyer is going to look for. I could go on and on and on about all the details that you need to think about and need to plan for when you're thinking about a divestiture before you even, you know, contact the first potential buyer. Not least of which is what are the expenses and employee resource times that you yourself as the seller of this business are going to need to incur to run through the process. But the point to walk away with here is that all this planning in advance will benefit you down the road. As part of the sale process, it will enable you to better define and market to potential buyers what you're including in the sale. You can identify some potential potential transaction terms that you want to tell buyers, look, we expect these to be part of your offer. You need to plan how to market the business. And doing all this planning will help you. What is the real value in this business? Likely a lot more value than we've been able to tap into. But think about what value you could sell to potential buyers. This is all before probably where you were going with your question, which is how do you run the actual sale process? This all happens before that. It's a fundamental starting point for, for a divestiture is all this upfront planning. And this could take, you know, I said take a long time. I mean we're talking months to up to a year. You might Decide now we're March 2021. As part of your review process, you might decide, you know what this business, you know, XYZ business unit, we want to sell this long term. Our goal is to start selling it this time next year. So between now and next year, you put together a project plan of all the things you need to do to package up that business and have it ready to go out to market a year from now.

There's a lot of early prep work involved and some few things I noted was one, define what's actually being sold early on and what's going with the business. Then the whole people aspect. I've learned the term ring fence from that and making those tough decisions and sort of understanding you may have some hybrid roles. The right time to sell and then preparing the documentation. I like your point around starting to think about the buyer's perspective.

Yeah.

And who's going to be the potential types of buyers. On the right time to sell. Is there a right time to sell seasonally? I'm thinking of like a house or a car. I feel like there's times of year that's better to sell. Is a there a better time of year to sell a business?

There is, as you know, the year end Rush in M and A. Just like in many businesses, it's a year end rush right now, not so much seasonally, but just where we are from occurring current environment perspective. It may cause a company to be tempted to rush a divestiture to market because it's such a seller's market and you'd have to balance like how quickly could we get out to market with an asset since the such a seller friendly environment with does that leave us enough time to do all the planning that I talked about Again, another reason why year end is a rush is because everyone, especially with the change of administration, right. Everyone's worried about are the tax laws going to change next year. So let's get this done in Q4 before tax laws change and the implications of the sale for us might change. So those are timing considerations though that you should be factoring in.

Great points. Well, let's get into the other steps because now that's just the front end.

The actual steps of the sale process look very much like what a typical bank or auction process would look like. One of the goals here you're trying to accomplish a bunch of different goals, but one of the top goals on your list is to maximize the value you're getting from business. To do that you want to create some competition for what it is that you're trying to sell. So you should run some auction or auction like process, could be lighter, could be heavier to generate that demand in that competition. So start with defining all the potential bidders. Pull together your BDR with all the information you've identified in the planning stage that you're going to want to provide now. You will provide all of it to all the potential bidders. On day one, you'll expose bidders to more and more information as they get more serious and as you run through your auction process. But populate the VDR as a starting point. Prepare your SIM or your confidential information memorandum that provides comprehensive overview of the business to be sold. And this is one of the things that bankers, one of their core things that bankers deliver, you can deliver as a corporate development team or deal team, something very similar to that that lays out the assets, the employees and contracts you're selling, the financials, et cetera. And then when you've got those steps in place, then start reaching out to your potential bidders. And I would start by soft outreach to just describe the nature of the business that you're selling in generic terms without really sharing any confidential information. Because at this point you don't have an NDA in place so just give them little bits of information and they know your identity and they know you're a public company. You don't want them out there talking about specifically, hey, this public company is looking to divest the business. So you got to be really discreet with what you're sharing initially with potential bidders. And you tell them if you're interested in hearing more, sign our NDA. Once they sign the NDA, that's when you can send them your full SIEM and your bid process letter, which again, bid process letter would look a lot like what a banker would produce and outline the important terms of a deal. What you envision as the deal process, maybe it outlines some of what you plan to do from a transition services perspective, which I'm sure we'll get into as part of this discussion here for bidders that want to continue to learn more from there. You conduct management meetings with interested bidders. And so at that point they've gotten the sin, they've gotten some basic diligence information in a vdr, they've had meetings. Now you're ready to collect some offers, collect offers from anyone who's still interested. And you should be narrowing the field down at that point to a small handful of parties that you could see yourself selling this business to to now make the process more manageable because you're reached a different level of seriousness with these potential buyers. With that group, you're in parallel providing kind of confirmatory diligence, the next layer of detailed diligence to them and you're negotiating final agreements. And then from there, at some point, once all the agreements are kind of negotiated with the three parties and you know what you have, you know firmly what their offers are, you select a buyer and you sign the deal. I mean, none of that's going to come as a shock to anybody who's ever done a deal on either the buy side or the sell side. It's really a typical auction type process.

