First Conversation to LOI Session 1

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Hi, I'm your host Kisan Patel, CEO and founder of M and A Science Today. I'm here with Jeremy Siegel, Executive Vice President, Corporate Development at Progress. Progress Software offers software for creating and deploying business applications traded on NASDAQ under prgs. Today we're going to discuss the process of buying a business specifically between the first conversation and getting an loi, the people involved, the steps in this process, and how to balance speed and accuracy during the bid process. How's it going Jeremy?

It's going great Kisan. Thanks for having me. Always a pleasure to speak with you about fun M and A topics.

I know you've been on here a number of times. Can we get the 62nd background?

I've been doing corporate development for over 20 years, mostly in the Boston, Texas, first at Akamai, then at Log Me in and now the last two and a half years at Progress Software where I'm responsible for basically executing on our inorganic growth strategy to being a billion dollar software company primarily driven by M.

And A. I wanted to get your time today to talk about the process of getting from this first conversation to an actual bit on the table because I think there's a lot that goes on there and it's not the same for everybody. Deal or company?

Yeah, it's a great topic Kisan, and one that I definitely am happy to talk to you about here today because it is so important people take for granted that oh, you just went right into an LOI and with a company and then you go acquire the company. But there's so much work behind the scenes that builds up to that point where you can actually submit a letter of intent or an indication of interest. And for me it really starts with relationship building and building trust and getting to know the company. The last thing I want to do is get on an initial call with a target company and say, hey, we're interested in buying. What do you think? It's more, hey, we'd love to tell you a little bit more about progress and would love to hear a little bit more about your company. And then from there, see if maybe there's some interesting things that we can explore together. And that could be partnerships or it could be something more strategic like M and A. But you never want to just jump right into the deep end and be like, hey, we want to acquire you. Is that something you'd be interested in? A lot of relationship building, a lot of dialogue. There are times when that relationship building piece can take three, six, nine months before you even have a conversation. It circles around actual acquisition. As these target companies learn more about progress and get excited about what progress could mean for the future of their business, they get more and more interested in having that strategic conversation. When I'm having that initial call with them, most of them don't even know who progress is. And so it's just as much of me educating them on who progress is as it is them educating me on who they are. And I take a lot of pride in spending quality time with the companies, in having dinners, having drinks with CEOs of companies, and getting to know them on a personal level. And I find that kind of effort pays dividends down the road when you shift gears from, hey, it's great to meet you, to hey, what about doing something more strategic?

Step one is build your relationship.

That building relationship is so key because you want that target company to trust you. You want that target company to have enthusiasm, of engaging with you. We had a situation recently where we've been talking to this one company for a couple of years, and over the course of that time period, they got to know more and more of our team. They got to meet our CEO, they got to meet our GMs of our different business units. At one point, the light bulb goes off and they're like, hey, maybe we could do something more strategic with you. That's the great scenario that they bring it up as opposed to me bringing it up. And that happens. Giving them exposure to more people within your company gives them better visibility into who you are as a potential acquirer and gets them more comfortable to have that conversation and gets them more comfortable to introduce us to a broader set of their people. And that's how we get to know the company better. We get to know their team better and as we've talked about, talked about on previous podcasts, the importance of people, it's so huge when you have those kinds of relationships in place. It just gives you greater conviction, greater confidence that a deal can be successful.

Are there any milestones or specific tactics or anything at this point of relationship building that you're setting up to get to that point? Hey, let's talk about a serious deal.

I wouldn't say there are any specific milestones that I set. It's not as if I say, all right, after one month, I want to make sure that we're having a conversation around sales and go to market. After two months, I want to make sure I'm having a conversation around the product and technology. It really has to be fluid and it really depends on the target company. It depends on their willingness to engage in those kinds of conversations. It's sort of a learning process. We're learning different aspects of that company, but it really varies from one opportunity to the next. Some might be more formal where they're like, hey, we'd love to give you. After you have an initial call, we'd love to give you a. Because a lot of companies, CEOs are so excited about their technology, they say, hey, maybe a great next step will be let's do a demo. And then you get some of your technical people from Progress on a call to basically see what this technology is all about. If my technical team comes back and says, hey, that's really cool technology, we'd love to learn more, then we can come back to them and say, hey, there seems to be something interesting here. Let's explore it further. Maybe there's a partnership opportunity for us. One of the great things that Progress has is we have 100,000 enterprise customers. We have three and a half million developers that use our tools on a daily basis. These startup companies, these early stage companies, kill for that kind of distribution. There are ways to our platform to get these companies excited. I do not have a formal playbook per se, as to how I engage with these companies. Other than that, sometimes it starts with the CEO of the target company itself. Sometimes it starts with talking to their lead investor. So there are multiple avenues that we can take to getting to know about a company in each situation varies.

