Executing M&A Without Corporate Development

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A Scientists Here at M A Science, our goal is to continuously expand our understanding of M and A and use that knowledge to create top notch training programs and resources. By visiting mascience.com you'll find all the information you need to take your MA skills to the next level. Get started by signing up for a free weekly newsletter to stay up to date on our latest courses, upcoming events and expert interviews. Again, that's mascience.com Kisan I'm your host Kisan Patel, CEO and founder of M&A Science. Joining me today is Michael Farlakis, CEO at e2open, a supply chain software platform with over 4,000 employees working with the largest supply chains in the world, traded on NYSE under etwo. Today we're going to talk about executing M and A deals without a corporate development team. Michael, how are you doing today?

I'm doing great, Kisan. Thanks for having me on your podcast.

Well, thanks for taking the time from doing deals to teach me a few things here. Can we kick off with a little bit about your background?

I've been in the supply chain software business for pretty much my entire career. Started in 2001 and prior to that I worked for the CSX railroad of all things. So went from railroads to software in a hot minute, kind of growing up in the industry. And I came to E2 open in 2015. In 2015 the company was about a $70 million company, wasn't doing so well. It was a public company that was taken private when I came in. And since that time we've scaled at about 10x and are profitable. Reemerged as a public company about 2 years ago. So super excited to talk to your audience about our journey and how we thought about M and A over that period of last six or seven years.

Yeah. So you have primarily operating background and even this situation sounds like it was a turnaround opportunity that you got into.

Software companies should operate in the 70s margins and it was declining top line business, losing money and operating margins or gross margins in the 50s. Not exactly ideal for a software company. When I came in, we had to restructure and rethink the business to right size it for the size that it really was, not for the size they wish it to be. That first six to nine months was in a way an M and A transaction in and of itself. We had to do so much work to the business to get it operating in a way that was break even at first. We were able to accomplish that in about five months and then make it profitable. We did that next few months and then we were sponsored by a private equity firm. You know, after like seven, seven months I went to them, I said, I think we're ready to think about a transaction. And then four months later we did our first. So the first little period there, six months was as if we were an M and A integration in and of itself. I kind of learned a lot during that period. This is my first time being a CEO, so I was never a CEO before. I kind of learned a lot in that first six months and took what I Learned. We learned as a team and kind of applied that to 14 subsequent combinations in pretty rapid succession. About two a year over the following seven, six or seven years.

How many employees did you have around that, that time you're doing the restructuring?

380, 400, something like that.

You did 14 transactions without a dedicated corporate development team. How'd you do it?

Honestly, our team knew a lot about the space. We had a pretty good idea of the purpose of why we wanted to do M and A in the first place. It has to start there. You have to have a real specific reason on why you want to do M and A and what it's going to do for the business. So we thought about what it could do for the business, strategically more than anything. And we had an idea of what we wanted to go do. And since we knew the market really well, we could identify the opportunities. So we identified the opportunities, had to fit a certain profile for us. We were able to vet them out. None of them were actually came to market. I think only one came to market out of the 14. The rest of them we sought out and we identified and we developed and then we transacted. So we were actually looking for specific things that met our criteria. And we were able to talk to the ownership or the management or combination thereof about why we'd be better together over that time. Thought about buying a company as more like selling. Like it was more excellent in the concept of the combined company. And over the years I realized that acquiring companies is. Has more to do with selling than it does to do with buying. And that's kind of been our approach. We just knew a lot about the industry and about what we wanted to do. So we didn't really feel, myself and two people didn't really feel like we needed to have somebody present ideas to us. We thought we would be able to create our own. And then we were owned by private equity, so a lot of the mechanics of the transaction, they helped us do that. So the back part of it was very helpful to have somebody that kind of had just the mechanisms. But we did the selection and we did the value propositions and we negotiated the deals.

Can you tell me about the part in the beginning when you're shaping a strategy to actually go out and do M and A. Was it all done in house? Did the PE firm help you or validate it somehow?

No, it was mostly us. Every business has a particular set of opportunities and a particular set of challenges that has to do with the markets they serve, the competition in the software Space where they are in a technology continuum, but mostly around the markets they serve and the competition they face. In our case, we had a great product for one part of the supply chain and it was for one industry. We buy businesses on some placement on the S curve, meaning every company starts off very small, it goes through some sort of rapid acceleration or growth period. And then unless it finds new markets or creates new products, it asymptotes out in terms of growth rate. It open was a poster child for being near the top of the S curve because they had built out the market that they really identified as a new and exciting market. And over the previous 10 years, they got all the easy customers. None of them are easy, but they got the ones that are most likely to buy and the next ones became harder. So we thought about what we could do to expand our markets. And that's how we came up with our strategy around using M and A to open up our growth or TAM and open up new markets. Because we felt like it was a fragmented market and we could add functionality, different functional systems which would grow our ability to increase our growth rate and also open up new markets. So we were in high tech, we could buy a company that was really good in cpg and then all of a sudden we could participate in the CPG space as well. Prior to that be very hard for us. So it was all about increasing our probability of success in our selling motion and to create more and more cross sell. And that was essentially it. There was not. There wasn't. We didn't need consultants or anybody to help us through that kind of general construct. And because we have a fragmented market, we were able to just execute along that strategy. We got refined over the fourth or fifth one. We got pretty good at identifying things that fit versus things that didn't.

