How Experienced Buyers Actually Make M&A Work

This episode is sponsored by dealroom and if you're on the buy side, you know the pain most. M and A tools, especially those clunky data rooms, aren't built for you, they're made for sellers. And it shows. Dealroom is the number one platform built specifically for buyer led M&A. It's designed to help you lead the deal from pipeline to diligence to integration with the structure and visibility you actually need. You get features like built in project management, templated deal rooms, real time collaboration, and AI contract review, all built to support how buy side teams really work. No jumping between tools, no messy workarounds, and no hidden fees. Check it out@dealroom.net or click the link in the description to see how it makes BuySight M&A a whole lot easier. Lead the Deal, Own the Outcome here's to the deal. I'm Kisam Patel and you're listening to.

M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Foreign. A Scientists welcome to the M and A Science Podcast. This show is part of our mission to rethink how M and A is done and build the operating standard for buy side M and A. That old school settled that approach. That era is over. Fire led M&A is about strategy alignment and execution, putting value creation at the center of every deal. And let's be real, it's not just about closing the deal, it's about making it successful. We get there by learning directly from the best. If you want to go deeper into the framework, grab my book buyer led M&A if you want the full system framework templates, exclusive content, expert Q and A sessions, access to me and the AI powered Intelligence Hub, join the M&A Science membership at mascience.com It's a home of buyer led M&A by there. Make sure to sign up for a free newsletter. Lead the Deal, Own the Outcome let's jump in. I'm your host, Kisam Patel. Today I'm joined by Carlos Sesta, an M and A advisor who recently made the jump from buy side to running his own advisory practice. Carlos has spent nearly 30 years in the corporate development side working on deals at companies like Verizon, Dentsu, Presidio, MP Digital. Now he's built an M and A advisory firm that's working with entrepreneurs across Europe and US. In just four months he has three mandates ranging from Creative Tech and Martech to to experimental marketing companies using AI to Make events measurable. What makes Carlos approach different is his focus on alignment and long term relationships over the traditional transaction focused banking model. Today we're going to talk about managing the M and A lifecycle, the deal structures that actually work and why human connection still matters even as M and A goes digital and where the industry is evolving. He's got strong opinions on banker incentives today and why they're broken. We'll get into that if we got some time. Carlos, how you doing?

Doing well. Thanks for having me.

We're here live in Rome.

Rome, Italy in eternal cities.

Hey, thanks for taking time to have this conversation.

Sounds good.

Kicking off the New year. It's only the second day of the New year. Hope you had some fun on New Year's Eve.

Certainly did. Happy New Year.

Happy New Year. Can we kick things off a little bit about your background?

You touched on it about 30 years almost to the date of M and A. Experience ranging from very early on investment banking. Most of it developed inside companies like Verizon where we also had a corporate venture capital program where I was very active and then to very acquisitive ad company Presidio and NP Digital. So it's been M and A practice over small teams, big teams, public companies, private companies.

How many deals you worked on?

I was counting the other day someone asked for my ideal sheet. 125.

125 deals. I know you've worked on some high profile stuff at Verizon but I've never been able to get you to talk about on record. Is it like some strict NDAs and stuff?

No, no. As long as I don't talk about and actually explains the tilt from telecom to advertising is that when Verizon was putting together their media company. I was very active and appoint person on the all The M&AOL Yahoo Deals where I was a director on the deal which is topic for a a whole podcast. Some other time. Just in terms of managing deal teams that are enormous. About 30 people on each side. But also very interesting how things cascade from strategy all the way to culminating with a deal like that.

Imagine that's when we first met. You were still at Verizon. And then I've got to keep up with you through your career. When you went to Dentsu and you were working on a roll up, I got stopped your office over there.

Correct.

We started working on some content and you went to Presidio and got to do some more content together. And then you did the run at MP Digital.

This goes 10 years.

Yes. If you don't and then said, and these are the most recent ones. Were different types of rollout platforms correct.

Or smaller companies that had Programmatic M and A embedded into their culture. So Denso was one of them. NPD and Presidio was more of a. They didn't have a corporate development practice and it was coming in and establishing starting from zero, which is great. What I love to do now. I had the blank canvas just to paint over it how we're going to design this. I think that's when you and I started talking about buy side M and A and how do you anchor this all with strategy and how you push that strategy through the teams and all the way to integration.

What is the hardest part about standing up an M and A function from scratch?

It is. I wouldn't say the hardest, but one that people underestimate. But it takes a lot of effort is getting the M and A strategy from people. What does that mean? That means getting into details of making choices in terms of we're going to pursue this and not that and then executing against that strategy. There's one thing to say, oh, we're going to buy, we're going to do a roll up. Okay, why are you buying scale? Are you buying capabilities? Are you after technology? You start asking these things and you figure out that a lot of senior folks hadn't thought about it. They're just operators that are heads down. There's nothing wrong with it. But they're confronted with questions like that. And that's the toughest part. It takes a while for them. Why are you asking me this? We're in this industry. Yeah, but how do you think value's created here?

I like that. We're definitely going to get into this a lot more around the strategy. I have that down as one of my questions. So after a 30 year run in corporate development, you know, now you're starting from scratch of the boutique advisory practice. Like why the hell would you do.

That and move countries? Because I just like to challenge myself. Now. It was one of those things that life presented itself like a life crisis.

Type of.

This is a crisis for you?

No, I like it.

I like that pretty good. But seriously, the whole thing started because I was negotiating against the table from gentleman who's my partner today on this company, German guy called Sven Hansen. He had Macanta, it's his company and then we partner on it and he was on the sell side, I was on the buy side. We were pretty straight with each other in the context of a deal. That is not an Auction. You get to know the person when you're under pressure and sometimes you just extend some understanding of their position. And they created a lot of respect between us. When I was thinking about this and he said, do you want to join forces? Because I'm here in Europe. You're bringing 26 years out of the US plus Latin America because you're from Latin America. It was really bringing global reach with the two man operation and experience. We're being successful because there's credibility, believe it or not. We're not optimizing for running a process. We're optimizing for embedding ourselves into the management team, being part of the team and sending the right signals to the right buyers.