So there's two big themes I'm pulling out of this. One is around trust. You're getting to know them, you're sharing information back and forth, you're getting exposure to people on both sides of each organization. Then the other is discovery. You're really learning. Sounds like you're shaping some of the strategy, maybe even validating if you had a hypothesis in doing this discovery. You demo your solution, we'll demo ours. This is where some of those ideas be a partnership or maybe it positions it to be an acquisition, sort of all comes into shape. That sound right?

It's a really good synthesis of what I was saying. And yeah, that discovery piece is. It's a really good way of describing it because yeah, we're learning about that company and we're assessing whether or not this could be interesting. The nice thing about Progress is because we cast such a wide net with regards to what it is that we look for across infrastructure software. We can look at a lot of things, but it's still important for us to understand what those businesses do and how they could fit within a respective business unit or a respective product of progress. And that takes time. And I'm not a super technical person by background, so I'm very dependent on the technical people, the experts within Progress to help me evaluate these companies like you said, discover and learn more about them. It's also a great way for us to weed out what isn't going to work for us because we tend to have a very broad top of funnel, lots of companies that are at the top of the funnel. And through this discovery and learning more about these companies, we're able to narrow it down to a much smaller subset of companies that we actually want to engage with at a more detailed level and potentially get to that point where we're having discussions around a letter of intent or an indication of intent.

How much of a hypothesis do you have going to that first conversation that this would be a great company for us to acquire versus I just want to see what's going on there.

Yeah, the hypothesis is usually pretty high level out of the gate. We do a pretty good job at Progress of sort of identifying the adjacencies, the interesting areas across all the different products that we have at Progress and we have a general idea that hey, we're talking to a company in the observability space that is probably going to have some interesting relevance to what we're doing with a couple of different products that we have. We don't necessarily know a lot. We don't know if the go to markets are aligned, we don't know if they're built in some type of technology that's going to make it easy to integrate into Progress. So there's a lot that we don't know. So it's really sort of a high Level hypothesis. Is this an interesting adjacency where we think there could be a relevant strategic rationale that we can develop as we learn more. And that's really the impetus for those initials calls. And it's not much more than that unless it's a company that is going through a process and we have more details and we have financial data and things like that where we can run an analysis and say, hey, we think we can afford this company, it fits within our financial criteria, let's go dig in. But those are more formal process type situations when we're more proactively reaching out to companies. It's very, very high level initially talk.

So we're still doing discovery, have some of these broad high level hypothesis. And this when you're understanding, go to markets are aligned, more information, you're doing.

Your diligence and we have a very, very sort of basic template for that initial conversation. There are certain things that we're looking for when we have that initial conversation. So obviously we want to understand what the company history is. We want to get a better feel for what kind of products they have, how big of a team they have, are they a distributed workforce, are they in the office type workforce, how much technology is built on open source. So there are a whole bunch of things that we can ask that can help us to determine if a company is going to be interesting and relevant to us or not pretty quickly. Like for us at Progress, we're not doing technology tuck ins. If we have a conversation with a company and they're like, yeah, we hope to start generating revenue next year, we know that's probably not going to be a good fit for Progress, we can probably end those discussions pretty quickly. But if we learn that the company has a meaningful amount of revenue and hit some of the other criteria, we know that we can continue to have dialogue and have it be meaningful and productive for both our side and the potential target company side, what do you.

Do to get them to like you?