Yeah, it's interesting because you have a few different verticals. You built a few different verticals because you have one in terms of industry where you're purely going after TAM and then you have capabilities to build a stack out and really have all the functionality end to end. It seems like stuff played between both. Were there any other pillars or was it mainly those two?

The third one was we were a network business. We really liked the idea of networks, especially in our space because networks are very difficult to create. They take a long time for companies in a B2B sense to create a network. So we identified supply chain companies that were network business, an application business, and if it happened to enter a new market for us, that's like a 20 run homer. So we would literally draw these four boxes on our wall and be like, okay, where does this company rank on a network versus application business? Which quadrant are they in? And then we would think about four boxes along. Strategically accretive versus financially accretive. So we could rate a business on how much strategic accretion we would get for that acquisition versus just pure financial. So we could literally rate different businesses in different ways and that would help us inform convicted we were towards the company and how much we were willing to pay for the business and the ones that we had a lot of conviction on. I would spend a lot of time seeking them out and pestering them until they would talk to me. And sometimes it would take six months to have the CEO call me back and then another six months to like, at least formulate an opinion. Many of the ones we've acquired we chased for a year. And mostly because we thought it was so strategically accretive to us and so financially accretive to us. Now, they were very attractive to us, but sometimes they weren't attracted to anybody else. Nobody else wanted them. But like, for us it was perfect for what we were trying to accomplish.

When you say network, what do you mean by network?

There's a little bit of inside supply chain stuff. Our big customers, the biggest companies in the world, think of the biggest CPG, food or high tech company in the world like they're a client. You think of them as manufacturers, but actually they outsource much of the activity. They don't make themselves. They use suppliers, these contract manufacturers, they don't ship product themselves. These trucking companies and parcel companies and ocean container freight companies, they don't sell product themselves because they sell through retail or they sell through the channel. So what does that mean from a supply chain perspective is the data they most need comes from those partners. Our business is around connecting applications to those partners. A network would be. For instance, we acquired a business that books 26% of the world's ocean freight because it found a way to connect the ocean freight carriers to the companies that do the booking of ocean freight that formed a network. The data sources became really important because if you're going to make a decision with an application, you don't need a rocket. Be a rocket scientist to figure out. You need data and an algorithm to make a decision. So we thought an interesting angle for us would be to provide data from the network as well as algorithms and applications to help companies make the best decision possible.

All right, I get it. That's why it's so important. How about the scoring part? Because you had an interesting view in how do you find the fit in these companies you're targeting?

Yeah.

Does it end up like a score out of a hundred?

No, just all relative.

I swear it ranges. It's like, I got a gut feel we should buy this versus there's a complex algorithm to decide if we should buy this.

It started with a very specific criteria, and that was almost a binary criteria for us. It was mission criticality. We wanted something that a company really relied on every day. We didn't want any discretionary software. We didn't want a software that could be like, it's not working, so I'll just turn it off or stop using it. We wanted software that was embedded in the operations of a big company. So that was really important. And we can talk about that in a minute. Why that was important to us. That was important. And the other one was adjacency. We didn't want to buy a functionality we already had. And because software supply to software is connected, it needed to be adjacent so we could sell them together. I have manufacturing, goes into shipping, Those things are adjacent. So it makes sense for us to have manufacturing and shipping software together. So I can, if I have manufacturing software, I can say to those guys, hey, I have this great shipping package. You want to buy that too? And vice versa. So it was all about cross sell and upsell. So that was our criteria. Okay, fine. If it didn't meet that criteria, we were not interested at all. At any price, didn't really matter, which wasn't part of our strategy. And then from there, we would literally think about a piece of functionality we wanted. The number of potential combinations aren't that great because it was so fragmented. So in each category, there might be four or five that would be interesting to us. And then we just literally rate them. We would just plot them on how financially accretive would it be, how strategically would it be. And we looked at other aspects too. We have three or four different ways of looking at them. And it was pretty easy to tease out that in this functional space, this one company was perfect for us. Now, it didn't always follow that it was the most obvious choice. Our frame might have was different because our frame was for us and what it could mean for our business collectively. Not about just was it growing fast or was it profitable? It was really more, how could it change our business and change their business together? That was kind of how we did it. So it was just a matter of relative rating based On a different functional category we were looking to acquire.

Was there any research tools or things that you used to identify these companies, data sets?

