How Not to Bomb Your First M&A Deal

This conversation is with Brock Blake, co founder and CEO of lendio. He was named Utah Business Magazine CEO of the year in 2021. In this interview, he'll teach us how to avoid an M and A disaster on your first deal. We covered common challenges of M and A, the proper deal approach on your first deal understanding culture of the target company, how to validate assumptions before acquisition commitment, and how to work with earnouts. This episode is sponsored by our flagship products, dealroom and Firm Room. What's the difference between dealroom and Firm Room? I get asked this all the time. I know if we could have made the branding any more confusing. So let me break it down for you. Dealroom is an M and A lifecycle management platform. It's perfect for any company that does two or more acquisitions a year. It manages your pipeline diligence and integration, also divestitures. It automates pipeline reporting and follow ups. So you stay focused on conversations with potential targets. And this is where it gets good. You can run full diligence for all parties involved internal, external and counterparty in one workstream. Then create a parallel work stream for all the integration planning. This allows your team to start integration planning at the start of diligence and iteratively update the integration plan with incoming information. This is how you get integration done faster. Nobody in the world does this better than Deal Room. I know that's a bold statement, but I will take bets on it now. Firm Room is a virtual data room that is as simple as it gets. Back in 2018, the team at Dealroom noticed many boutique investment banks and law firms that cared about their customers were just looking for a simple data room solution that wasn't charging ridiculous per page billing fees. So we did something about it and carved out the data room functionality in Deal Room and made it into a dead simple self service data room offering. If your deal isn't that complicated, then probably a simple data room is the way to go. You'll find the best value with Firm Room. Pricing starts at 500 bucks a month. But there you have it. Deal Room versus Firm Room settled once and for all. You can check them out for yourself@dealroom.net and firmroom.com Again, that's dealroom.net and firmroom.Com let's get to the interview.

I'm Kisan 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 scientists, welcome to the M and A Science podcast where we learn from the best in M A to uncover proven techniques for enterprise value creation. If you're interested in learning more about M and A Science, how we support world class M and A teams, or just want to get involved with our community of forward thinking M A practitioners, visit Mac science.com you can get started by subscribing to our free weekly newsletter for the latest insights and events. Again, that's mascience.com I'm your host Kisan Patel, CEO and founder of M Science. Joining me today is Brock Blake, Co Founder CEO at Lendio.

Lendio is the nation's leading small business.

Finance solutions provider designed to help small business owners access and manage capital. Lendio matches small business owners with the right lender and loan to meet their needs. Today we're going to talk about how not to bomb your first M and A deal. Rock. How you doing today?

I'm doing great Kisan. Thanks for having me.

Hey, thanks for taking a break from running your company and doing deals. To teach me a few things here, can we kick things off a little bit about your background?

As was mentioned, I'm the co founder and CEO of Lendio. Lendio is the largest platform in the US for small business lending. So we're helping Main Street America, restaurant owners, landscapers, dry cleaners, whatnot get access to capital. So they come to our site, fill out an application, comparison shop loan options from a bunch of different lenders. We have about 400 employees. We fund about 4,000 loans a month. We are growing quite nicely. Our headquarters are in Salt Lake and we have an office in New York as well. I started my entrepreneurial career right out of school. I was playing soccer at BYU and I heard about an entrepreneurial program with this venture capitalist. This very wealthy venture capitalist decided he wanted to figure out how to give back. So he created this program where every week there was a four hour class. You're at the feet of these successful entrepreneurs, hearing their stories and every week there would be an entrepreneurship kind of sales competition or marketing competition or tech competition. At the end of the eight weeks there's a hundred applicants. They narrowed them down to 20 and we went through this boot camp and at the end of the eight weeks they selected five and gave each of us $50,000 to go start a business. So I was one of those winners and could use it to go buy a business or start a business or anything that I like. I was out talking to other business owners trying to figure out what I was going to do whether I would buy a business or whatnot. And every business owner I talked to, their biggest pain point was capital. I need a loan for this or I need to go raise money for that or I want to grow here. I want to open up a new location. And it was such a pain point. So we decided to figure out a way to solve that. We went through a bunch of iterations, made every mistake in the book, but finally came out with a business model of Lendio where we're kind of this two sided marketplace. We've had a nice run, we're founded it in 2011 and keep growing it.