I like to think that I'm a likable guy just out of the gate. Goes back to the first point when you talk about trust and discovery, it's building that trust is just having a good dialogue. And I spend time before I get on a first call looking at LinkedIn, seeing if I have connections to the person and being able to make little tie ins like hey, you went to Cornell, I went to Cornell or whatever it might be. Those icebreakers make those conversations go more smoothly. A lot more of those target companies, CEOs or whomever I'm talking to enjoy engaging with me more as opposed to that point I made early in this conversation, just coming out and saying, hey, we're progress, I run corporate development, I want to buy you. And that would probably create a different tone. But because I'm building that relationship, because I'm building that trust, I think more of these company CEOs enjoy engaging with and then enjoy meeting a broader set of folks within Progress. One of the nice things here at Progress is my CEO is more than happy to get on the phone with any of the target companies that we're looking at. And that helps me a lot too because one, it shows that we're serious and two, it gives those target companies visibility at the highest level within Progress and that makes them feel good and makes them feel important. And I think that helps a lot in doing those different things. For the most part, gets most CEOs or whomever it is I'm talking to at target companies interested, willing and happy to have good dialogue. The hit rate is not 100% Tucson don't get me wrong, there are certainly some companies that just have no interest. They sort of know because I'm a corp dev person where this is ultimately going to go and they just have no interest in engaging and that's fine. But for the most part they're open to that conversation. I think given today's market environment, they have to be. It's harder to raise money. There's no IPO window open right now. We as an acquirer are a great liquidity alternative for a lot of these companies that they're engaged in building the.

Relationship, developing trust and the discovery. When does that threshold come? Hey, time to get serious. I would assume that you would step up your diligence to put an offer in front of them. There's gotta be this. Yeah, we'd like to see what terms you'd propose for a deal. Like where does that little place point.

Happen, especially for companies that are VC backed or PE backed. The partners on those deals with those companies are going to be very protective of those companies and very protective of their team and them focusing on executing. So you're right. At some point the rubber hits the road and you have to basically say to the private equity person or the BEC person, we've really enjoyed these conversations that we've had with the same company. We think that there could be something more strategic here and we can determine a view or perspective on value with not a ton of information. We can get a basic financial pack, an anonymized census. We can run a valuation model that has us be able to say, all right, we think we can support a deal in such and such range. And so I can have that conversation with the VC or the pe, if it's a bootstrap company, directly with the CEO of the company and say, hey, these conversations I think are going really well. They could be interested in doing something more strategic. Is that something that you'd be interested in? And with the VCs and the PEs, you can say, hey, these conversations have been going really well. We think we could do a deal somewhere in this range and we know you've raised X. We typically know what the post money valuation on the last round is. We have a feel for whether or not we can put in something that would be compelling to a VC or private equity firm and be able to say, hey, we think we can do a deal at X. Is that something that you'd want to engage further? Because when we get to that LOI stage, we haven't really gotten a chance to do a lot of diligence. We've done a couple management calls maybe, but we haven't really dug in on the technology, we haven't really dug in on the sales and go to market details pipeline, things like that. We haven't done much at all on the back office side. So around hr, around it, around legal, around finance. So there's a lot that we need to do that we can't do until we get to that LOI point. And we need to make it interesting enough to the VCPE person that they're willing to say, all right, company X, company Y, let's open up the kimono to progress at this point because this is a price that would be interesting to us. If we could get a deal at this price, it's worth it. We'll have that dialogue with the respective person on the other side and if it resonates, we can jump right into an loi.

How does that originate? Are you dealing with the management team to get to the vcpe? Are you talking to them directly?

It really depends on a deal by deal basis. What I like to do is I like to find a soft landing. I don't like to do cold calling and just reach out to someone out of the blue. So I like to see where do I have connections, who can I leverage to give me a nice introduction. Lots of times that's with the VC or the private equity person. And I'll ask my contact when I'm connected to you to say, hey, would you mind doing a warm intro to someone? Because I'd be interested in talking to this company. Instead of just going directly to the CEO of the company, I might go to the VC or the pe if I have a relationship there. If I have a good connection to the company and can get a nice warm intro to the CEO of that company, I'll do that too. But I tried to have that initial contact be warmer as opposed to just a cold call outreach that tends to have a much lower hit rate of success.

Okay, so wherever your warm sources lead you into through the business with investors.

Yeah. And if it's on the investor side, you typically will say, hey, we're interested in your company. X. We think that there's some interesting tie ins to to a product that we might have a progress or to progress as a whole. And we think that progress brings some interesting things to the table. And we'd love to just have a preliminary conversation to get to know the company again. I'm never coming out and saying, hey, we want to acquire this company. They ultimately know what it is I'm trying to do, but they know that it's a process. It's an according process. If I can do a good enough job explaining why it could be interesting, usually the VCs or the PEs are more than happy to make that interest. And if I do a good enough job with the CEO, him or herself, they're usually more than willing to have that initial conversation.