No, we knew the businesses. People on our exec team have been in the business for 20 years. We basically seen the market grow. We had an intense amount of organic knowledge about the market.

When you say the exact team. And we've gotten some alignment that. Here's part of our strategy in organic growth acquisitions. Who in your exec team are you having using their brainpower to think about companies to buy?

Well, it's really three. We have the head of strategy and then our head of go to market or revenue. And then obviously we have our human capital people. We have a set of operating principles. We always evaluate how we feel about them. Understanding our operating principles and assimilating to them. That was important. It was mostly the strategy and revenue. And myself, the PE firm would be very helpful and instrumental in terms of, okay, how do you do some of the calculations on valuation? So that way it would help us out in that way. But that was pretty much it. We didn't really need a team to tell us what to buy. We didn't need a team to tell us how to value them for us. We felt we could do that okay by ourselves and we were able to execute that a lot of times.

All right, I want to get to the fun part. My favorite part of the deal is hunting.

Hunting? Yeah.

What's your approach on these companies? Because you did 13 out of the 14 were all proprietary deals, which is great to hear. How do you do that? You just send cold emails, calls.

I grew up in the sales world, so just like selling business is interesting, I know a little bit about it. We talked to some people about what it does and what they do and how they are. And then, okay, that's interesting. Probably worth my time to go pursue. And then I just triangulate. So I find out that Kisan, you know a guy or lady that knows the CEO and like, normal stuff, normal triangulation. I want to have a conversation and sometimes I get an intro. Sometimes they would not respond. Sometimes I would just have my EA reach out cold and try that avenue. Sometimes I would just call and leave a message. And sometimes the PE firm would know somebody. Like our PE firm might know who their owners are. So then we just look, they're owned by PE firms, so we can go to PE people. Like, I knew the PE guys. So if they were owned by a competitive PE firm, I could, I knew them. I could say, hey, Barry, you have this Great business. Anyway, you can introduce me to the CEO and I learned about it. It was just that. It was just selling the same thing I did for 15 years, how to sell software. If I wanted to sell this company of system to manage your warehouses, then I need to find out who the person in charge of warehousing is. And knocked on doors until I got to that person and hopefully didn't embarrass myself when I talked to them. That was pretty much it.

You touched on a lot of different channels of internal folks you can get introductions to and external folks, the PE firms you can get introductions to, cold outreach. But it sounds like underpinning all of this is this level of persistence.

Yeah, that's probably true.

That really comes down.

My parents would attest to that. They would tell you stories about I want some toy at 8 years old and I would talk about it for 4 days and go to bed first thing up the next day. I'd be like, I want that toy. I have a level of persistence in me for sure. For sure.

Does that pan out? Is there a limit to that persistence? What's the frequency? Are you trying to hit him up at least once a week?

No, I'm not obnoxious about it, but I'm definitely showing up. So I'll definitely meter my persistence. So, you know, I've kind of learned how to taper it over time. The other thing is, if you think about the strategy of adjacency, that means that the broader our solution or platform became more things, more functional areas became adjacent. So if you think about supply chain software as a series of A to Z, in terms of functional capabilities, they're all interconnected. If I have like C right in the middle, I can only buy under our framework B or D. Now if I have C through F, that means anything adjacent to any one of those letters are interesting to me. So as we got larger, as our platform grew in terms of breadth, you have more surface areas of adjacency. So that means you have more aperture. So let's just say I would identify that there are these six companies that all are important to us. One may not be that more important than another one. It's not. There's not an order of operations, but they all pass our test. So then it was a matter of just saying, okay, I like in this category, that one and this one, that one, different categories, we could be very tactical about what's available and very strategic simultaneously. Meaning I didn't have to buy the one adjacent to B because I could buy the one adjacent to F just as easily if that became available. So just talking to them over time meant that I'd have a greater probability of success of one of the ones that I'm talking to being ready to transact at some point in the future. So I didn't have to be locked in on one, I could be locked in on six and just kind of work them just like you work a sales one. I'm going to try to get one deal a quarter. How do I do that? Is by having 10 prospects and trying to work them. I don't know if I'm going to get all 10, but I might get three or four of them. I need to keep working it to increase the probability of success. So I literally looked at it exactly the same way as I looked at selling. Same exact process. It's indistinguishable from how I sold. I sold for a lot of years, I sold for a decade, got a lot of reps at that.

And it got easier. Start awards saying opportunities multiply as they're seized.

Yeah, you just see pattern recognition. You get better at reading, understanding situations. You can fine tune your approach. And some of that you just, you don't even know you're doing it just because you did it so many times.

How do you structure your company to accept these acquisitions? There are two big parts, right? You got to build your muscle around the diligence to get the close. And then integration.