Good founder story. Yeah. I was always curious if any of those accelerator programs ever worked or made any difference, but in your case. Yeah. At the very least it got you through the path to make iterations that got things in the direction you're in today.

I guess some of them do.

How about M and A?

You've done some deals. What? How'd that get into the picture? What prompted some of the deals you've done?

We've grown organically a lot. And then we're always evaluating. Are there problems within the business that we could solve faster? Who went and made an acquisition? So we've done three acquisitions. We've learned a lot. Some great wins, some painful experiences along the way. We will continue to do M and A as we go. But first deal happened. We founded the company 2011 and our first acquisition I think was around 2015. And then we've done a couple more product acquisitions since then. They've been really helpful to our business. They don't always go the way you think they're going to go. In fact, they go usually very different than you think they're going to go.

Can we talk through some of these deals that you've done? What were the drivers behind them? My goal here is this M and A science. I've done this for a while, have a lot of conversation about M and A. Our company's growing and scaling. We hit 50 employees and Brock. I'm itching to do deals. And this is the experience where you've got it fresh in mind through those first deals where I feel like the real tough lessons are there and I just really want to learn in preparation of when we start doing deals ourselves. And I feel like there's some common themes in those first deals that you do and what prompted it, but I'd love to hear a little bit more about what drove those deals.

Yeah. So the first one we did was the largest acquisition and essentially what we were Trying to do is we were trying to go out and acquire a competitor. We wanted to scale more quickly. A big part of kind of our growth was our ability to acquire small business customers. We wanted to find competitors that had figured out unique ways of acquiring customers that were different than the ways we were acquiring customers. Long island is kind of a hotbed for some of the lending marketplaces or some of the brokers that are out there. So we went out and I started evaluating, meeting with every potential kind of competitor that we could meet with. I went to about 10 or 15 different organizations, and some of them, I'd walk in the door, and the second I walked in the door, I'm like, this is not it. This is not the right fit. You could just feel by the culture. In fact, some of them were kind of, to me, very shady. I felt like I had to take a shower. Coming out of what they built like, it just was totally the opposite of what we were trying to do. And finally came across one that was actually one of the largest players in the space. And met with the CEO was someone that I connected with right away. I could tell by walking into the organization, just by seeing the type of atmosphere, the environment, the energy, what's on the walls. They cared about their employees. They cared about culture. So we started building a relationship right away. We were like, this is something that we think could turn out. We ended up acquiring that business. The name is Business Bounce. It's interesting what you learn when you're doing an acquisition. The founder, CEO of that company is no longer with us. That lasted a couple years was actually really helpful to our business. Then we started to see things differently. The way he operated versus the way I operated. The way his opinion on growth is different from my opinion on growth. And his opinion on culture and business practices was different than mine. Not better or worse different. And just felt like there was an opportunity for us to be able to separate. So we created a separation plan. But as we went through that first acquisition, it was all about culture. We. We learned a lot around the type of team members that we were acquiring. We're here in Salt Lake City, Utah, which is a very different environment than Long Island, New York. Yeah, imagine they didn't trust me coming in as a leader. A lot of the first interactions we'd have, I get up and stand up to do a town hall. And they just had no trust. Who are these people that are coming in and buying this company? The only way we could build trust, we'd say, hey, this is where we're going, this is what we're going to accomplish. This is how it's going to benefit you. And then have your actions and your results match your kind of prediction and you would start to gain credibility. But we went through some really difficult times as we made that acquisition just from that buy in. It required a lot of work and effort to be able to get this relationship built and the integration happen so that it has been successful.