And then you do relationship building, build the trust discovery. Get to the point where, hey, I think we got something here. We'd like to propose something formally in front of you, basically proposing the idea.

Yeah, exactly. And that will be in the form of either an indication of interest or a letter of intent. And when we're submitting those letters of.

Intent, wouldn't you have an NDA sign before that?

Oh goodness, yes. After we have that initial conversation, if there's interest in continuing to have dialogue, we'll sign an NDA. So the NDA has been signed a lot.

So pretty early, like hey, we are going to meet each other's stuff.

I'm not going to say, hey, I want to talk to you. Let's sign an NDA and then we'll set up a time to talk. I'll usually have that initial conversation and if there's some there there, then say, hey, as a next step, maybe we should sign an NDA and so we can talk a little more freely and openly and we can share a little bit more about each other that we might not otherwise be able to share without that NDA. So that NDA is long in place. When we're having a discussion, we get.

To that point where we want to put something and we're already getting some information. But to put an LOI together you need some financials and pretty good amount of information, wouldn't you?

When we're at that stage, we've typically already gotten the financial pack and so that will have details around a P and L, details around a balance sheet, details around recurring revenue streams, details around the operating expenses and the cost of goods sold. We have decent details there for them.

To send you that. Their expectation is you're they're sending that information to put together an offer.

Typically, yeah, sometimes we'll just have a much more high level financial detail, but we can build a valuation perspective on high level information. And then what we say is we'll obviously need to validate this with diligence and more detail at a high level. We think we can do something in this range. Unless we learn things in diligence that prove that your revenue is significantly less than what you told us or your expense profile is significantly higher than what you told us. We should be able to do evaluation in such a range. But you're right, there are situations where we're not going to get that level of detail. But we can still put together a preliminary perspective on what we think appropriate value could be.

This is probably where it varies a bit, company to company in terms of how easy it is to get that information or willing to share it.

Absolutely. Like in a competitive situation, if it's a banker led process, we have access to a lot more information. We'll typically have a more robust data room established already so we can get some of that information to be able to do some of that preliminary diligence. If it's a more proactive approach where we've reached out to the company and they're not necessarily in an M and A process, then it takes a little bit more courting time, a little bit more time to build that trust. And then if we get to that point where we're thinking there could be something more strategic here, we can ask for some of those things that I talked about, that financial pact that allows us to submit a more meaningful letter of intent. But a letter of intent as non binding document doesn't have indemnities. Nescros and an loi. You're saying, hey, I think I can do something in the price range of this. This is the diligence that I still need to do. I'd like to have some period of time for exclusivity to be able to go hire all the third party resources that I'm going to need to be able to do this work and see if we can go negotiate a deal while we're doing that diligence.

Can you walk me through the people that are involved to get to loi? You're having a first conversation and maybe you got a colleague going from there to loi. Who are the people that get added in?

We typically have a pretty limited set of folks that are involved up to the point where we sign a letter of intent. Obviously we'll have a legal involved because they're helping us to negotiate the letter of intent. We have some folks in the finance team involved because they're helping us to build out the financial model. We'll have whoever is going to be the executive champion and maybe one or two people from his or her team that are involved evaluating the company from a technology and a go to market standpoint. And that's typically. It is typically pretty limited. And similarly with the target companies, they're not bringing a bunch of people over the wall because they don't want people to get all nervous that they're about to be sold or something like that. So it's typically the CEO, the cfo, maybe a chief revenue officer or a chief product officer. So it's usually very limited on the target side, but it's also pretty limited on our side as well as the buyer. Once we execute that loi, that's when we bring in the much more robust diligence team across all the different functions.

So on your side, you said it was legal, a number of executives and.

Then our finance team that's helping us.

To build a model finance team, hr, not typically.

They're not typically too involved pre loi. I have a good relationship with my chief people officer so she's aware of the different deals. I also have a couple people on her team that dotted line into me. So they're aware of the deals but they're not necessarily doing a lot of work.

How do you engage them? What I'm trying to get to is ultimately you got to put an offer and your big considerations around the offer are your capex and synergies. I'm curious about this. Right?