We always had a process, a very technical spreadsheet process, do these things on this order of operations. And we had a team of people that would do the functional part of the integrations. Okay, here's what we have to do. Step 1, 2, 3, 4, 5. And we got pretty good at that. But about the third one, fourth one, I guess we did, we started to kind of realize that we had to think about our structure of our business differently from a go to market perspective. Because we found that like the head of sales all of a sudden was slowing down, couldn't sell as much because he had to integrate and figure out all of the integrations. The integrations load us, our selling motion down. So we came up with another way of organizing around business units, which allowed us to break the business down into several business units. So instead of having one person in charge of sales, I'd have at the time three or four heads of business units. Each one of those were in charge of some subset of customers. And by doing that, when we acquired a business, it could fall into one of two categories. It could become its own Business unit. That was pretty simple. Different market.

Boom.

It's a business unit. There you go. We just have them operate like us. Or we would sprinkle the clients into the business units we had. And by doing that, we didn't tax any one department and by department, selling department too much. So we found that enabled us to go very quickly. We would announce the deal and have headcounts, assigned the day off or within 30 days of. We took a very rapid approach to integration. Immediate approach to integration. We wanted to really reduce the time of uncertainty for our company and the company that was coming onto the platform. And we would do that by giving people a lot of information about what they were doing. This is who you're going to do this. Are you going to serve? We're not running your business in parallel for. For six months. We're not doing that. We're going to run as one combined unit as best we can right away. And it's going to be bumpy, and we're going to have our challenges and things aren't going to be right. But we're going to learn to kind of operate together. And the sooner we do that, the sooner we're going to get to operating as one. So we kind of thought about structure of our business to accept businesses in that service really well.

It was interesting is you did some acquisitions, saw it as actually slowing down your growth, and then you structured your. Restructured the business around business units. Does that sound right?

Yeah. To do more acquisitions.

To do more acquisitions, which is interesting. What was that transition like? I always find it fascinating, even looking at growing a company now. When do you get to that point? How do you make that transition? What does that look like? That's something I've never heard anybody talk about.

I worked for a company for 12 years, and that company grew from 40 million to 400 million over that period of time. It was a great company. I learned so much there. I learned what to do and I learned what not to do. What I learned not to do was let the business get too big before you thought about structure. And that business got too big. It was just too big to run the same way. And I remember distinctly it was August, and I'm like talking to the team. I'm like, I think we should change our structure. We need to go to business units. And everybody to a person was like, no, I think we're not big enough yet to do that. It'll cost us some more money. What I learned then that I could apply now was it's better to go to a new structure earlier than later because change is hard. So if you do it when you're bigger, you have more things to change. If you do it when you're smaller, you can grow into it and more manageable. So we literally did it, I thought a year or two prior to when we needed to do it. But that served us very well because it allowed us to get to that operating structure much more quickly and learn how to operate together as a team more quickly.

Can you tell me about your approach to diligence? Again, no. Corp dev function. How do you go through that and how did that evolve over time?

We're in the ARR business, so churn becomes the really big thing. You want to sniff out. The first couple, we got kind of burned. We didn't really sniff out enough of the churn. And then we realized that we're never going to sniff out the right amount of churn. Just assume some companies are going to be a little bit weak and let's bake that into the economics of a deal and then hope we don't get it. But don't be surprised if it happens and don't be too upset. Now it's hard to remember that you baked that into the economics of your consideration because I already paid the money, so now it's like I want all the stuff. So I think that was kind of a learning is be a little more realistic what that company was all about and what was good about it, was bad about it and accept the bad because you can't separate the bad from the good. We could change the bad, but that might take a little bit of time. We got a little bit more just realistic about. Some of these companies we acquired were much smaller than us, and some of them were being acquired because they needed to be acquired. They were strategically constrained. They really. We're stuck. We just took that on and it showed up in purchase price. We felt we bought things for a very good value as we owned it. We thought we could take costs out to make them profitable. We generally did that like by 35, 40%. And then we made them grow faster. So every year our growth rate actually increased, even though we would buy another company that had no growth rate. So we would dilute ourselves of growth rate and then be able to come back on the other side and increase the growth rate. So we just felt like we knew we were buying an asset that was perfect for us, but had its own set of challenges. But we always felt we could change the bad part. We'll just change the bad part and make it better for us, and we'll operate the way we want to operate it.

Where are your key people when you're diligencing a deal?

Well, those we have billable hours, so we hired the lawyer, we hired the accountants, so we have billable hours there for sure. But we have every functional area does their due diligence. So it's okay. Legal, you have your playbook. Go to market your contracts, talk to customers. Hr, we looked at census pretty carefully. People overpaid, underpaid, who has to be cleaned up. All of that was by function. Each person had its own set of playlists of what they would need to do.

What are the key things you're looking for? It's almost like you got pre loi and then post loi. Diligence.