What considerations do you put in when you look at doing an auction process? Between doing a full on comprehensive auction process versus very targeted when you're targeting a single or a few buyers or whatever sits in between those?

I think part of that comes out of your assessment of the buyer pool. So how certain are we that these five potential buyers, we're going to come up with real buyer from this group and we're comfortable with all five and we're kind of indifferent to any one of these five. If that's the situation you have, you could shortcut the process, run a tighter Process with just those five and try to eliminate steps where you can and just cut to the chase. If it's less apparent where you're going to get the most value and find the best home for your business, then you want to go with the heavier process. Start with a much larger pool and run it more like a very fulsome type auction process. The potential bidders, and you know this at the outset as a seller and knowing the space, you're going to know this pretty well and have a good handle on it. That, that I think is what drives most of you know what the process looks like.

Great. Well let's walk through the steps on how you come up with the buyer's pool.

This was interesting for me the very first time I did this inside of SAP because the first divestiture process I looked at doing there, it was actually trigger by us getting an inbound inquiry from a potential buyer for a segment of our business. Sure enough it was a business that we were interested in selling. But we hadn't made that decision, we hadn't gone out and contacted anybody. They contacted us. And so initially I just thought well here we go, we got a ready made buyer, let's go, let's start talking deal. And it was our CFO at the time who said hold on a second. We have a pretty large ecosystem around this particular business. We've got partners, we've got customers that touch this business. If we just sell this business without contacting any of those and at least seeing if they're interested in taking a look, we're going to have a different issue on our hands. Once this thing is announced, which is maybe a lot of bad relationships with some close partners and customers of ours. So at a minimum we should take a look at our ecosystem. Companies that are close to us, run a process with them at some level wasn't well defined at the time. These initial stages, you know, at least contact them and see if they'd be interested in taking a look. And from there it kind of triggered similar to the auction process. My head at that time wasn't even going there. So I'd say the starting point, if you are a large organization looking to carve out a piece of your business, who in your ecosystem are closest to that business could be interested? They need to be part of the buyer pool. You can't just say, oh let's go look at the carve out the financial buyers that will give us the most money. I mean that may not be the best overall strategy, strategic move for you as a company. Of course you do want to think about financial buyers. There's a whole industry of buyout firms out there that do nothing more than look to buy carve outs. You should think about who outside of those two groups, your ecosystem, financial buyers, what other potential strategic buyers might be interested. So you might have to do some research there. You might need to think outside the box a little bit. Consider buyers that may not be in your industry or in your sector, everyone at some point level. As a tech company, now you're selling technology. Don't just think. Software companies may want to think about industrial companies that are trying to inject a lot more tech into their industrial products. They might want to buy your software and kind of embed it in their products. So think outside the box a little bit. When you've got kind of identities of companies, look at their existing businesses and think about are they a good fit for this business. There's this best owner principle that I think is espoused by McKinsey, which I looked at years ago, and I agree with that. There's not just some one generic value for every business. The value of a business is kind of in the eye of the beholder or in the eye of the owner. A business could be a lot more valuable to a company who knows how to run that particular business and combine the synergies than to a company that plays in a kind of adjacent space, doesn't really understand the business well, not just one value for the business that the business is relative to the owner. And I think that's a good way to think about businesses, especially when you're doing a divestiture. Think about who could get more out of this business than we've been able to get and why. You want to think about what type of home you're going to provide for the employees because today they're your employees and you want to give them a soft landing in a good home. And think about, you know, the record of these buyers and doing other deals. Do they get deals done? What's their deal volume? Do they know what they're doing? Resist the urge to target everyone under the sun. You're not going to make it easier on yourself by contacting 100 potential buyers out there just because they're a software company, for example, and you're selling a software business. Be a lot more targeted. Even if you end up with a big number like 20 bidders, you've connected the dots and say, okay, all 20 of these. I could see the rationale for them buying it and I can See, they'd be a pretty good home for this business. That's what you should be doing. Not just do they have money to, to use to buy the business. So that's how you attack the bidder pool process.