I get a sense that it was focused on buying a competitor. The big interest there was not only getting more market share, but seeing a different go to market and ways to acquire a customer.

That's right.

Interesting on the initial, hey, there's a culture fit. But then later on discovering the intricacies of culture fit. What about the other deals that you worked on because you mentioned they're more product focused. How the nature of flow with those.

Deals go or compare the second one that we did. I'll tell you one thing that we've learned is sometimes we go out and make an acquisition based off of the hope that the idea will help accelerate the business or the technology. And partly I've learned this from my business partner. Acquisitions are more likely to work if you really define the problem statement, what are you trying to solve for? And then how will this acquisition, this product or this service or this company actually solve that problem? Specifically? Not just I go find a cool company and I'm going to acquire it because I hope that it will be additive. One plus one equals five to scenario. And sometimes that happens, but I think it happens a lot less than you think. We kind of had this idea that hey, if we could go acquire this, it was a bookkeeping solution technology. It didn't have any revenue or customers, but the technology was pretty good. We thought if we could go acquire this technology, we're really good at customer acquisition, we're really good at sales and marketing. But we're a lending marketplace. And we thought, oh man, we could cross sell when a customer comes in for a loan, we could cross sell them for bookkeeping or when they come in for bookkeeping, we can cross sell them for loans. And the data that we'd be gathering from doing their financials as a lending marketplace, it's really hard to get access to a small business owner's financial data and to build a relationship over time. And so the hope was, okay, let's go acquire this. So we did this was pre pandemic, acquired the technology, learned that the technology is never as good as you think it is, ever. It's. It may Demo well, but when you get into it, you realize, okay, this is written in a different code base. Our engineers are used to writing in PHP and mysql. This is in a different code base that you have to learn. Even if it's in the same code base, the learning curve of what it does and how it works and integrating it into your product is way more challenging than you ever anticipate it will be. Takes twice as long, twice as much money. So it took us eight months at least before we could really even start marketing the product. We made some big announcements around it. Everyone was pretty excited about it. Okay, how's this going to work? How are we going to integrate it? And when you get into it, you realize there's just so much spaghetti code there and you're like, oh, this is not what we thought we were getting. We started executing on this hypothesis that we could cross sell and it would integrate nicely and you would have financial cash flow management or bookkeeping right alongside lending. We ended up marketing and selling to customers again. The problem was it's hard enough to build one business, your core business, let alone going and adding a second business. The core business is a marketplace. The second business is this monthly SaaS subscription and it's bookkeeping and it's fulfillment and it's cash flow management. And everything about operating the second business is different than operating the first business. And now what you're doing is you're spreading your resources so thin that you're trying to run two businesses. And listen, it's hard enough, as I mentioned, like just getting one right, let alone two. We ended up shutting that business down after about six to 12 months of trying to operate it because we were just spread too thin and we weren't doing either one of them. Now we took some of the technology and the concepts and we're using them in different ways today. But the whole hypothesis we had around providing bookkeeping and cash flow management didn't pan out the way we anticipated.

You're going right into the complexities the further you get away from your core. Even though in the beginning you saw some common foundation you could leverage on the go to market that you currently had. But then when you looked at the whole scope, what it sounds like of operating the businesses, there's so uniquely different because it's much further away from your core business. That was tough to manage.

No question. Yep.

The other deal is a tech deal too.