Consistency of revenue. Can I count on the revenue? You think about what I said, which is I'm not really banking on like their growth rate, so I'm going to grow it a different way. And also banking on the fact that I can like remove duplicative costs because remember, we're the same business. So you can remove a lot of duplicative cost without affecting the customer experience. The question really is, whatever the size of the business, 20 million, 30 million, a hundred million, doesn't matter. Is that a hundred million dollars solid? Can a hundred million dollars be reduced by $20 million? That was the key. If it's $100 million and we felt like it's a $100 million business for the next three years consistently, pretty safely, then okay. If we felt the revenue cycle was weak, we felt that their contracts were too weak or they were just contracting too fast and we couldn't count on the revenue. That was the biggest thing we focused on. I couldn't execute that part of the strategy if I couldn't rely on the revenue. So that's why mission criticality was super important to our overall speed at which we wanted to operate. So that's why knowing the revenue was solid became pretty important to the overall strategy.

What about the people culture component we.

Talked about earlier, how we really transformed the business early on in kind of year one. I showed up in July. By July 7, we announced we're shutting down the California office headquarters and relocating the business to Texas. We also embarked on changing every department all at once. So we literally restructured every department all at one time at the same time, in parallel. The reason I did that was I was afraid of a year and a half of sequential change, which would be very demoralizing. To the business. So I just felt like if we just did it all at once, it'll be very disruptive, but it'll be over quickly. Duration of disruption was important, but what I did to start was we set out about creating a set of operating principles. We sat that, I said, we need to set up operating principles to ground how we do business. How do we treat each other? What's the ethos of our business? Not what we do, but just how we're going to go about our work. I said to the exec team, you needed to develop these. All I care about is two things. And those two things are be prepared and treat others with mutual respect. Those were the two things. I said, anything else, you guys come up. We can have like seven or eight of them. We still use them today and we publish them and we articulate that we strive to operate to these principles that helped us in that first six months. A lot. Like a lot. Because we could actually articulate why we're changing, purpose of the change, why we had to change. And here's how we're going to come out of this really tumultuous time and operate as one company. And we use that as the starting point of every single acquisition. Here are operating principles. This is how we think about business. This is how we think about each other, is how I think about trusting people. This is how I think about learning. And that kind of helped us form a culture. Even though we grew the business 10x whatever, six years or so, something like that. There's a lot of people to bring into the business and to get operating as one.

When you're looking at companies, is it such a big evaluation on their culture and getting a sense of how it's going to be compatible, or is it more? You're going to be the dominating culture and it's going to blend together regardless.

It's more like that. It's more. We have a way of operating that goes back to the selling part. When we talk to management and ownership about how we're going to go about the integration, we're pretty upfront about. We're going to change a lot of things really pretty quickly. It's going to impact people's lives. Here's what we're going to do to soften the impact of their lives. So we treat people, we think very well in terms of, and we'll talk about that if you want to, about how we do that, but we treat people very well.

Let's break down integration because I feel like all this wires down to how well integration gets executed.

We want to make decisions very quickly on people. 65% of a cost structure of a software company are people. 65%. The next big piece is hosting costs. Besides that, you have offices and coffee. Like, there isn't much left. So the business is basically people. Your hosting costs, what, however you do it, are fixed. You can't change that. So your flex is people. We know we're going to affect people's lives and we don't really want to make a decision quickly. So we always want to transition. So we would literally go in and say this subset of people who are going to go pretty early in the process that's mostly like the C suite that doesn't want to stay or. And then there's a lot of people we say, will you help us transition for three to six months? And at the end of that time, we'll give you a stay bonus and we'll give you severance. We want you to help us transition. If you say for six months, we'll pay you a fair amount of just a stay bonus to stay and then we'll give you your severance on top of that. And what that allowed us to do was elongate or be a lot of stability in our business, and it also allowed us correct mistakes. So let's say key sign, we said, you know what, we don't have a roll for Kisan because that role is already done by somebody else. And then after like two months, this guy Kisan is like pretty awesome. I. I think he could be used where I have an opening over here. So we can say, listen, I know we told you going to go. If you want to go, that's fine. We're going to fulfill our requirements. But if you'd like to stay with us, we have another opportunity that we think would be great for you. Here's why. Different part of the business, different job. But here's why it could be interesting to you. And that allowed us to elongate that period of having people that knew the business around longer, and that kind of helped us create stability through change. One of the things that I kind of think about is when you go through rapid change, what can you do to create as much stability in the organization as you're changing? So if you can create a lot of stability, you can change faster. So by elongating, you know what? Normally companies don't treat people very well on the way out. They just don't. And we would go above and beyond.

Tell me more, how do you do that?