I like that analogy used about best owner. Reminds me of real estate. Highest and best use for property.

Yeah.

Sort of thinking about the same way.

Yep.

When we get into the research, the nitty gritty in terms of finding stuff outside of like the regular sphere that may be obvious in the ecosystem to be able to do research. Have you found any good tools? Because bankers are going to have S and P market intelligence. Bloomberg's got a product, Thompson Reuter's got icon and then there's some smaller databases.

Like Pitchbook and other ones we use databases like that. I pay them, they don't pay me. So I'm not going to give them some free marketing here. But we do subscribe to a couple of databases like the ones you've mentioned. I would tap into our banking contacts even though they might be disappointed to hear that we're going to run this process and we're going to do it in house without them. The point of having a strong banker network is that you can tap into them for things that don't involve you paying them a fee. And most of the banker contacts that I have are willing to share information that they know about potential in the case of what we're talking about here, potential buyers for a business and they'll do so discreetly. Obviously you're tapping into all the public sources and if you got to ask around at your own company, like I may not know something about a potential bidder because I've never had any dealings with them in my M and A world. But someone in our sales organization may know quite a lot about them as a company. They may work side by side with them in some sales cycles and so they may know how they operate from a go to market perspective. And that could be very helpful in kind of understanding who that bidder is. You've got people around the company that you trust and can tap into. You should leverage those folks too.

So you're really more on focus on what's arm's length initially and really get understanding because you may get more of the hotter leads that way.

Yeah.

And then the second tier is the third party database. I've surprised you only found good luck with like Google and LinkedIn.

Yeah, that's right. That's right. Glassdoor is a good source of some information. Some of it you can get Without a subscription on Glassdoor at least evaluate, you know, on the topic of are they a good home for my employees? You know, you can get, you can get a sense of that from some of the glass door from.

That's also an interesting point too is doing diligence from the reverse side. Is this going to be good? And think about the people that are involved that are going to be going through the transition.

Yeah. Just as a deal practitioner, it is interesting to Normally throughout my 20 years I've been a buyer mostly in my corp dev roles, I've been primarily a buyer other than the investitures that we talked about here. But even in my M and A legal days, my firm did mostly buy side work. To occasionally see things from the sell side is really good perspective. It's really good to kind of keep the perspective that you can kind of take back with you when you're a buyer.

Does this process differ at all between a share or an asset purchase?

It's an asset purchase by definition. So it's very much akin to all the issues that you deal with in an asset deal are present in a divestiture and then some because you're not just packaging up all the assets or even substantially all of it in a neat type package and sending them. You're pulling out assets that are, like I said, co mingled in some cases with other assets of your organization. Just take a simple customer contract. Let's say you're selling some product as part of the business that you're selling. In a contract with your customer, you may have sold that product but 10 other of your products that you're going to keep that are going to remain part of your business. So how do you sell that customer contract that yes, it includes all the rights and the economics and stuff around that one product or selling, but that contract is also housing all of those same terms and economics for the nine other products you're keeping. It gets complicated how you kind of divvy up the rights and stuff of a contract rather than assigning it as a whole as you would if you were just selling all of your assets. So it's issues like that. It's one finer example, but it does get really complicated when you're pulling out a small piece out of a much larger hole.

Would you ever stand it up as a company and make it into a stock sale? I know a lot of the big complications with the whole HR pieces as well, especially if you're dealing with some multinational pieces.