Yeah. So the third one we did first of all, that we made a decision early on as we were getting into the diligence that we were not going going to invite the CEO to be a part of the ongoing merged operation, which was a challenge in and of itself. We were basically buying the technology out of bankruptcy. And so the team had been running on fumes, getting lower salary or no salary for six to 12 months. And we felt like the technology was valuable and there was opportunity to take it and do some something valuable with it. But you know, the CEO that we were working with, we didn't see eye to eye. So we told him early on we weren't going to invite him to be a part of the ongoing operations. A lot of the key team members ended up finding other opportunities late into the process. We thought we were going to get this great team and this great technology and we ended up getting about three or four team members. One of them that was exceptionally strong and is that knows the technology inside and out. But all of his kind of key team members that were other engineers and developers to be able to help with the code, found other jobs before the deal had closed. I feel like we negotiated a good deal and whatnot, but what happened when the deal closed was that we're highly dependent on this one individual. Again, the code base is in a separate language. It was in. Net we code and php. We did a lot of diligence around the technology and how differentiated it is and it is super differentiated. But again the complexity of trying to write in two code bases and bring those together and integrate them and then the dependency we had on this in one senior architect made it so post acquisition to be able to get it from to market just took so long. It was a technology that we were taking. Again we were buying it out of bankruptcy but the hypothesis we had on what it could solve, we are going to still solve the problem that we were buying it for, but now we're doing it in a different way through a different platform. We learned a lot around the differentiators and we've taken those differentiators and we're take and we're replatforming those. But there's just a lot of complexity. I mean I'm being quite vulnerable in the discussion around like yeah, you are. A lot of these just don't go the way you think they're going to go. And it's really hard to figure that out until the deal's done and you get into operating the business of how complex it is.

You've like hit all these huge challenges. This is like a whole degree I'm about to learn in this conversation. Because we talked about the cultural difference and some layers to that. Then we went into the complexities. Going away from the core and just running a different business than you anticipated, and the resources it's taken up, you had churned. Why you're doing a deal that you're trying to manage. And then you have the complexities of the tech integration that you can easily overestimate. So there's a lot of fun things for us to talk through. Ultimately, I just want to learn how not to buy my first deal. Maybe we think of the timeline and I wanted to get the culture. One was really interesting because I think you're right. That's one of the first things you start thinking of in a deal, is you want to make sure and it'll make up stuff. But even we're looking at a company, right, hypothetically that as 20 people, you may cut a quarter of the people. And then you're sort of assessing these people in the 15 are any good? And maybe we gotta be more optimistic. And I think that's a big piece of it, is you really want to know if they're not good people, how's that going to work? I liked how you spent that emphasis doing it, which I think I'm developing that maturity and thinking. But then even from the lessons learned when you found those differences, how would you re approach it now? Looking at a deal to make sure it's not just the gesture of culture, but really understand that culture enough to know that the deals sound in terms of people coming together.

The easy answer to this, and I'm sure people listening, are like, oh, man, if you would have just done more diligence. And the challenge is, I've got a friend of mine who's doing an acquisition right now. Timing is critical in the deal. The seller wants to do the deal for a reason. The buyer wants to do a deal for a reason. And the motivation for doing the deal is such that it's let's do this in two weeks. You have scenarios like that where what is your motivation for doing the deal? And you want to move quickly, but you also want to do your diligence. And that's a really challenging thing to balance because your diligence, a lot of times they're trying to put their best foot forward. The CEO may not want his other team members to know that he's considering selling the business, he or she. So they don't really want to give you free reign and free access to all their team members to be able to start interviewing them until the deal's done. That's very standard. You also are trying to do as much technology diligence as you can and what you're. You go in and you look at the code base and you go in and you look at the demos and you walk through everything in great detail and you start to envision on how these will work together. But in theory, looking at it is very different than, okay, put two people next to each other and integrate these code bases. And how you do that in practice versus kind of the theory and the diligence becomes a very different experience. So there's a lot you just are not going to find out during diligence. You're not going to find out until you actually get into the deal being done. You can try and do your best and you're good and the more diligence you do, the better. But sometimes it's. I don't know exactly how this is going to work out until we've actually done the deal.