We're going to pull a thread on that, on how the industry is shaping, evolving your take on what you're seeing on the advisory side. I love the fact that he found your partner on the opposite side of the deal table.

It's very interesting.

And then we should add an element like you're immigrant in the U.S. growing up in Brazil, so you've got to have that part of your journey. Now you're like a second time immigrant in Italy.

Second time immigrant. Well, technically I'm coming back. I'm Italian citizen as well.

Okay, there you go. You got that. Through marriage, I believe.

Through marriage, yeah.

So I do have some cheat code because this is like our fourth time doing some content collaboration. So I want to dig into the things I personally felt that were most valuable. Especially looking back, I've done close to 400 of these podcast interviews. One, let's start. Go back to strategy. Want to just talk through the life cycle of a deal? I feel like strategy gets. It's just such a broad word that we use day to day. And I feel like in the context of M and A, you know, this is part of like buyer LED framework. First thing is having clearly defined strategy, you have that it allows you to create the criteria so you can go get your hunting license, find deals that you can confidently execute. But teach me, like, why is it important and how do you know when you actually got it defined to that level, that it's executable and there's some.

Real life experience attached to that. And one of the, one of my roles in starting to set up a corporate development practice, the company was doing M and A because they wanted to do M and A. And I had tough questions, but what's your strategy? I was met with, looks like I had three heads. What do you mean we're going to buy stuff Cheap. And we're going to sell for one and a half times that multiple or more you break down into saying, hey, strategy. And I will only know that because ever Izon we had a whole vertical of McKinsey People doing strategy and we execute against that. So strategy is as much as deciding what you are going to do and what you're going to pursue as determining what you're not going to pursue in that situation. This specific CEO wanted to pursue everything. What do you mean? If it's opportunistic, we'll pursue everything. You spend a whole lot of energy if you're not pretty focused on what you're looking for. And you can pursue scale, capability additions and technology at the same time. As long as you put that into the context of we are in this industry or sub industry, we're going to add value by being the most brackets in the. So it's almost like creating like a mission statement. Getting a CEO to think about that is how you start building strategy. And then the M and A part is tactical. After that you have the levers that you can adjust for increasing success, to position your first success, which is the outcome on the M and A, not the transaction itself. It's what happens after. So everything that comes after that is mostly tactical. So that's why I like to spend time with strategy. When I joined NP Digital, I consulted for them for six months. I didn't want to join because I want to make sure that these guys want to do M and A. And is it going to be programmatic? I'm a big supporter of the McKinsey paper that talked about programmatic. M and A through cycle, through economic cycle, through technological cycles is what brings value at the end of the day.

Can you walk me through an example of this? Convince me why buying low, selling high isn't a good enough strategy.

I'll put it this way. I want to maximize our chances to be successful. I'm going to dial all the dials to 11 to make sure that we are successful. Because if there's one thing that gets under my skin is when people start saying, oh, 70% of M& A has failed. That's such a generic statement that there's so many variables under that that I want to optimize all of that. And the most important is strategy. Because if things happen in your industry or in a certain deal, you're knowledgeable enough of the strategy to make adjustments in order to get the outcome that you need.

If I look at my most recent role at Deal Room and still Something I'm working on. That's the one thing I struggled with is every time I found stuff that was, you know, it's an early stage company, so it's hard to go too far away from the core because that core distribution isn't there. So the stuff that was closer to the core wasn't as fragmented. It was more like one off acquisitions. It was hard to build like a real good M and A strategy. I felt until we had a strong core distribution, if we had a core, strong core distribution, then we can go play in different adjacencies.

You see what you did there, you hit the limit of the strategy. So you had to understand, if I can make acquisitions that are close to the core, then maybe it's adjacencies. You're still talking about your M and A strategy. You didn't necessarily sit down to talk to someone about it, but maybe if you had, you would have found that first, like this is what exists today. There's not many opportunities here. So what about adjacencies? What about buying scale? What about making it part of a bigger technology play that is exercise that hopefully you do before you start talking to people and looking for M and A. Because you might be already talking to a company just to come home and think, what am I doing?

The challenge of that one is like the balance between your organic growth, because it's still early stage, and then when you apply M and A, which is still a big question. I think it'll come over time. But you got a point there. You still got to have that view of where the business wants to go five, 10 years out and how are you going to get there, which is in that business, like, hey, we're at 10 million revenue. How do we get to 100 million revenue in five years, which probably some M and A is going to have to come and play there.

That's interesting because I have been discussing with someone on the buy side now, trying to get an advisor on the buy side, but trying to be very thoughtful about it. What the person is struggling with or the CEO is struggling, is that okay, I can do M and A. What I'm seeing right now in the market, but is it time proof? Because there's so much going on with AI disrupting industries that I don't know if I'm buying something today will last five, 10 years. That's a great point. I partner with some industry experts and try to figure out, okay, if you were to put together like a venture program here, where would you invest? And that sort of shifted how you're thinking about today to tomorrow and you start integrating. And what we're trying to do is integrate like a vc, a CVC program with the M and A program as one and not necessarily have barriers of this is. No, it's like for a certain type of capability one acquire is that a disruption coming into the horizon and if there is, should we do M and A or should we do venture investment? So that's been a very good tool for uncertain times or highly disruptive waves that are presenting themselves.

I like that approach of just thinking of it as a venture where you're going to take these long term bets out. Because right away I started thinking a little bit different. If I would have done that, there's some interesting AI I see emerging that's focused on spreadsheet modeling. I would take bets on those things because somebody's going to come out to be a clear winner that would fit in our ecosystem of doing deals.

This whole thing is about bringing the Verizon type of strategy capabilities into smaller companies because you're not going to hire a bunch of people. But if you don't have R and D, you do some small investments in companies that are interesting and observer seats are not uncommon these days. So you have a real intelligence that you can bring to the company and then you can also put that information into your M and A strategy in your M and A process as an indicative of should I pursue this company or not?

Can you walk me through an example? You used the most recent one where you stood up the MNA function. I could see how it's easy to say hey, we're going to go buy a bunch of lookalike companies. That's what consolidation play is. But how do you even shape that up?