Yeah, no, it's a great question because. Yeah, because we're making certain assumptions and it's a good point.

You want to change the price after you got an LOI signed, right?

We do not. We are Very focused. We'll walk away from a deal rather than retrade on price, typically because once we set a price or a range, we don't want to back off. We have good conviction because we know having done this as long as we have where we can get good operational efficiency, we know at progress as a percentage of revenue how much G and A we really need to operate a business successfully, how much sales and marketing we really need to operate a business successfully. So we know where there are going to be synergy opportunities when we have a high level P and L. And so we'll make general assumptions. If we get into diligence and we conclude that we need a lot more of that team or we're not going to be able to get to the kind of operating margin profile that we expect and need to have to get a deal done. We'll walk away from a deal. But we've done this enough that we know what we can do. So we have a high level of conviction that we're going to be able to get a deal across the finish line. If we've gotten some of that basic information before we get to Manloi stage and then the diligence process is really confirmatory and validating what we've assumed or what they've told us.

Keeping that in mind, then how do you engage those people that you need to validate your capex and synergies to make sure you're bidding accurately?

We have a core diligence team across all the different functions. We've spent a lot of time over the last couple of years since I've been here, really building up the bench across each of the different functional areas that evaluate a company.

All these functional leads are involved before loi?

No, the functional leads are not involved up until the point where we execute an loi, the team that's been involved is much smaller. It's the legal team that's helped me to negotiate the loi. It's the finance team that's helped me build a model and it's the executive sponsor, maybe one or two people from his or her team. That's the extent. Then when we get to that stage, then we bring in a much broader set of folks to help us dig in and dig under the covers to really truly understand the business and do it both from a standpoint of confirmatory diligence, but also what do I need to know to map out a really detailed and thoughtful integration plan so that once we do get to the finish line, that company will get integrated into Progress in a seamless manner.

The gap I'm trying to figure out is to get to loi, you gotta model this out, your capex and synergies. And then it seems like the people that really know that stuff, your functional leads, get pulled in after you sign the loi. I'm trying to get that picture of how do you balance that out? How do you accurately get off on the table?

We've done enough deals that we know the parameters of what it is that we need to make a deal work. So we know that if a company is bleeding $10 million and doing 30 million in revenue, probably not a company that we're going to be able to get to the kind of operating margin that we needed to get to. So we tend to look at companies that have a different operating margin profile. We look at companies where we know that maybe the company is spending 50% of revenue on sales and marketing. We know, and they're growing 5, 10%. We know that's not efficient. So we know that we can do that much better. Same thing on the G and A side. Maybe they've got seven different facilities but no one's going into the office. We know we can operate that better. So there are a lot of things that we can understand at a high level when we're looking at a deal that can give us conviction around certain assumptions. But you're right, then we go in and the teams, the functions who have to live with it, need to go in and validate it and come back to us and say, yes, I can do this or no, I can't do this. And if they say no, I can't do this, then they're harder discussions where maybe we look for puts and takes across other parts of the business. Or ultimately we say we can't make the deal model work and we have to walk away. It's rare that we have to do that because we know what we're doing and we know so well where we can extract operational efficiency. So there's a high degree of conviction even with a limited set of folks who are evaluating the business before we get into an LOI stage.

Finance ultimately drives all this activity to get to an LOI in terms of the valuation.

So we work very closely with the executive champion and the finance team to build out our assumptions and to build up that model. It is not effective if we just let the finance team say this is the model and go live with it. There's a lot of inputs that come from us as the corp dev team, the executive champion with input that Executive Champion has from a couple of folks that they have that are evaluating the business and you can set a basic set of assumptions from that. If we were to just to let Finance tell us this is what the model is, that would be in effect very interactive that way.

You got Business unit, Leadership Finance and Jeremy Corp. Dev. It's sort of between the three to really agree on a valuation model to.

Put a bid in and then obviously reviewing that with the CEO and the CFO and making sure that they are comfortable with the numbers that we're talking about as well.

And then does it continue to live on where as you go through confirmatory diligence, are you updating that model as you get information from?

Functionally, the deal model definitely evolves and it definitely gets more refined. One of the key reasons why we have Finance that ultimately owns it is because that deal model is going to eventually transition into an operating model. And so we want to have really good understanding of all the different inputs and all the different assumptions that are going into that model. Because at the end of the day the business unit and the business unit's finance partner are going to live with those numbers. So they need to be comfortable with it.