That's something to think about. But then that's a whole other phase, then you do all that. You could do that as part of your planning and then your execution before you actually start the divestiture. So the example, remember I talked about, what if you decide now to sell a business this time next year, maybe over the course of that time period, you start pulling out those assets, you house them in a separate subsidiary, and then when you actually go to market, you're going to sell the stock of that subsidiary. You know, obviously there's a lot of tax implications associated with that. The HR that you said, as you mentioned, because you're going to move people into a new entity, but there might be a good reason for doing that. One thing to think about along these lines is if you're a buyer of a business and the business you acquire has a lot of different sub businesses and one of those sub businesses is not really the reason you bought that larger business in the first place. And let's say that sub business is part of a subsidiary of the parent company you bought. You might want to leave that sub business in that subsidiary for a long period of time because maybe that will be a good candidate down the road to divest. And if you've kept it in that separate subsidiary, that does add, you know, at least, at least an ability to think about selling the stock as opposed to having to do a more complicated asset structure.

Make that a lot easier.

Yeah, you're still going to have things like transition services, which I know we're going to get to here, but you skip the step of pulling out of the larger whole the assets that you need.

That's where I thought it would make more sense to do that. It would make it a lot easier. Let's pick that back up with the TSAs because I think that's where I'm curious around that stuff. If you try to eliminate that stuff earlier than later. But I do want to frame the whole idea of running through this as a bank controlled process versus doing it yourself. Why would you choose to go this route in terms of divesting without a bank?

First of all, we talked a lot about all of the planning that goes into valuating and prepping for a potential divestiture. And most of this planning is, is, I'll say often, maybe 100% of the time, better handled internally rather than bringing in a third party like a bank. Even if you were inclined to ultimately hire a bank to run the actual sale process, the planning at a minimum, really should be done internally. I mean, no one knows the interworking of your company, its Business operations, processes, you name it, systems, employees, better than your internal team. And being intimately familiar with all of this is critically important for that effective planning that we talked about. And so bringing a third party and getting them sufficiently up to speed and educated on all of these internal aspects would just take more time, money, human capital than it's worth compared to handling it internally. Handling the planning piece on top of the planning. I mean, if you have an in house steel team as we talked about, which is a context that I'm coming from, then they'll likely have the expertise to run the auction style divestiture process and they can collaborate much more easily and efficiently with all the internal people that you're going to continue to need to lean on throughout the sale process. Not that your internal folks are just there to help you with the planning of what you're going to sell, etc. They need to be there to help you throughout the sale process. And you've got all the internal relationships, so you're going to be more effective at that than a bank would anyway. So the bottom line is the reasons you do it is it's cheaper, it's faster, the process will be more efficient, the outcome's likely to be more effective for you strategically because you know the business better. But that is all premised on. You need the horsepower to be able to execute this because it does take a lot of time, effort and deal expertise. And you need, you need to have that in house.

So what Russ is saying, it's 20, 21. Who needs bankers in this hot market?

I'm not sure. I'm sensitive to how many bankers we have on the line here, you know.

Well now the Baker devil's advocate, hey, we have it run a process. It's going to be competitive. We'll get you 10, 15% more than you will yourself.

Maybe, maybe. I feel pretty confident in what I'm telling you because I've done it, you know, at SAP, done it several times. Even the evaluations that didn't get to a closing, we look back at it after the fact and we said had we hired a bank, would we have gotten farther in the process? In each case, it was more or less internal reasons why we decided to shut off the process that we would have done even if there was a third party helping us out. But I've done it to the finish line several times and I know it can be done. And it was done in a reasonable timeframe and we felt like we got good value. In one of the cases, we got more than What? We had a presentation that we gave to our board way back when before all the planning started and we estimated what we could get for the business. We ended up getting more for the business than what we said to the board. So maybe there was a bit of under promising and over delivering there. But I mean the point is we definitely didn't get shortchanged. At least we didn't feel like it. So I'm coming from a place where I know this can be done because I've done it.

You're going to get a lot of calls from bankers after this, asking what you're divesting of next.