You shape that up by identifying. I can only point to real examples and NP Digital, for example, we mapped out three or four subsectors that we want to do after and we started to see what's out that in the market. I know there's a we want to prioritize at that point. Well, let's go in this versus but we said just let's see what's out there. It's really like testing the management team as to their appetite. But it's one thing that they tell you do the strategy. It's another when you really test them. There's this but you told me that it is in agreement with your strategy. Would you want to buy this? And they start thinking and sometimes well actually let's go after the different one it's very iterative and that's why. And I was part of the company, but as an advisor, you need to have that feel that you're embedded in the team and comfortable to say, not question your ability to design a strategy. But I want to test drive it on real examples and see how you react to them.

Yeah, that's why I just want to get an idea of like, how does it actually come in play. Like when using that company's example, maybe they've done a handful of acquisitions and then how does that evolve and get shaped as you?

Oh, yeah, the way it evolved is we have a strategy. Everybody's agree on that. Here's a target. Should we go after this? And then let's say you're already on your way pursuing. That's when I start optimizing sort of my levers more on a tactical base to optimize the outcome that comes with that spiral that you and I talked about. Instead of looking at the deal as a time continuum, I look at it as a spiral because there are certain parameters of the deal that you want to come back to and revisit based on what you find out and what your strategy is. So imagine a spiral that has three spokes. One of them is deal structure. It's usually what you start with, I'm going to pay this many times for that company, three times revenue.

Boom.

And then how are we going to pay for it? It's all cash upfront, because I want to integrate things very quickly. Or the other approach is people have preferences. They say, I never want to pay everything upfront. I want to protect myself with an earnout or equity. Okay, whatever it is. You define that spoke first. The second one is, what do you find in diligence? Are you able to fully diligence forecasts and liabilities, technical liabilities or tax liabilities, whatever it is, are you able to diligence on that based on your findings? And you come to the third spoke, which is, how are you going to integrate this company? And by integration, I not only mean the back office functions coming together, but also how do you go to market as one or how do you maximize the going to market? And this is less of a problem when you have a limited number of acquisitions that you're working on, but as you're doing a roll up, you start getting into, oh, people are stepping in each other's cells, there are swimming lanes here. And you start going about that. So you think about the three spokes, establish the price, look what you have in diligence and then you start revisiting them. That's why it's a spiral, because you started here, but you maybe want to move here when your price structure right now because you find something, let's say I don't trust their forecast or they're too optimistic. Okay, so now instead of buying everything up front, you want to put some structure on the deal, some payment that is contingent upon profit or however you measure success. Now your deal structure changed and okay, you satisfy that condition, satisfy your diligence condition. What about integration though? Oh, I can't fully integrate right now because I need to be able to measure this thing that I just said I was going to fully integrate. That's the usually now to do to your integration strategy. How are we going to do that? Okay, so maybe measure only on revenue. Okay, can we do that? That's how we go. So instead of one direct line going to the closing, you do a couple of turns on that. And the corollary of that is that if you're doing multiple deals, every deal should be different.

This one resonated with me because like I said, most time you get taught that many life cycle and you think of it as a stage and then you're done with the deal. Then integration pops up. The thinking here is the deal structure essentially is you have your deal thesis and your deal structure kind of outlines all those assumptions that you have that here's your model you're betting on. Then you go through diligence, you come with findings and all this stuff interconnects. Cause if you come across something that maybe is like, hey, this cost of integration is going to be a lot higher than we thought it's going to be. All of a sudden you got to go back and revisit your deal structure, make an adjustment.

Exactly.

Then you start doing more integration planning and find out that not even feasible to integrate the timeline that we expected. And then hey, these synergy captures based on that integration is probably going to have to get readjusted.

And there's more. I see a lot of buyers that like to say we have a template for our deals and we'll do every deal like that in terms of structure. And I necessarily love that because of what I just told you. Every deal will have its own issues. One that always comes up is we're going to give them equity on their company. So that's fine. We're all aligned. The problem with that is that when you give equity as part of the payment, you automatically diluted the seller's risk on their own business, meaning they're going to be riding on the success of the whole thing and not necessarily or that own unit. And I can see the point where you're going to look at a target and say I don't believe in their forecast or they're too optimistic. I really hope that they achieve that, but I'm not super comfortable. You want to be tying their compensation to their performance and not the whole thing. And that has also integration strategy ramifications. When we did the masterclass, I came up with a cheat sheet of if this then that in general, all this is in general because it's not a science, but how changes in each one of the spokes affect the other two.

I want to step back a little bit and I'm going to come back and dig into this because I want some more specific examples. I referenced this and I'm going to talk through it as the buyer led mindset to approaching a deal. Now, half of this I got from you. Okay, I'll just put that out there. So you're like, this sounds familiar. Would you stick this from one is start with the end state. Hey, we're trying to put a deal together. Let's really crystallize what that end state's going to look like, what a combined company is going to look like. Part of it is understanding because we always talk about culture. Everybody uses the same buzzwords for their values. But having a conversation where you can get to a point that you understand how they operate, like what does leadership look like, how do they make decisions, how do they handle tough scenarios? That is another key part of just getting that early from executive conversations to understanding culture. And then this is when you go back and you can actually start thinking of outlining a go to market. And we talked about doing this before loi of like, hey, let's start thinking through of how we're actually going to go to market together. What's that going to look like for the customers? And this kind of starts your integration thesis basically.

Exactly.

As you progress, you get loi sign start progressing through diligence. You can build a parallel work stream to do integration planning that runs alongside diligence so that iteratively, as you start learning more and more about the company through the diligence process, you're updating your integration plans accordingly. This kind of feeds back to the spiral model that we talked about.

Yep.

And then I would say the one is the concept of a reverse diligence too, where you're sort of helping the company understand where they're going to fit into the puzzle pieces and getting that alignment on what it's going to take to go execute integration together.

And this is a big one. And this is actually one that my partner is big on because he was an entrepreneur. He sold this company. So they still in his mind say, okay, why do these people want to buy me? He probably has more in his mind than I did because I was on the buy side and I know why I'm buying a company. But he was always big into reverse diligence. But you're right, tactically, you want to cause those tough conversations between buyers and sellers to happen before you close the deal. It's hard to do before loi, but during diligence, it's quite normal to start to having tough conversations about integration. And how do two teams come together. That's how you evaluate culture in my view, how they're reacting to things. If they started doing this, that's not very open to your acquisition, they still want to do it. It's a very tangible way to measure what culture means. Rather than sending your HR person say, hey, come back, put a report about culture. And I've seen some of those are, oh, they have a Christmas party. That's their culture.