How do you make sure your bids are accurate? You don't miss a big capex or synergy. Don't tell me it's years of doing this. I want to shortcut that. I want to make sure it doesn't take me.

We're having good dialogue, having enough dialogue before we submit an LOI that we have a good enough understanding of different aspects of the business. If it's a capex heavy business, if it's a customer support heavy business, if it's heavily dependent on cloud hosting costs, spending a lot of money on demand gen, if they have a crazy sales model with multi levels of folks involved in deals like a vp, a director, an actual salesperson. So we have a lot of things that we know and a lot of questions that we know we can ask to get enough insight to be able to build out a preliminary model.

What are examples of those big ticket items in those categories of capex and Synergies that you probably pay attention to and want to make sure you get.

Right on the cost of goods sold side. If they are using a third party provider like an AWS or an Azure or Google Cloud, we want to understand what are those relationships, what are the dependencies? Are they just using it for compute storage? Are they using it for other support that can influence our ability to get synergies? When it comes to facilities and having a whole bunch of office locations, we ask a lot of questions around. Is it more of a virtual environment? Is it a work in the office environment? We know we can get potential synergies there. We ask a lot of questions to really dig in and understand what are the key marketing initiatives that drive top line. We can understand where we can get synergies there. Same thing on the sales side. Sometimes the ratios of sales to SES and sales to account managers are just out of whack. So there are lots of things that we can look for that allow us to say, hey, here's a clear area where we can get synergy. If it's a product that is similar to a product within progress, we know we can leverage our sales team to basically just add that to the bag. So maybe there's not as big a dependency on another sales team. So there are a whole bunch of things that as we evaluate a company can allow us to think about where there are potential opportunities for synergies or not.

And it's all within those executive leadership that you got a pretty good handle in terms of understanding the business. And obviously a lot of it's mapped out through financials you're reviewing.

If we see a company and they've got 60% of revenue in sales and marketing and they're growing, growth rate is sub 10%. We know there's something off kilter there. We see a company and they've got G and A that spend north of 20%. We know that there are lots of efficiencies there. On the R and D side, we know that if their R and D is high, maybe they have high cost R and D people and we can move those costs to some of the other places where we have centers of excellence for development like Bangalore or Sofia, Bulgaria are other places where we do development. So there are a bunch of levers that we can look at as we build out these models that gives us that conviction. I know it sounds weird that you can have that, that level of insight that early before you let all of the different functional folks go off and hit the ground running. But at the same time we need to have some perspective because we need to be able to assess whether or not we can one, get to the kind of operating margin profile we need and two, get to the kind of price that's going to resonate with the seller and the seller's investors.

That's why they always blame you for everything when it comes to all the post close activity. Tell me about Negotiations. When you are going to put this offer in front of the target, are you doing it with this? Hey, I'm going to put 5% padding to negotiate on this. How does that work?

Oh, yeah, absolutely. When I'm working on a deal, I'm never going to necessarily give them the highest bid out of the gate because then there's no room for negotiation. I definitely need to have some room for being able to move and to make it more of a negotiation between both sides. So I usually have a good perspective of what my range is that I can do a deal in. And so if we can get alignment within that zip code, then you can have a conversation. If they're in zip code X and I'm in zip code Y, then we can say we're never going to be able to get there. So let's agree to part ways now rather than waste cycles.

Is it like a percentage range or are you just taking your top divided by two and that's where you start with.

It varies. It varies. There are situations where we just want to come in with as strong a bit as we can because maybe it's a competitive situation. We need to. There are situations where we're filling each other out so we're going to throw out a number, but we know we can move on it. So it really varies based on the situation. The company that you're having a conversation with, progress is not an acquirer. That can typically preempt a process because we aren't out there paying crazy high multiples for deals because we can't, because we don't trade at a crazy high multiples. Anyone that's selling to us should have a basic understanding of where we're going to be from a value standpoint because we need that deal to be accretive and they should know where we trade at from a revenue multiple standpoint, from an EBITDA multiple standpoint. And the only way we're going to create shareholder value is by paying a multiple that's lower.

What about if it's a situation, if you know the company's in trouble, like we're probably going to see a lot of companies coming up is that. Do you still play it by, hey, this is what market's going for or do I look at the situation and saying they don't have a choice?