Treat People the way you want to be treated and you be pretty direct about it and you tell them that this is what the change is and it's because the job is duplicated and this is what we decided. And I know it's impactful, but here's what we're going to do to help you and, and people, I think like the fact that they were known. The worst thing you can do is still fear, uncertainty and doubt in an organization. Telling people where they stand immediately, even if it's bad news, is that a thousand times better to tell somebody bad news on day one than tell them good news on day 90? It's just bad. Those 90 days create factions. My company, I'm better than that person. All of a sudden you get insular. We try really hard not to do that. People just want to know that's what we did. And I think it's a matter of how you thought about the people first. Even though you are going to impact their lives, it's going to be impactful. And we try to help them the best we can. And I think that approach has helped us go through change, but also have a well operating business.

The forward communication, you told me in another conversation, you budget severance into your deal. Can you tell me more about that?

It just becomes like purchase price.

Okay.

If we're going to buy a business for $10 and we have a particular way of thinking about how we treat people now. And remember, we also never took the approach of you versus me, meaning we would literally think about the collective business and we would say Kisan's actually better than Michael. Michael's a nice guy. But you know what? I think we're better off keeping Kisan. Michael's got to go, even though Michael's been here a while. So we'll treat Michael the same way. So we know we're going to have to make severance. We don't have to let people go. We have to do that to pay for the acquisition and also to operate better. So the question is, what's the right optimized operating framework? What's the structure? What do we need and what's the best person we think for those roles? And then we say how much going to cost us to have them stay? And stay bonuses and severance. Sum that up and it's if it's an extra $10 million, it's an extra $10 million. So we bought the business for an extra $10 million. It's fine. Like we just thought about his purchase price. So you get unattached and unemotional about that.

Are there other things you're budgeting related to integration into the deal?

Capital capex. So we're pretty aggressive in operating our own data center. So we know that we're going to have a fair amount of extra capex when we do it and a fair amount of one time costs. Those one time costs could be we're going to negotiate out of a contract. Okay, fine, we want to get out of office. What can we do to have that be reduced from our rural P and L? So basically we just try to sum up what we think the one times are and then make that part of the overall purchase price in terms of how we think about paying for the transaction.

I got the part where you're identifying key people for making the transition, giving them stay bonus severance and then key people for ongoing running the company and creating retention plans for them. Sounds like that's the main pieces to really think through for integration and being.

Direct about how we want to operate. This is how we operate in terms of structure, this is how we operate in terms of our culture. Being pretty direct about that upfront. So it's clear, we're trying to be as clear as possible.

How do you think through go to market? It seems like that's the part that goes awry when it comes to integration.

If you think about our strategy of adding complimentary functionality, it's about distribution. Let's just say I have 10 customers and I provide solution A for them and you have 10 customers, you provide solution B. Of the 20 customers combined, actually five are the same. So it's actually 15 customers. So now I have 15 customers that I can cross sell. So I have seven each. So that's how we thought about it. So we actually have grown primarily through existing clients. So 80%, 75, 80%, 75% of our new bookings are with existing customers and 75% of our go to market salesforce is existing customers because it's distribution. And once you pay for that with one acquisition, I have that now installed, I get the second acquisition. I can just route more things in that salesperson's bag. I can just give them more things to sell. Now. It doesn't happen instantly overnight like it isn't, oh wow, thank you. I want to buy that from you. But over the course of time we have really long relationships, like 15 year plus relationship with clients. Over the course of time you get to just talk about the next thing and the next thing. So you wake up after doing a fair amount of acquisitions and you have two solutions in with a customer and we have six more we could offer them. Chances are over the next five years one of those six things are going to hit. That's it. That's how we thought about it.

How do you know how much overlapping customers you have? Because I feel like that's a lot of data you don't get till you got something signed.

We get that at the LOI phase before when we get an ella. Why? We'll generally get a lot of data, especially if we're not competitive. We're competitive. It'll be more shielded and we'll know. We make assumptions, but it's not competitive. Meaning I have solution A, you have solution B and I never compete with you, your business because we're just different. We are both in the umbrella of supply chain. But you operate in one part. After a different part then we can convince the seller to give us the data that generally has worked out. Okay, I guess.

One thing I'm curious and you're getting to it with the last response around looking at the overlap of customers and then the adjacencies of the product. How do you look at that against how close it is to your core versus how far away it gets to sense feasibility and what that cross sell is actually enough cells can look like.

It's about adjacency. We started in manufacturing side of supply chain. That's where we started. Very first one was actually on the demand side. We were on supply side, bought demand side. So we literally just filled in the middle if you think about it that way. So companies only do two things. They figure out what the demand is and they make product to fulfill that demand. That's all they do. Super, super complicated in the middle, but at the essence, somebody wants the soda and I'm going to figure a way to give them a soda wherever they are. I'm just going to figure that out. So they can buy a soda from any point in time, any part of the day. We started with the demand side, we had supply side and we just literally just piece by piece build the adjacencies in the middle. So there really became no core. It was just a matter of what's next.

You had it pretty well mapped out, but you never had a deal where it was totally out of the core and maybe really far out.

No, wouldn't do it.

Okay, you wouldn't do it. It wouldn't fall into your strategy.