So if there's some things that you'd expect to change, you're trying to shake this stuff out early. If you're saying we don't do Christmas.

Parties or something because things like discussing, for example, coming into our CRM, there's a cost associated with it and we're going to price that on the deal. But we're going to be working together on these deals and that test them like, oh, you're already retrading me. That causes some interesting discussions about willingness to join the team or that's a.

Shift in how they're going to operate, saying, hey, our go to market is built around bills for us or I.

Feel like that is one I aspect that causes the interesting conversations then reporting lines as well. When you start talking about org charts, it's a good one to start a good discussion.

Take away people's C suite title or.

Take their cars away.

Take their cars away.

It's more common here in Europe to have a car lease. This is just one example. But just getting into more of a what will be life after the deal.

Yeah, pretty impactful changes. And having more of those tough conversations earlier is a key part also most.

Importantly how you go to market together. We got to tackle a client with these sort of shared resources and you start talking about how we're Going to dedicate the staff to certain types of clients. And then you start hearing things like does the target say, but I won't take deals that are smaller than this amount per year or a contract value that is this amount. And you say, why are you part of the team now?

How transparent are you with the target company and the deal structure model? You have your model, these are the areas you're assuming synergies and everything. And revenue forecasts. How transparent are you with the synergies?

Yeah, there's one point that is the negotiation. So let's talk about reverse synergies and cost synergies. Let's break that down. Revenue synergies we sort of develop together. I obviously have my reservation view of what that number should be. And if they're more aggressive than you expect them, if it's part of an earn out, let them have it.

I'm curious because I'm under the impression that and I feel like I came up in the industry as not being too transparent. Because if you're too transparent, you share your model over. All of a sudden you got a seller that's tweaking your model and trying to optimize their own valuation. You're better off just keeping them. Here's a rule of thumb of how we came up to this valuation, but I'm not getting into the real specifics there.

Yeah, okay, so here's a better answer. There is a point at the deal where you open kimono on. Here are the clients that we're going to tackle together. There's probably a million from this client and it just really probability weigh them and you share between them. It's towards the end. It's towards the end. But there's that point.

But getting to loi, you're coming up with a figure and getting to that agreement at loi point.

I'm still not disclosing that because I haven't done diligence. It's disingenuous, I think, just to talk about that. And then cost synergies. When I was a Verizon, for example, a big deal is very much predicated on cost savings. And you don't give that to the seller when you're building a portfolio building capabilities. Cost synergies are not the thing. They're not driving deals. So you can be pretty transparent about those. You can say, we're going to integrate this, we're going to integrate that. And by the way, there's a cost associated with this and we want to fix that. To your previous point, a lot of Transparency, like full transparency on that. I usually go to sellers and say, CRM, cost, your cost. Today, this is under us, but there's synergies that are going to come with it. It's really a table that ends up on the sba. They're saying your standalone costs, your cost under us. We agreed on this. Full transparency.

Full transparency in the plan. Basically how you're going to integrate the company.

Yeah, yeah. And that's very welcomed by sellers, though. They don't want to be retraded. They don't want to be retraded. And to show that there is additional costs that we didn't know, not even how to price them according to the deal. Here's not every trade is what we're.

Thinking about when you go execute this ties back. So I mentioned you having this parallel integration planning that happens, but then you're still keeping your deal model live and active because you'll go back and revisit it as you go through diligence and make these adjustments. Can you give me more examples? Because I found that pretty helpful of things that you would alter and I feel like it could come from any direction. You could find something with integration planning that maybe gets you start looking deeper into areas of diligence or back to the deal model.

Examples of what we found in diligence that gets. It's serious enough to go back and redo the model.

Yeah, Just get the interaction between them, because I feel like you get triggered from any part of it, whether it's through the integration planning, through diligence, or just how you're forecasting your synergies.

Yeah.

The way you forecast your synergy is probably going to guide you on where you're going to spend time doing diligence.

Most of the items that would trigger a significant change on how we're looking at a deal or how we would address deal structure or integration strategy is our ability to verify the forecast. Sometimes it's not even the company's fault that they don't have a sophisticated forecasting process. But then the nature of the business, let's say everything is project based. Any forecast will be based on wild assumptions. And that's like the nature of the business that you're buying other items related to revenue. Let's say there's big clients. When there's client concentration, for example, it's very important that client stays so that your forecast is reasonable. Client renewals in the middle of the deal are sources of that sort of change. I've done deals where we knew going in that There was client concentration. But what we did in the deal structure, and that was a very creative one, I remember there was incentive for the seller to diversify revenue. So if they diversify revenue away from that one client, they'll get a kicker in the first year or second year payment. I can remember which one you start being a little creative with. Not only with the current state of the company, where do you want it to be? If you reduce my risk by diversifying your revenue a little bit more, there's a kicker for you. Because I'm buying on a risk adjusted basis, I'm still better off.

That's a good example of here's the thing that you discovered and then you went back to the structure around how you're proposing the earn out terms to incentivize them to sort of de risk that area.

And it wasn't a structure in terms of am I using equity, am I using cash? Here's a kicker. Here's an additional payment for you if you derisk the company for me in year one. And there's another kick if you de risk in the year two.

What are the good ones? These are good. This is helpful. This is what I think is the most important part of just thinking through.

How it's tactical stuff that you learn along the way that helps you dial for optimization. I don't want to get into a deal where I know that one of the spokes is faulty or. Well, you're just going to hope that things go well here. So when I got the opportunity to design the whole thing at NP Digital from zero, that's what we're doing. Okay. We're optimizing all these dials and to best of my knowledge, the deals are doing pretty well and they were all a little different.

You're engineering for outcome because that's ultimately.

Exactly not for a transaction. So that's the difference. And then that's the link to the advisory thing. I don't want to optimize for a deal as an outcome, but performance, the deal working as an outcome.