That's a great point. There could be opportunities where we can get assets for cheaper prices than we may have been able to get last year. And that's just the result of the market environment. The market Dynamics. It's interesting. Private companies, I still don't think there's that equilibrium between what sellers want and what buyers are willing to pay. There's definitely more correction happening in the public markets and in the private markets. But it's only a matter of time. You're right. Before those private companies say, hey, going to have a really hard time going out and raising more money. If I do raise more money, it's going to be a very disadvantageous terms from the VC who for the last two to three years had to give me all kinds of great. Right. So now that the VCs are in a position of power, maybe it is a good time to sell. I'm better off selling now because in order for me to make the same amount of money, I'll have to get to a valuation three, four times where I'm at today. Yeah, I think there are going to be a lot more companies that are going to at least be willing to engage and explore that. If you read the Journal or the Pitchbook or any of these publications on a daily basis, it's very clear that VCs are being much tighter with who it is that they fund. They're funding much less on the mature companies, which is where we focus because we're looking for companies with scale. So those companies are going to be in position once they get to that point where they're going to run out of money where they don't have an option and we're going to be a good viable option for them.

Are there other things you're negotiating on your LOI besides purchase price?

There are certainly, Lois, where the seller wants to negotiate more upfront, they at least want to get some visibility into what are the gotchas from a purchase price adjustment standpoint. So give me a feel for what you're going to do with networking capital. There are certainly situations where the seller or the banker wants to know that you're going to commit to procuring Rep and Moranti Insurance as your recourse for indemnity. So that can get negotiated during the LOI stage. We're trying to negotiate exclusivity. If we can get exclusivity, that's great. It's hard to expend hundreds of thousands of dollars on diligence resources and not know if you're even going to win the deal. But sometimes in super competitive situations you need to do that. But when they're not as competitive, you're trying to get that exclusivity period. So that's important. Something you Negotiate. You'll talk about high level on structure, but again a lot of the structure stuff is dependent on the tax work that you do and digging in more deeply in some of the legal aspects of the target company. So it's hard to really have a lot of visibility there. We try to make it clear that we're going to take good care of the people that we retain in the deal. So we usually put together some sort of package of retention for them and that's negotiated in the loi. You're hearing that there are certainly a few things. It's rare that you can get someone to sign up for LOI or an indication of interest where you're basically just saying here's the price and I want exclusivity. They want a little bit more detail and so you have to negotiate it.

I don't get how you do a deal without exclusivity. If you got to invest so much time and resources to get to close.

Up until three or four years ago, I never would have done it. But in competitive situations that are banker led, where there are three, four, five parties that are all seriously reviewing a deal, these bankers are requiring diligence to be primarily complete before they select the winning party. And in those situations you have to make the decision, is it worth it to me to put our best foot forward to potentially win this deal and thus incur these costs knowing that I might not get this deal or is it not? And do I just walk away because I'm not going to incur those costs because I don't think I really have a good chance of winning the deal anyways or I'm just not comfortable incurring all these costs on the deal. But you're right, it's a very tough balancing act, which is why we try to find more proactive opportunities where there's not a process or a banker led process so that we can control that and have that exclusivity period.

So if it is proprietary, you would tend to get exclusivity.

Exclusivity, yes. Typically, yeah, we want on a deal that we source and find ourselves. We're not going to go through all that work without exclusive.

Specifically, what good do bankers do in this world?

They usually have a much more robust data room in place. When you initially start doing diligence in a proactive process where the company isn't really teed up to sell, the information trickles in a little bit more. In a more formal process, there's a much more robust data room with a lot more of the detail that we're going to be looking for in a diligence process. So that's good. They also bring a level of experience that particularly sometimes entrepreneurs or sellers who are newer to that process, don't really know what they're doing, can get ahead of their skis. And so bankers can keep them a little bit more balanced and a little bit more focused on what it is that we're trying to accomplish in a deal that can help. I had a situation where a company did not have a banker and it was really difficult to negotiate with them because they just had never done this before. They didn't know what they were doing. We were months down the road with this company and they got cold feet with regards to valuation. This is something that you should address early in a process when you sign an loi, not when you're about to sign a definitive agreement. So a banker wouldn't let something like that happen.

Would you do a proprietary deal and encourage a company that you felt was going down that path to find a banker? Recommend a banker.