That's a fair point to emphasize that you're not going to get the full scope and story. You have to accept the fact. And then when you mentioned that there's a compressed timeline which pretty much every bank process runs, we want to get this done in a week. Yeah, you're just under that circumstance, you have that mixed with owners that want to keep the total transaction confidential. Fundamentally, that's what you got to deal with in the variables. I can control anything particular there that might be the things to really strike proactively on. I found, for example, I just asked directly about culture and really ask deep questions, try to understand the leadership style and things like that. I found that to be a lot more comfortable after talking enough people that approach that in those early conversations, as opposed to just trying to be observant about what the culture is.

For sure, you're asking a lot about culture. But even then, your philosophies about culture with the senior leadership team may be very aligned, but they may perceive what their culture is, or you may perceive what your culture is. But the larger the organization, what is the team members on the ground level saying when they start becoming coworkers? The way they go about the little things that are not going to come up as you're talking about, hey, what are your values? What's important to your culture? How would you describe your culture? All those questions you can ask but you don't really know is my point, until you get it done. Now, I'm not saying that you shouldn't do a deal because of it, but there's just some risk that you're taking no matter what when you're doing a deal.

That's interesting. So you look at it from the point of real bottoms up because you can't be assumptive that top down, you know, leadership team and that view of culture. But as the structure and the folks that are individual contributors could be completely different. That's a good point.

The other thing is on the technology, like I don't think I'll ever do a deal again where the code bases aren't compatible because I know there's philosophies that it doesn't matter what the code language is. You can do.net and you can have PHP or whatever it might be Java or. And you should be able to make those work. But the difference is I have a. We have 80 engineers on our team that are really proficient in PHP and Java and SQL. Let's say I want to take 10 resources and move them over and say I want to integrate this so quick, I need to integrate it in three weeks. The reality is you need to hire a totally different type of engineer or figure out a cross train them. We've come across too many hurdles where it slows things down. The excitement is real at the beginning, but then all of a sudden you don't have anyone that can work on that code or understand that code or integrate that code. It slows down your ability to execute and deliver. And that's really what's happened on our third one is I have one really strong senior architect and then I've got some other engineers we had to go hire Net and they're not speaking the same language. And so now it creates a bottleneck on execution.

That's a good point. And then the timelines to actually integrate and go to market get extended exponentially. It sounds like. Yeah, so what's the thing to avoid there if you know you got different code bases? I guess this is just more upfront diligence on the tech stack, bringing in your top tech guy and really looking at what this is going to take listening to them.

And that's the thing. So again, my learning is we had all of our top engineers doing diligence, like looking at the code base. Look, we knew it was in Net, it wasn't a surprise to us. The thing is, when you look at the architecture, you're like, oh, it's really well architectured. Oh wow. The code base is really clean and that's different than when you're actually starting to code it. People are optimistic around oh, we can integrate this. We'll have our two teams work together and do connected through API and whatnot. But it ends up being very different than you think, at least on the software side. Now, not all companies out there that are doing acquisitions are trying to integrate software, and so it may not be totally applicable to everyone.

Yeah, it's interesting. It's a fair point, because that is a lot to really make sure you get right. Because if you don't get this right, it's going to throw all your other assumptions to generate revenue on the deal off. Yeah, the deals that I'm looking at are literally buying IP or buying an old code base that you know is not worth rebuilding. So the strategy is more around migrating customers to your products. But that's the difference, I guess your whole focus there is more on the customer retention. What I'm trying to get to is either here's a big risk item you ultimately bring it down to that you have to manage. Is there any way to validate that if you have control over risk? Because here, your timeline, I think you mentioned ended up being like eight months. I think that's what throws everything off. Is there anything that can be done to really have control over what that's going to be?