It doesn't pass the threshold test some of these deals.

Michael, I see companies do.

I've seen it too. And it's like you just a head scratcher. It's like, why would that business buy that business? What's the leverage? You need something that's going to give you leverage, meaning you have to have leverage in your go to market and distribution. You have to have leverage in your. If it's a manufacturing business, in your manufacturing capabilities, like maybe there's leverage there that only people operating the business can see. But there's got to be some amount of leverage of how the two businesses can create more operating leverage combined. If it doesn't have that, then essentially you're a private equity firm, which is fine. If that's your strategy, if that's your strategy to be a kind of a holding company. And there are plenty of companies that do that. So I'm not knocking it. It's just that you have to think about the business as if you were a financial sponsor, not as if you're an operating company.

Is integrating the go to market, including the people retention, the most important part of making a deal successful? You can disagree with me, I'm just.

I think there's two. For a software company, there's two pieces that are most important. It's the go to market and it's the technical integration. In order to be able to have value and add value of having A and B work together, you have to have some schema on how that can work. In our case, the technology our company built, well before I got here was the schema. So we had a very elegant way of combining fast without having to rewrite software. That was our thing. I think we just got lucky. I got lucky in that it had that capability. Without that capability, the technical integration would have consumed the business you could never consume. You can never combine that many businesses that quickly. If you didn't have some elegant way of technically operating the software as if it were one, even though it was many, the company had built that ahead of time.

Out of your whole tech stack, would you, would the priority be around the technology that powers the go to market, the CRM, the marketing tools and stuff?

In terms of the back office. Yeah, the back office. I was referring to the customer, what they're buying on the back office, it's.

Oh, the actual product. I get it. So you're right. So go to market, we'd include the underpinning operational technology, but then there's actual delivery of the technology. So it comes together.

Say those are the two things, like the back office piece. Look, if you can deliver product and sell product and account for it, Properly, that's all you really need to do.

I can imagine they can complicate. Let the tech guys figure that out. On the go to market side, which is one I've been curious about, is there a framework or specific playbook that you have evolved or developed over time.

Doing it that was built for us? I don't know if there's a framework that can be applied generally around the go to market, I think it becomes a matter of where your end markets are and how do you think about the cohorts that are similar. Like for me, I always thought about markets and distribution. What end markets can we serve, where we have a reason to believe we could be successful? And in our space of operational software, very difficult to show up in a new industry and be like, hey, we're the whiz bang kid. It takes a long time. If you're good in high tech and you show up at a grocery store and say, hey, we are really good at handling your high tech stuff. You're looking at like, yeah, that's awesome man, but I don't really think we do that stuff here. And you sound a little weird to me, so I'm not even going to talk to you. It's literally that for our business, it's literally like that. So like you had to get open markets up and you had to be creative about how you thought about the relationship between software and those markets. So markets became important and then distribution becomes really important. So distribution describes the efficiency of your selling motion. So if you can create a very efficient selling motion, right, your customer acquisition cost or your AR acquisition cost becomes low. That allows you another reason to believe you can be a high margin business. So we thought about that was how we thought about it. Markets and distribution.

Okay, sounds like no straight cookie cutter template. But we're going to be putting a series of case studies together to get some examples.

I think it's about really understanding the business. Like say you just one day someone shows up and says, kisan, you have a new business. Here it is, your Aunt Llewellyn gives it to you and you wake up, it's okay. What did Aunt Llewellyn give me? She gave me this business. Okay, what does that business do? Who do they serve? What's a competitive framework? What are its challenges? What are its opportunities? And how do I most effectively reduce the challenges and accentuate the opportunities? M and A may be a way of doing that, using M and A strategically to solve the problems of the business and accentuate its value. And that's A function of the business and markets it serves right. So I think that's what I'm trying to say is more strategic in nature in terms of how you can envision the business becoming something different than it is today to be able to take advantage of its inherent opportunities.

Michael, you make all this sound way too easy. And before I get ahead of myself, can you give me advice for a CEO starting to do even our company like a year or two from now we do our first acquisition. What are the things I should be conscious of so I don't screw up that deal?

I think you have to be really mindful of the purpose of the M and A. There could be lots of purposes. It could be a financial purpose. I'm in a low margin business and I just, I can't operate in a low margin business. And you have a high margin business. I like. That's my purpose. Okay, that's a. That may be a valid purpose and it might support what your overall vision is of the company. So I think it becomes, if you're running a business, you have to set a vision for the business and you have to see is how might M and A participate in that vision and be used to create that vision or to enable that vision and then that defines your purpose. What is the purpose of the M and A? I think you have to start there. For us it was very simple. I needed a bigger market to serve and grow faster. I need more things to sell my customers. We were blessed with having solutions that were in our clients infrastructure for eight years or 10 years. That's a great place to start. I can't sell them anymore. The thing they already have, I just can't. They already have it. I need to sell them more things. I don't have more things. I can't write new things quick enough so I can buy new things. That was our purpose. And then the rest of it evolved from there. So I think the very first thing you have to really get your head around is what is the purpose of the acquisition? And if you can't clearly define that in a sentence, then you probably haven't found your purpose. It has to be obvious to yourself and to who you're communicating it to. Like obvious to a point where you only need one number to kind of believe it true. I think that's the most important thing. What is the purpose? And then from there you can evolve your strategy on how you go about it. And the rest of it's just tactics after that. Just tactics.