Can we talk about earnouts? Because I feel like it's just becoming such a common thing. But then everybody hates them or they could easily go sideways too afterwards. I want to learn about that because you had a good example of just how you structured that earned out to align with the deal. Teach me how to properly set up earnouts when you should use them, when you shouldn't use them.

At Verizon, I had an attorney that hated my deal attorney hated earnouts. He was like, this is Drastic before litigation, let's never do it. The problem was then the target companies would get Verizon stock. And Verizon stock was driven by the performance of the wireless business. Not for one acquisition that I made in the data room space, for example. So people were not incentivized. So I went from there to Dentsu where almost every deal had an earn out. And that was a big influence of how the company was driven by finance. The finance organization had a lot of weight into how we do deals. And then I started doing deals and then I noticed how integration was never easy with these earn outs and how getting into auctions I'll be in disadvantage compared with people putting more cash up front just because that's what you do on competitive deals.

How do you think through structuring earnout versus the stock example. Because to me that would make more sense just to use stock if you're.

Small enough and the contribution that the target is bringing to you is one that if they mess up, they're going to feel in their stock great.

Like the rising example. If it's not, yeah.

If it's stock, it's so driven by other things that's great. But you're not measuring them on their.

It's almost like symbolic of a partnership that hey, the stock is like we're in the same house together.

There's definitely context for that. When you, you want to buy the company, say hey, I know we're aligned but I want you guys to have an upside. This is why my deal is better than the other deal. Because the other deal is just an earn out. But I'm trusting you. I'm de risking you. By giving the stock of the mothership in an auction, you're going to be pushed to do more cash upfront for sure. And the puts and takes is how do I protect myself from the downside of this? So if you are forced in your hand to do more cash upfront because on an auction then your diligence needs to be more sharpened. The pencils on the forecast, you got to put someone there, say okay, we can put more cash up front because we have now we're more comfortable that they are going to hit 2026 or 2027.

What's like the big reason to do it? Earn out. It's hey, they have such optimistic projections. Why are we holding to it with this earned out and then in that case are you doing this earn out with expectation they're going to achieve those goals or it's more of a risk? I think there's that, hey, the risk is on them.

If what earnouts accomplish is one, seller's financing and two, risk protection for the buyer with an upside for the seller. You start with this sort of three characteristics of whether or not is made for and depending on your diligence, one of those will be the biggest driver for them. So you get into diligence and you're like, I don't trust this forecast, but I need to be on the space. It's a strategically important asset because I'm adding this capability. It just so happened that right now and you say, okay, and then you make it a little bit easier for the seller to achieve the earn out. So it's less of a put your money where your mouth is. It's more, hey, I'm going to make it easier for you to get it. And by the way, we're going to help you with synergies. We're going to cross sell into our clients. So we're going to get that together. The way you make the achievability of the earn out, it evolves with the deal. Again, it's the spiral. Oh, we really like these guys. Oh, there's someone else bidding at them. Oh, gosh. Let's make it easier. A little bit easier for them to get the earn out. Pretty comfortable. So the earn out is yet another dial that you push up and down. You make it easier or harder to get. But my starting point is always the seller's forecast because then I keep them honest as to if you see it's going to, you're going to hockey stick. Yeah. Prove it to us.

Does it happen when they come back and say, maybe we'll adjust this forecast?

Very rarely, no. Very rarely, no.

What's the percentage that you put on earnout typically?

Percentage?

Yeah, Deal value.

I usually like a 70.

30. 70 upfront, 70 upfront, 30 on earn out. Anything else? Would you ever mix beyond the 70, 30 and put stock in there and really minimize?

Yeah, we would.

I don't know if it's just me. I just like keeping all my cash 100%.

It depends. We should talk about sell side too. I know we talk a lot about buy side.

We are. Because it's all you're doing now is more sell side.

Exactly, exactly.

And by the way, I just remembered the spiral concept is in the book I just published too. Is it wasn't there is a part in there. I'm pretty sure I credit you for it just for record, but that's a good point of reference in there as well. And I'm sure we're going to do more stuff around that as well as we are building out the new science membership.

Let's do that. Let's put a whole frame because this is one part of something so big advisory today should be defining a strategy M and A all the way to integration.

Let's riff about the market and this advisory, how we see things shifting. I know we had a fun conversation about this and for me it's always been my neg on the industry was that it's always about closing the deal. It's always about getting the highest price with the highest certainty, which is basically optimizing for the banker's fees at that point. If you look at all this content we've done and all this focus on what makes deals really successful, it's different. It's not purely about optimizing for certainty and price. There's a different view we talked about where it's like if you're optimizing for outcome, it's actually a very different way of thinking about deals.

It's a very different way of looking at deals. And it gets even more revolutionary or you have to break things. When you talk about sell side, let's.

Talk about stakeholders first because I feel like that's what drives some of this. You tend to get some board folks that are like, hey, we want to make sure we get the best interest for the shareholders, want to get the highest price. And you see this happen. They want the process to be competitive and push for the highest price, which I feel like I would agree with. I'm an investor. At the end of the day, I want to optimize my IRR. I want to have something I'm pretty proud about, 30 plus percent or whatever people are seeking out.

And that's why bankers excel at. They have the process down. If you're a public company, they can even do fairness opinion for you. You will want them to do a fairness opinion. It's a completely different game. And that's where bankers excel. At the team page, we have two people in Hong Kong, five people in Singapore. That's not what I'm doing. Our approach is more to the entrepreneur, even on the sell side. What I understand is I get you, it's an auction. But do you care what happens on day one? If you don't, it's an auction, it's the biggest price, let's go. But if you care about what's happening on day one, if you're looking for a strategic fit and ability to maximize, if there's a structure on the deal, then you want to do a little bit more work on your own strategy, your own positioning, the signal you're sending to potential buyers and the quality of the people that are bringing the deal for you. So what I'm batting a bit is on I bring these deals to folks that I know and I have some credibility for being on the buy side for this long and being an operator. And I understand information asymmetry and the use of it on sell side assignments. But there's also reputation that you try to keep as you have other deals that you bring into the market. That's all to say we do a whole lot more diligence ourselves, technical diligence. We bring experts from the industry to understand the whole equity story of a company and then put it in the best light possible. Not pushing the boundaries of what's true or not. But you understand the story of the company and you bring the most appropriate buyers to the table. But again, if it's a full auction, it's.