Some of the learnings we've had is how we approach the deal. So we approach it this way. Now, first off, what's the problem we're trying to solve? Is this a problem that we're making up or is this a predefined problem that we've articulated within the organization that exists? Secondly, is there a good culture fit with the leadership team and does the product fit and the code base? And some of those things, we get excited around the hypothesis, okay, this actually solves the problem that we're trying to solve. And the second most important phase then we get into next is what are all the reasons we shouldn't do this deal? And I think it's really important to go through that phase to be able to say, why won't this work? What are the risks to making that happen from a culture standpoint? What are the reasons we shouldn't do the deal from a cash or financial standpoint? Let's list every single possible reason why the deal will go bad and why we shouldn't do the deal. And if we go through all of those in a very sincere way, we're not just making it up because we're excited about the deal and then we still are, like, even with all those risks and all those reasons why it'll Fail. It makes sense. Then we'll continue to pursue and really get into deal negotiation. Kind of our goal is to put together an alawi that makes sense and then open up a 60 to 90 day diligence period and really try and be methodical around what are the items that we need based on the reasons we shouldn't do the deal. Let's create our diligence list and go validate all those assumptions and start to dig into it. My approach in a deal now is quite different than maybe my approaches would have been in the past.

I like it. I'm going to use this framework on the next deal I work on. I'm going to really focus on the problem to solve and I want to unpack that a little more. Here is a real reason to do the deal as opposed because this does happen. Probably because my background's been a deal guy. You find the deal and then you rationalize why you want to do the deal.

Oh for sure. You tell yourself it's perfect for reasons X, Y and Z. And listen, if I can help one person, whether it be you or anyone else listen to this podcast to get through this process and have a really successful deal out of it, then this will be a great win.

Well, make sure I define the problem to solve before we start looking at deals.

Yeah.

Okay. Two, this is really the core diligence, the culture with the leadership team, any of the tech diligence on what your thesis is around doing that and then really emphasizing from there the third area, reasons not to do the deal. And that's essentially guides you fleshing out your investment thesis. But getting that into how you're going to do your diligence.

I talked about culture fit and technology fit. Depending on the type of acquisition you're going to do, you might be doing the customer diligence. Will this customer. Your hypothesis is that all these customers will come over to our tech platform. Is there a way to be able to validate that? What would be the reasons they wouldn't come over? What would be the reason they wouldn't adopt? And so if you're going into you're basically buying additional customers and you don't have conviction around those customers transferring over. You want to really spend some time diligence trying to figure out how to validate that.

So let's take that. That's what I'm really interested right now, Brock. Because we have a business line that's in the data room space and there's a hundred competitors there and there's a ton of little Ones that super outdated 20 year old code. Nothing's updated. They're either flat or slowly declining. And there's not. Nobody has a big appetite for that. We got something compelling, easier that we've transitioned customers to our so we have some confidence that our ability would be to sunset the product and bring the customers to a platform and provide them a better, more enlightened experience. How do I make sure that's a problem to solve? Because the problem to solve is delighting these customers that are on this old crappy platform but doing that through an acquisition that we're or it's a play on getting some more market share. It's to play on getting revenue by essentially picking up the customers and eliminating costs.

Yeah, I think the question that I would start to ask would be what feature or service are those customers getting through the company, the provider today that is keeping them there? If the technology is old and it sucks and you're going to just sunset it, why didn't they switch to a different provider before? Is it just because of apathy? They're like oh I'm on this provider and I'm going to stay forever. Or is there actually something that may be totally a small little feature or something that you would think oh that's the dumbest thing ever. But that customer like a big percentage of those customers keep it just before that one thing. Just trying to understand again your hypotheses of why are these customers staying with this product and how do I validate that if I make this acquisition that they will come to our product and not just cancel and move to someone else's. Just those gotchas of I think sometimes we assume it's old, it's antiquated.

Yeah.

I don't know why these customers are on there but they're on there and we're just assume ours is better and they're going to move in that case that's the area of what could go wrong. What are the reasons why they wouldn't sign up to ours and dig in there. Figure out how you can validate that.