Yeah, I should have mentioned this too. When we're talking about the potential pool of buyers, one of the things I do, I get a lot of calls from the buyout shops, the ones that specialize in carve outs and divestitures and I generally don't know them as well. I don't know them as well as my banking network, all the bulge banks. I've got relationships there, I've got relationships in most of the regional banks and I've got relationships at most of the private equity names that, you know, the household large scale private equity names. But the area of the market that I don't know that well is the carve out market. When I get calls from those guys, I usually do have a call with them to get to know them. 15, 20 minutes. What do you do? What kind of businesses do you look to buy? What's your track record been? You know, if they seem to know what they're doing for my particular space, their info goes in a file, you know, in my Rolodex, essentially they've got the modern day equivalent of a Rolodex. I would look to that folder if we were ever thinking about doing a divestiture and calling those folks. And if I didn't do that I wouldn't know where to start. I'd just be googling buyout firms and maybe tapping into some bankers to help me decide who the best ones are to reach out to. But that's something I do and I, I think it will benefit me at some point down the road for sure.

How many calls you get any month from buyout firms?

I'd say on a yearly basis I probably get about 10 calls a year, so almost one of them.

That's not bad. Thought you'd be more popular.

There's an uptick, you know, as the M and A market started coming back online in the second half of last year through, you know, present Day. I mean, there's definitely been an uptick.

How many bankers call you?

Well, it's the bankers I know, you know. So at this point, I'm not getting as many frequent banker calls unless they have something to talk about. They don't do a lot of unsolicited calls like throwing garbage over the wall. Because at this point, 20 years in, I've established relationships where I've shared what our strategy is, what we're kind of looking for. They did this at SAP, done it at Ansys. So they, they know I, we do get some cold emails from banks about crazy ideas like, you know, do you even know what our business is? And we politely decline those within 10 seconds. But it's manageable. From the banks, it's manageable.

Let's get into these beloved TSAs.

Yeah.

Do all divestitures require TSAs? Why are they so complicated?

They are complicated. I wouldn't say all, but I would venture to guess 90 plus percent of divestitures involve some sort of TSA. Some services that need to be provided by the seller to the buyer for some period of time post deal. They run the gamut, but they're mostly in the category of back office services. Hr, it, accounting, finance. A lot of it depends on who your buyer is. So if your buyer is another strategic that is fairly large, has a large back office of their own and they're already in the business, let's say that you're looking to sell, they know that business well, they can pick that up pretty quickly and absorb it within their structure. But even then they might need you to do a month end closing or two of the books. Or they might need you to do a couple of payroll runs until they can transfer the employee so that even there, there's going to be some level, if it's a financial buyer, they're looking to buy a company and they don't have a group of accountants and HR professionals sitting around to be able to sustain that business. So they may need your services for three months, six months, whatever it is, until they can hire those resources for that business specifically on their own. Watch. Defining all the variables, all the specific, you want to be as precise as you can, I think, on services that you know, you need to provide. What are the parameters, what are the service levels around those? The buyer will want some catch all of like and any other services that we, you know, need you to help out with. But as a seller, you want to be careful about that because you want to be able to know what your resources are going to be spending their time doing after you've sold this business to support it and what you should be charging for that. The more you lose specificity of that, the muddier that stuff gets, if you know what I mean. You know, there's a lot of complexity with defining in detail what services you're going to provide, how much to charge for them. And then the key point here, and this is where I've seen a lot of parties on both sides get tripped up, is around the endpoint of these transition services. So this can't go on forever. You need to set an endpoint. You need to set milestones for how you're going to get to that endpoint and fully transition the business to the buyer. You should establish regular management reporting meetings to check in on the milestones, to enforce some discipline, like, hey, is somebody actually driving towards getting these things done? And where are we with this? Maybe a bi weekly or monthly basis, so people don't just come along, but not really think, okay, when are we done with this? You just need a lot of discipline around your intent and your actions towards moving the buyer off these services. And there's conflict. There's conflict even internally because you don't want to do anything as the seller to disrupt this business even after the buyer's taken it over. Remember, many times the customers you've transitioned to this buyer, they're going to be your customers too in other contexts, or you may have transitioned some partners that are also your partners in other customers context. So you don't want to do anything that damages the business that you've sold because it may end up impacting some of your own continuing customers and partners. So there is this internal conflict you want to support, you want to be helpful, you want to see that business stood up on its own with the new buyer. But you're not running a charity, and you need to do something with your own resources in the long term as well.

What happens when the buyer refuses to get off TSA or maybe too slow to meet the timeline? Like, what happens then?