As long as I get that exclusivity and have that period and they're not going to go market the deal and then come back to me, you can.

Ly sign first and then say you should probably work at a bank.

So I do think there's value to it. If it's a CEO who's been through it before and knows what they're doing and has processes in place and has all the materials easily accessible, then great, then they don't need it. If they've never done it before and they don't know the first thing to doing a diligence process, then it might not hurt.

Do you use these different components in an LOI as different levers in accommodation? So I'm thinking of my approach to buying a house. I will go out and low bid, very low in purchase price, but all cash offer, no contingencies. I'm closing in five days. I'm looking for is to see if they counter. If they counter, then I'm throwing back my contingencies and other variables.

Absolutely. I am definitely focusing on some of the other pieces, like speed, like being able to get to a deal quick, like certainty to close. So you know our willingness to do rent and warranty insurance, having a lot more flexibility on deal terms that are much more aligned with markets today versus same market three or four years ago. So I'm highlighting those pieces and saying these are the things that differentiate us because price is one piece. But if you're going to go down a process with this other acquirer that's going to take two months to diligence. You. I can do that in 20 days, I can do that in 30 days. And in the same time I can negotiate a deal and hey, have the cash on hand because I have a balance sheet with over half a billion dollars in cash. You're not going to have to worry about financing contingencies and other things like that. So absolutely, I will leverage those things as much as possible.

Is there ever hesitation on reps and warranties from either side sellers?

No, not really. We just did a presentation this morning to our legal team and we were talking about how reps and warranty insurance is basically table stakes today in most deals. It's just expected. We've gotten comfortable with it as a vehicle for giving us the protections that we need. It isn't really a sticking point for us on deals, whereas in the past it may have been.

You ever had a deal where even before loi and you're just proposing the idea of doing acquisition and they were like, no. And then you convinced them to say yeah. Has you ever had that where you've actually had to convince someone that wasn't for sale to sell?

Yeah, for sure. In some of these bootstrap situations that I was alluding to, it was a very long courtship period. You know, it's interesting. Sometimes there are two or three founders. Maybe one or two are all on board with selling, and the third one is not necessarily a sure. And so you need to work extra hard at convincing that party why selling makes sense. So those kinds of scenarios have definitely.

Is it the story of growing together? You'll still get a lot of upsides. You know, what are those things that really get someone to change their mind?

Say the person's in their 60s and they're on the final legs of wanting to work. It's a great liquidity event and a great opportunity to go off and enjoy other things. It is all about having bigger platform and what the bigger platform provides. Small company that's been bootstrapped with maybe a couple hundred customers is going to salivate over the opportunity to be able to bring that to 100,000. There's that platform. There's just all the additional pieces that come with being a public company for their people, being able to have a more robust 401k plan, being able to have stock in a public company that actually has liquidity as opposed to being piece of paper that could never be worth anything. So there are a whole bunch of different levers that you can call out as reasons why maybe you should give more serious thought to this.

It sounds like a great topic to bring you back on.

Great.

Can I ask what's the craziest thing you've seen in M and A?

I go back to this one, the craziest thing where this company like months down the road of getting to a definitive agreement and having everything pretty much buttoned up and decided that the valuation wasn't sufficient. That company will definitely regret that decision because this was pre the markets doing what they've done and pre valuations coming down. But it happens. And so people are crazy. And I would say entrepreneurs who don't have any experience with deal process tend to be the ones that get into the most trouble. And that's happened to me a couple of times. And the last thing you want to do as a seller is come to the buyer right before you're going to sign a definitive agreement and say, I'm not comfortable with the value. Because you've had plenty of time to discuss that and plenty of time to negotiate that. And it's no longer the time when you're getting ready to sign a definitive agreement. But I've had two situations where founders have said I'm not comfortable with value at the last minute and that's a deal breaker.

I guess the one thing loi about definitive agreement, that's yeah, like, all right.

Hey, all the power to you. In that first case, the person came back to us six months later and we were like, sorry, you had your window. Good luck. In the second case, they haven't come back to us yet, but I suspect they will.

This has been great. Jeremy, thanks for taking the time to chat with me. I learned a lot helping me become a better M and A scientist.

You always ask great questions and tough questions, so I appreciate it. Look forward to the next one with you.

Hey, those of you still with us, cheers. Here's to the deal.

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