Yeah, I was going to say is it fair to say to use that contrast to the public company example, if it's an entrepreneur owned business, they care about the people and the legacy of the business.

Yeah, there's that component that's a big.

Factor for them because again it's not purely yeah. And I r return. It's like, hey, this is business I spent most of my life building. I care about the people, I care about the legacy of the business.

There's also helping them understand what each buyer is optimizing for. Give an example. People look at private equity as oh, big checks, let's go. Whereas what I tell them is I want to understand what you seller is solving for in terms of like after the deal closes. Because the point of optimization that these do is a portfolio. At the end of the day they are an asset manager. They're allocating part of, let's say a bigger fund has investments in public markets and private equity. They are optimizing their portfolios. This company is not going well. Continue to invest on them and invest on the other. Their unit of optimization is the portfolio. Whereas the seller might think, oh, they're optimizing maximize value of my company. Not necessarily in the big context of things. And what I try to convince them or try to tell them is that when my team is working on the diligence and how we're going to position into the market, my unit optimization is your company. It's not a portfolio of others. So my story is going to be around your company. If you end up selling to P, that's fine too. But just be aware of that. And many times people don't take that into their listen, I'm dealing with operators. They're good at standing up businesses, sales, marketing, getting them to the market. They didn't have time to think about, position it correctly to the market.

How do you walk through the thinking between private equity and the strategic is I feel like the P firms always have the second bite of the apple that they sell on. Hey, we'll come in because a lot of them are even buyout firms or growth equity. They're still second by the apple. We're going to bring you all these resources. We're going to be on the same team. We're going to get the next big success story. Maybe then we'll sell to strategic versus selling directly to strategic. And I'm trying to fish for where your biases sit.

You need talking to entrepreneurs. It's really a personal decision. Some of them are young and say I want a second bite of the apple. I want to work for a PE fund. I understand the risks.

There's a question timeline. You could say, hey, you know what, I got 10 more years I'm willing to put in the industry. That's probably where I'm at. Then there's folks that are like, hey, I want to retire next year. And at that point you're probably a little behind on doing some of this exit planning.

We absolutely show them the advantages of pursuing a PE route. For the entrepreneurs, a lot of their wealth is in the company. So you diversify it away, you start putting your bets elsewhere in terms of where your resources are and getting to accumulate more wealth as you go into this, to the next fund, into the next fund until you end up with a strategic. But many times strategic pays you more upfront because they need that capability right now and they're able to realize more synergies right away. Do get more consideration right now. Have a little bit of Runway with the strategic and maybe it's interesting and they made the entrepreneur an executive on a bigger role. It depends. Some strategies are really enticing and making intellectually challenging and stimulating for entrepreneurs to stay with them. So it's money now versus any. Are you going to execute in five years and 10 and keep going?

There could be some good incentives post close for either situation.

For either situation. Yeah. I'm not taking one side on this one. What I'm interested in is in providing full transparency of what one looks like in the other.

The Best buyer. At the end of the day, it depends. And what you're bringing to the table is, hey, I've worked on the buy side and all these deals. Let me help you understand what these different buyers are optimizing for in terms of how they optimize looking at value of the business but then operationally what that's going to look like when the deal is said and done, that's that.

And there's also tactically within the life cycle of a deal where buyers try to cheap value away. Sometimes the deals get shut down because the story isn't told right. But there's points where the balance of the leverage changed from one side to the other. You sign, you sign the loi, the leverage turns to the buyer. Now you're tied into that.

There's some good of having you know this. It's a slick where you're, you're wearing two different hats. On the buy side. I love proprietary deals. I don't want to touch an auction deal. But then on the sell side, of course like the auction is, it's better because when you're doing some of these proprietary deals, some of the growth equity funds I talked to, they drive you nuts. Like they will give you this bright shiny valuation range and they start going through diligence and they pull back at least two turns because they'll be like, oh, this didn't look good. Oh, your retention was a little low.

Reputation of the firm that is buying you is also very important. I always advise like everybody does this.

So this is what pisses me off. They just sort of. Then I get to the other point. Well, I'll go to process and then I'll flip it around and then now you can't play games.

What I do with my sell side clients is to prepare them for that. They just come like completely armored. I do diligence on them and say, look at this number, why it's in here and what happened here. And then try to put that in the best light possible. I wouldn't let things go misunderstood by the buyer. In points where the buyer can chip value. Example, client concentration. I see. If you have client concentration, what is the plan for next year? Show that as well. If you have working capital is one. A working capital adjustment is one that all of the sellers never thought of and we're there to avoid the value chip and now parts of the process, the way the deal is structured. I've been on the buy side times enough to understand when certain things will in fact get value off the table by Making earnouts more difficult to achieve and all that. Let's put forecasts on the table that actually we can accomplish live a little bit for performance.

Is that one of your buy side approaches? Make that earn out, just turn that dial up so it's hard to get. I was curious about that. I feel like there's some of these deals where I've looked at and I'm like we can structure this earnout knowing that they're probably not going to hit it.

It has happened when the forecasts were so aggressive that they never got there. But then the problem is what you're left with. And if you really there's a strategy behind you have the company in your portfolio is the smart folks would renegotiate the RNA because they don't want people that just say I bought your company for 30% and now you get nothing. Haha. It's not a great strategy to begin with. And I worked for folks that in the past and I Learned with them CEOs that you know, it's getting three months to the end of the first year now they're not going to hit it. We already started talking about renegotiating it because like the people we want them in the business, I think the smart people that been doing deals enough will probably do that.

That reminds me, there was a point where you told me that you were doing these. You know, everybody does the post mortems after a deal, but you would talk to the entrepreneurs like six months after the deal. What'd you learn from doing that?

It was mostly at Denso. We had a good team. You have resources around to do post mortem and we have to present the post mortem to the M and A board. Integration was one thing when I started and in the course of four years it changed radically. A lot of that came from these postmortems.

What were the takeaway do's and don'ts?