I've had the situation, but never to the point where it's become a problem. So you're back at the. You might be back at the negotiating table, and you may need to renegotiate it to extend it, to have maybe a tighter plan around. Okay, we missed our first transition deadline. We're going to reset the deadline, but how are we going to get there now so this doesn't happen again? I've had that. I've never had the point where you know, you're actually forced to think seriously about just cutting it off. But the reason why you define deadlines in the agreement because in a worst case scenario, you could have the right to say, look, we're done here, this contract ends and now tomorrow you will no longer get these services. You want to set up your contract in that way so you've got kind of the doomsday scenario covered. But hopefully you don't have to get there.

Are TSAs profitable? They just feel like there's such a big variance in how you can negotiate them that essentially those are things the pillars of the deal.

Yeah, they can be. And they can end up to be a pretty significant negotiating track of their own, obviously in parallel with, but separate from the main divestiture around these charges. Because the buyer is saying, look, we'll pay you, we'll cover your costs and maybe a little extra, you know what your costs are. Don't try to snow me on what it takes to expend these resources to provide these services. On the other hand, as a seller, you're saying, well, I could be putting these resources that I'm using to productive use elsewhere. There is an opportunity cost associated with that. I should be compensated for that. And yes, if you could gain a little bit of profit from this stream through the TSAs, at least for some period of time, why not do so? So there is some tension there around the economics. I wouldn't count on them being wildly profitable. And of course, as we just talked about, they're going to have hopefully a fairly short time frame associated with them. So really I think you're the right perspective and the right goal as the seller is make sure that you have in the cost cut. What I've seen and the biggest problems it's you agree on transition services, economics that don't even cover your costs to provide those services. You as the seller of that business, and so now your business that's left behind on a whole is actually less profitable.

So why not go through the divestment process, stand up the entity on its own so that you don't need TSAs. It's sort of been on its own for a period of time, then take it to market. I would assume you'd get higher value if you did that versus having to unravel and figure out all these TSAs.

It's worth considering that because if you're going to stand it up in a separate entity, the first step is the all the same around planning, defining the business, et cetera. It's all the Same you would do if you're just going to sell it, direct the assets to a buyer. So you're right, you're not adding much more from a process step and you may be saving yourself a lot of headaches with the tsa. For example, the reality is let's just ignore what tax implications would exist from first as a first step because there might be like a double taxation situation where you're taxed on the transfer into a sub even within your org structure and then taxed again when you sell the business down the road to a third party. But putting that aside, the reality is Kisan, people look at it as elongating the process. And remember, most buyers, or most sellers rather, don't do all that planning that I talked about. I shouldn't say most, but many do not. They rush it to market. So the thought of like, oh, first, before we rush it to market, we're going to put it all in a separate sub. I think that's a part of the reality of why you don't see it happening more. But you're right, it is worth a thought because there are some advantages there of having a neater and a tidier package to sell, if you will, to buyers.

We'll have to go into divestment consulting after this. I'm all for it going back to the buyer. How do you help define value for the buyer? How do you pluck out the value in what you're selling?

One of the things that I found to be fun because it's not part of my day job, my normal day job around these divestiture projects is you're marketing here. You got to find a way to market this business. And so when you're pulling together a pitch for potential bidders, when you're in the planning phase and then when you're putting the sim together that we talked about, you need to define the market opportunity for the divested business and position the future potential for the business. Lean a little bit on that best owner principle. So what would a best owner look like and how would they envision operating this business and kind of say, that's the business you're getting. Best owner. This is why you should own it. Because. Because all the things that you want to achieve you could get with this business. Pulling together that story is important. When you're discussing your own historic financial performance of the business. There's going to be a disconnect there between what you've done with the business and the vision you're trying to sell. And so numbers are Going to be what the numbers are going to be. Your historic performance is what it is. And so be transparent about how it could have performed better if it was with the best owner or a better owner, and why there was a disconnect between the growth opportunity that you see for the business and how you operate it. And it could be as simple as, again, this was not part of our core business. We know how to sell X, this is Y product. Our sales guys aren't as good as selling this. There's no reason to hide the ball. Every potential bidder knows there's some reason you're selling it. And so to say we weren't good at it, or we weren't as good as we could have been, we weren't as good as you could be with this business, you know, there's no harm in that. I think that's a benefit to your sales. And then, you know, you want to highlight for bidders the key customer relationships and the, you know, the talent, the employee talent that they'd be getting as part of the business. And you want to bring that out for potential buyers as well.