Number one thing, purpose. What's the number two thing.

Number two thing. People.

The people. Yeah, we talked a lot about that. On the purpose part one of the things that sounds interesting, you have a good buy in or alignment with your management team around purpose of the company. Is there anything around that that you did specifically to get that level of alignment in your organization? Because it sounds like you really have that culture of doing M and A.

Well, for us, it was not just the management, it was also for us, sponsors. So I started with the premise that we have a board, we have sponsors, right? Everybody has a board. But I don't think of ours. I don't think of them any different than I think of us. Meaning we are very transparent in all the good and bad what's happening. We would literally give them our sponsors, the same weekly report I would get, they would get before I saw it, as if we were one. So the first thing is create alignment between your major constituents. And as a CEO, two major constituents are your board ones that hire you or if you're the owner, then that takes. It's just yourself and then your leadership team. And I think what people want to know is what's the direction of the company so we can all pull the oars together in the same direction. Now you don't have to know exactly what the destination is, but you have to know it's over there, north, northeast. And that's what we're going to do. We all need to pull together as a team to grow in one direction. For me, as I started out being a CEO for the first time, I felt the most important thing I needed to do was make sure our team was aligned. And anytime I felt the team wasn't aligned, I would really try hard to get them to be aligned. Any little issue, you hear it and tend to go up. How do I fix that? Because if they're not aligned, that means your organization is not aligned. And that creates really bad behavior. And then they have a real big. They have a bigger problem. So I think it was all about talking about what I felt the business could become and just getting people to believe in that as a critical element.

How deep does that go with the leadership team? And I'm thinking you have these different business units. Is there a leadership team that's overseeing all the business units or do you actually click down into folks in the business unit?

One of the things I told you when I worked for that other company, they did some things well and some things not so well. Like every company and one of the things they created was a field leadership Council, which was like the operating lieutenants in the business, so not the executives, but the people in the actually talking to customers and leading bigger groups of people. And it worked really well because it created a communication mechanism to communicate where we're going with the leaders that are leading the field. And we did that pretty early on, created a field leadership team where that became kind of communication army for us to be able to communicate as an executive team on where we're going, what's coming over the horizon, what's coming next. Like, you could leave breadcrumbs on what might be there. So we created that next level down, as in not super formal. We would get together. If we had a quarterly all hands call, we would have one with them a couple days before, and that was a bit more information that we'd share with them. And then we'd have it all hands call. So they can kind of precede and talk about what's going to come as a way to just be a communication mechanism for the exec team.

Okay. There's some architecture in the communication in the organization.

Yeah.

Michael, what's the craziest thing you've seen in M and A?

It's all the same. We want to pay less, they want to pay more, but want us to pay more. We had situations where it's like, yeah, they kind of knew that something was up and didn't let us know. We didn't sniff it out.

No crazy demands and deals or crazy things you've seen people do after the deal?

Not really. And I think part of it is it goes back to the sellers wanted to sell the business to us. I'm not kidding when I said we would talk to these companies for a year and a half a year. Buying a company is more like selling, in my opinion. It takes on all the attributes of selling and not so much the buying. Then the negotiation.

Negotiation, okay, how about the biggest surprise in a deal? The biggest surprise in diligence or integration?

I'll tell you the one thing that we had to do is interesting. We bought a company that was owned by ocean shipping container companies. It was half owned by then, and there's like four of them that were the owners. It took me a long time to prove our worthiness to own the business. And I felt like I was literally being pledged they would do things like Friday afternoon before Father's Day, I remember the call says, yeah, can you be here on Monday? And around the world, I'm like, yeah, it's Father's Day. Like, yeah, can you be here on Monday. So yeah, yep, no problem. We'll be there Monday. I feel like I'm literally being pledged like I was in sophomore in college again. That was about it though. But again, it's just to me, it's you got to give a reason why the businesses are better together. If you can't articulate that very clearly, you don't really have much of a point in trying to do the deal.

That's funny. You make me want to go do deals in the supply chain software space.

There you go.

Let's go for good people over there. Michael, thank you so much for taking the time. I learned a lot. You're helping me become a better M and a scientist.

Hopefully there's one or two things that can help your audience.

Those of you still with us, till next time, here's to the deal.

Foreign.

Thank you for taking the time to explore the world of M and 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 and A function or optimizing one that you've already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to 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 and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.