Transparency about this, transparency around integration. Everything that we talked about having that integration work stream, it didn't exist before. It was, yeah, we have a plan, we're going to integrate this and that way. But involvement of the seller in it never happened. So all of those were byproduct of the post mortem. Another one was accountability. You started to be much more serious about accountability leading up to the business like if I have a deal sponsor inside the business that wants that deal to happen, what is that person saying about the ability to achieve these objectives? And if it didn't, it would have not necessarily consequences on the take away your Pay but it will be in the record that we need to improve our ability to forecast here.

Those are good takeaways. Talk to people and learn.

And you want to do that as soon as possible.

This is going to tie it back to just having a reputation as a buyer. Some of this stuff comes down to. I don't know if there's any investment bankers listening to this, but I had some questions. It has nothing to do with you specifically. We talked about just the industry and how the banker fees and incentives just aren't truly aligned. Like you mentioned that earlier. What does that look like as we see this market evolve and what the future could look like? Because I feel like some of that your incentive is always around the steel value, which makes sense because we want to optimize for price. That goes back to the thing. Are we pushing for the right buyer in that case or timing wise? Yeah, nobody, everybody wants to make their money today.

I was going to say nobody ever got paid by saying oh, we should wait six months until we come to the market and nobody ever got paid. And those are insight driven things that are based on experience that are, they are super valuable. Six months can make a big change on this.

You're the buy side guy down the sell side basically. And for me I'm still all buy side. And this is where I don't like, I hate auctions because I don't like these compressed timelines. And as soon as I had one deal where a deal and then also we're going to run this auction and I was like I'm out.

Absolutely, I'll do that too. The light bulb went on for me because when I was between getting out of the buy side and started advisory, started working with other banks on a sort of freelance base. Can you help us with this? Because you have industry knowledge and context and we're advising this buy side and we are already three months in this journey. We were talking to this company and I scratching my head like why are we buying it? Why are we looking at this? What is the strategy? And I just comment to someone that was my beer in the bank. He said I hope we're not just buying this for the sake of getting big. Haha. He came back to me and said no, actually we want to get big. And I was like oh okay. So that's for me that point was like, I'm thinking as a buy side person where there's a strategy where this guy has a mandate to buy a company, buy a company. For me that was the point. I was like If I want to do a buy side I want to do a little different. And now that I'm on the sell side I have the ability to just turn that around and educate folks around it. But for me I don't have an answer yet. How pay should be changed and the banks are doing a great job is they optimize a process, they have resources to throw at it and context and they play golf with the PE guys and that's great.

It is changing though because I remember Dealroom started back in 2012. I spent three full years beating my head on the wall and selling to bankers. Maybe that's why I'm ill jaded.

I was going to get to that. So the model that we are proposing is embed ourselves with the management team.

Mind is you don't need the full deal team on I don't think you need. If you look at the way all the AI technology everything's emerging like you don't need analysts, associates. So let's talk about VP Director, MD, all in one deal.

Big part of the value that the banks bring to the table is their CRM. And I think that now with AI it's easier to find companies. Origination became less of a moat.

Oh yeah, you can get access to any of this and now there's third.

Parties that'll like a two man operation that fits your criteria. Two people in Finland doing exactly what you'll find them. So if you thought your value was a list of companies in the past that has deteriorated. So where's the value today? The value is on running a process. Running a process efficiently.

I'd agree with that. I have banker friends have helped me think through structures I never would have thought of that comes from experience. I would come hit you up if I needed help. I've done this in the past on just deals I've worked on like hey, I want your take on it because you've seen it from that corp dev perspective for so many years.

Yeah. So that's what we're trying to build is yeah we can run a process as a small company can run a process in multiple countries because bouncing around but we will embed ourselves in our team. There's one engagement that we have now that it was the model for what we're going to do in the future which is we are from two guys. But there's certain aspects of this company that we know experts in the industry that have worked on equity, equity stories like equity narrative and technical diligence. So we bring them in the team and we Say our proposition is to prepare ourselves for other buyers are going to try to achieve value away. We're going to do our own diligence. We understand the story, we understand weaknesses and strengths and we're going to position us ourselves to defend against those value achievements. So it's a great network of senior executives that you bring them into a certain deal. We do our own diligence. We have our plan on how they protect value and implement from there. That's what I think for the size of deal that we're doing right now, the banks will never pay too much attention. Listen, it's a volume play for them. They need to pay the associates to pay the analysts. We are a little different.

We embed ourselves in concept of simulating this buy side of a deal before taking it to market.

The market is changing, as I said, origination value just out of doing that. So what's the value other than just red taping contacts, where's it going?

We see AI changing everything and just being the tech side of it. This past year I've seen probably close to a hundred AI for X and M and A products, which I was like, this is a huge hype cycle of these tools. I don't think they're all going to make it. But this in reality too, because now you can go build your own. I'm sure you build stuff in house and all this stuff. So that's changing quickly.

It's changing quickly. Ability to be in different presence in different continents helps too.

I will tell you, I love the idea of tapping into corp dev experience into a deal because those are the people that I've honestly found the most value if I worked on a deal. I obviously got a pretty large network from harassing people through this podcast.

Yes.

It's always them that hey, I'm working on this deal. It's pretty. Of course all my deals are really hairy. Just size we're operating. But they just help me understand like here's all these things you should really think about. And the corp dev hat is always integration risk come up.

Exactly. Because the corporate dev has that connection with strategy. So you're always thinking about how you're executing that and solving for a bigger picture. But also you're thinking beyond the closing. I just have to keep people here. I have to make this thing work. It's almost like you're democratizing a little bit more of that continuum strategy deal integration to smaller companies, companies I don't have access to or bigger teams to work on that. Or an entrepreneur that and I think this is most of the cases where they were so heads down, which is a lot of work standing up a business, growing it, marketing, sales. They never thought, stop to think, what is my strategy? What is my equity narrative? And it's fine, we're there to fill that gap. I think what you find out though is that talk about some models that are out there that are trying to address this thing, like fractional M and A folks now, they're out there, they want to do work, there's a need for it, but what someone does with that, because everybody wants to be selling their companies. Let's put a software platform that matches professionals and people that need it and get it from there. So I actually subscribed to one of them. When I was in this transition period, say, let's see what's out there. I wasn't getting any hits. And then I communicated with a person that worked for the company. What's up with that? I was like, the algorithm tends to favor people that already aren't the system and work. So I think there's a problem with that. Here's another algorithm in our life that we have to cater to. So I removed myself from that. So human touch is still relevant. Right? I want to embed myself into the, into my clients and not be matched with them. And by the way, there's a right way for me to market myself in this algorithm if I want to be.