Those are great points. It can be tough to fess up. Why you're a bad parent.

That's why this discussion, even at the outset, you know, with your annual evaluation, that's why companies don't do it. There's like kind of an inherent admission of some failure at some level. I mean, if that's the perspective you want to take, it can be seen that way. Nobody likes to voice that in a meeting with executives, hey, we're failing here. And maybe before it's a complete failure and we lose all value in this business for our shareholders, et cetera. Let's sell it. It's a difficult topic.

Finally, how do you ultimately choose the buyer? What are your criteria?

I go back to the strategic relationships that you have when you go into the process we talked about when defining who the bidders are, but also what strategic relationships you want to maintain after. And you can weave some of those strategic relationships into the deal itself. So let me take an example of. You're going to sell a software business. You're selling it to a company that has better expertise in that software, can support it better, can evolve it better than you can over time. But they only play in the U.S. let's say they have no salesforce outside of the United States. And you do you have a global salesforce? Well, what you might want to do as part of the sale is you sell the software business to them. They're going to support the customers, et cetera. But as part of the deal, you become their reseller for that software outside of the United States. So that way you maintain some connection to those customers, you maintain a connection to the buyer for the business. You gain another continuing revenue stream associated with the resale outside the US So it's much bigger than just price. There's some strategic considerations, some of which can be made part of the deal. And I think that's first and foremost how you potentially extract a lot of value out of the business. Now, if it's a business that you want to get rid of, you never want to look back and you're never going to have a tie to it ever again, then maybe just headline price for the divestiture is most important. But I think most times there's going to be some continuing connection between you and the business you're selling. And that should be the first criteria. And then of course you got price and you've got best home for the employees and the customers. And then finally certainty of closing. And this is really important. I throw it in at the end, but it is really removed from the obvious. But it is maybe in some regards the most important because if you start a sale process and you get very far down the road and all your employees of this business know that you're looking to sell it and then the buyer can't close or doesn't close now that business is forever damaged. You know, you may lose all those employees. You got a big problem on your hands. So you want to make sure that you're dealing with a buyer that is really serious, that will close, that can close, et cetera.

Those are definitely some key considerations to consider. What's the craziest thing you've seen in M and A?

You asked me this how many times and I had to keep coming up with stories and I.

And I have it supposed to be crazier. This is when you sort of. Everybody's here. Signed an NDA, by the way.

Yeah, no, it's okay. No, it's. Every time there's a theme that is around my crazy stories, they all relate to like 11th hour situations in the deal when you're either right at the signing or right at the closing. Something that you can never imagine happening coming out of left field happening. The one I have for you, it's an oldie, but it could. I had a deal one time that was all packaged up, approved by the board of the buying company. I'm not going to say where my involvement was. It's not Ansys on my current employer. The deal was was all approved by the buyer's board, press releases were all drafted, announcements were ready to go, everything was all teed up for signing and at the last minute the controlling shareholder of the buyer said, no, I don't approve the deal. You can't go forward with the deal. And the deal was such that we needed the controlling shareholder approval. And it turns out the reason why he didn't approve was because the management team of the company that was being bought worked for a company that this controlling shareholder used to work for back in 20 years prior, left on bad terms, hated that company. And for that reason he, by his own admission, he wouldn't. He pulled the plug on the deal. The most irrational reason to not do it. And he didn't even know the management team that used to work at his former employee that he hated. They didn't even overlap in time at this company. But he was like, up. They are alumni of this company that I hate. I'm not doing the deal holding grudges, Kisan. It's what keeps me up at night. In every deal where you think you have everything buttoned up, there's no way the deal's not going to happen. A common question I get internally and from everyone I deal with in our transactions is what are the chances the deal is going to close? And I could never say 100% because I've got, unfortunately a couple of stories that lead me to know that nothing is 100%.

So yeah, that was a great story. Yeah, don't hold grudges till the end of time. Hey Russ, thank you so much for your time. I enjoyed our interview today.

Me too. Kisan. Good seeing you.

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