I haven't looked at a lot of those products. I haven't seen one that's really. Unless it's like again like you're doing more transactional type of assets. You're doing these kind of little domain.

I don't know how you can do it. Some of these assignments are you need a corporate dev person for six months. Okay, you need a banker. You don't need a corporate dev person. You need someone just to do. You already know the deals because it takes this long to figure out strategy and bring it to the market. And you want the corporate dev person to be the catalyst of different opinions that you have in the business and coming up with a deal that satisfy all of them. I don't understand. So there's that model, sort of a partial M and a person.

There's a do it yourself listing services. I'm seeing more of those.

So that's an interesting one. And I run into this by when I was doing the buy side for the other bank that I told you about, it's like, oh, they listing 27 deals. And I was like, this is interesting how Are they doing it? It's all smallish deals. So I was we're talking less than 20 million into enterprise value. Maybe 30 at the top you list there. It's only a retainer. There's no success fee. And they will put together I guess an informational memory on that is very basic. But it's attractive to sellers because they say I'm not going to pay a banker fee. It's just like a retainer, I don't know, $5,000 a month for the period that I'm listed there. And I got the chance to do diligence on the buy side and said let's see what it looks like. Because if you're not incentivized to maximize the value of the exit, what are you doing? And I found out that what's interesting is that they have a process where there's so many EBITDA adjustments. You're talking about negotiation strategy, the concept of anchoring the discussion. They anchored so far off and that you look at that and say there's so much work to just bring it down here that it's not even worth to have a discussion. It basically makes so opaque. You don't know what's real EBITDA that you have to put like man hours to dig into that to get to the point. And if you're a seller and it's the first time that you're doing it, I think you would want some help on pushing back on some stuff and not listing here it is. You're on your own now. So that's addressing I guess a need. That is a lot of the folks that are probably dissatisfied with banker fees. I understand that. I think the unexpected effect of that is that I don't touch that platform anymore on the buy side. It's just too much work.

You're still using the same amount of work.

It's a cloud of things that we have to clean up after that.

So some things yet to see and how the advisory side evolves in the coming years.

All of this point to the fact that it has to change somehow.

I'll revisit. We're going to do a follow up interview here in about a year and see what's.

It'll be interesting because I think in a year we'll see what's happening. I really like the model of being embedded but then as I mentioned, and I know I'm saying that word too many times, but providing the option of the VC view as a continuum to the M and A, that's really interesting because there's reticence in getting into the M and A market, though, giving all the disruption. If you have programmatic M and A, you'll continue doing this and small enough that you're going to go through this technology. McKinsey already said that. But if there's so much uncertainty, you're looking at VCs and making some investments there can be informative for you in both ways. Both in saying we should pursue that or do not touch any of that for now. Let's wait a little bit.

That's like forcing yourself in the long view of where you see the industry shaping and informs.

Also, if you execute an M and A transaction, this is going to be disrupted in 18 months.

What's the craziest thing you've seen in.

M and a craziest thing? We're talking crazy. We're talking like absurdity. This shouldn't be here, Right?

Sure.

I was working for a public company and we were looking at a deal was brought by a banker and the banker had done some diligence on it, presumably. My attorney searched the name of the CEO of the company and found out that it's all public records that he used to run a math lab when he was in college. And it's not even a good operator because the math lab exploded.

Oh my God.

And everything is on a legal filing. It was quite bad for the banker that was bringing this to us to say, you think that we won't find about this or you're a public company, there's no way we can. But that was the craziest thing. As in, how does someone think that this could come to the market and a public company would be fine with it. That for me is pretty crazy. Have a record of that and I understand that person is the owner and he had a good idea later in life. And everybody deserve a second chance. Stay on the board. Don't be the CEO of a company. So that for me was the most absurd thing of thing.

Wow. They didn't have a good PR spin of life changing.

There's no PR to polish that.

I think at a fair point, if they would have positioned himself on the board, then they probably wouldn't have been.

As the banker led that pass and the bank embraces that they knew it's.

Not going to be.

And that comes again to the point of credibility. If the banker doesn't tell you that the next deal that they bring, maybe they don't care. It's a volume thing anyway.

So loading math labs is part of.

The diligence checklist that was not on the diligence checklist.

Carlos, this has been a great conversation. I appreciate you taking the time to kick off this new year with the.

I know we went a little bit all over the place, but I'm happy to contribute to what you're trying to build here, which is great and necessary for the industry. What you're doing with putting an AI engine behind the intelligence is great. I wish I had that when I was taking the step from being an M and a soldier at Verizon and running at an M A department. That would have been critical for me to lead the charge there. I think you're filling a void there. Is there in terms of intelligence, different role?

You know, I've kind of stepped out of the running a software company and I feel like my mindset is there's a lot of great tech out there. Why not figure out how to leverage it? To me, IP is all this we call intelligence. But getting all these little lessons learned and being able to use those platforms, so now it's very dynamic. You get access to it when you need it as opposed to when you don't.

It definitely fills a void there. People should take this as education that you don't get anywhere.

I appreciate your contribution because it adds a lot of value to building this new model out that we're working on for this year. Helping me through these conversations become a better M and A scientist. It's a pleasure, man. If you're still listening. Fellow M and A scientist brothers and sisters out there. I give them credit, a lot of love if they could listen to a whole podcast interview all the way through. I'm your friend to be here. Reach out to me on LinkedIn. I want to know if there's some good things from this conversation that you found valuable for me. This is one that was pretty impactful. Learning the spiral model and how these deal stages really intersect with each other. It was a big eye opener and I really stuck with me. But I'd love to hear from you if you have some other feedback, topic, ideas, criticism. I'll take it.

Yep, we'll take it. And ideas on how this thing is evolving because I think it is M and a model Buck Carlos.

Find him on LinkedIn too.

Hit me up.

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 already have, we're here to help, and if we can't help you, we probably know someone that can. You can reach out to me by email Kison K I s o n mascience.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal.

Foreign.

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