I like that. This gives me a better sense of the real problem to solve is understanding that customer experience and likeliness for them to want us move to our product and then we could look and identify opportunities where here's the profile. This is a flat line for a declining company that legacy you start doing diligence because sometimes it's weird situation just their team structure and it's not really a proper company. Especially some of the overseas stuff like you just they're not ready for a climate to manage people in these different countries. But you do get to the one that at least makes enough sense. You're having the conversation. I guess there's the stuff we talked about, the leadership, making sure you get along with. And I think this is the point of going to meet them in person and spending some time.

If you want their leadership, if you may just be buying their customers and you may not want their team, you may not want their leadership, you may not care about the culture. That's part of kind of the problem you're trying to solve. I'm not trying to expand. I just want customers. Then I'm not sure how much time you need to spend with their team and their culture.

Yeah, that's true. There's definitely a lot of transition. I think you're going to ultimately need people for a period of time.

Yeah.

Even if we're going to send this wind down a product line, probably up to like two years, I would imagine, being able to have that product and maintenance.

Yeah.

But I think you're right. It's not like, hey, this permanent hires into our company. We're taking a bet. Ideally, it's at a price point that really makes sense. That's worth taking this bet. And then I guess the key thing that I'm trying to get at too is just the validation of what we're betting on here, which is likeliness to get customers over. Is there anything you could do before? I'm trying to think all the things you could do before loi, where I got income pen on this thing. It doesn't cost a lot of money either.

I think that is a great point. There's using the different phases of the process to your advantage. If you have a willing seller who is like, hey, I'm interested in this. I'm excited about it. You have quite a bit of leverage pre loi and they're trying to put their best foot forward and everything else. And then post loi, you're going to do the negotiation phase and we're going to talk about that. But post loi, you're now saying, okay, this is diligence, period. You're getting deeper. I think that the discipline is for deal guys. Like, I think you and me, once we get an loi done, I'm excited about the deal. I'm emotionally invested in the deal. And I see, oh, this is going to solve this problem for me and let's get the deal done. Their team members on your team are at least on my team have Been like that as well. They get excited about it as well. Everyone has their diligence list and we go and we cross off everything, but unintentionally you miss things. Leveraging those time periods to be able to gather the information you need I think is critical in the process.

You may think of just the your hit rate because you're not doing a huge volume of deals. You're not a serial acquirer per se. It's more of you're doing. You're being opportunistic. You're looking for these opportunities. Even the first example of buying the competitor different, learning a different go to market. Like, how many companies are you talking to? How many CEOs are you talking to before you ended up moving on that one deal?

I think it depends. Some are more opportunistic. And it's not like I'm going out and doing a search. I've come across, met a CEO and I'm like, oh, this is really interesting for this problem that we're trying to solve. And so it's more of just a conversation with that. And then there's another scenario, like the very first acquisition we did where we defined exactly what we were looking for and we went out and met with 10 or 15 companies and found the company that we felt was the best fit. It depends on is this more you've got a problem and you've come across and it's opportunistic or is you know exactly what your strategy is, you maybe want to acquire two or three or five and you're going to go scour the market and find every single target and kind of go through this methodical list. I think there's different approaches.

I got it. Try some different things, figure out what works best for what you're trying to do. I'm still trying to get a handle of like how do you validate if the hypothesis is built around capturing the customers? I said there's one what boils down to how do you validate that? But then can you rope in that target company and make them part of it? Like you're really getting aligned on the strategy says ultimately this is what we're doing. And is there things that you want to be that open about and see if like they got ideas or there's like a mutual agreeance on what percentage of customers you're going to bring over? I'm trying to get to the point of that and getting to the deal terms where you're also getting aligned on how much we're going to pay for it knowing that the goals are we're trying to get 70% retention on these customers.

I try and really map out my vision before I get to an loi. I want them excited about this. One plus one equals three. The LOI is usually built in a way where I've got, I may give some upfront cash, some seller financing where it's paid over time and then usually an earn out and usually that earn out is going to be tied to. I want those key team members tied to the combined success of the organization as it comes together. They're bought into the vision, they know what we want to accomplish, they're excited about moving it forward quickly and as we do, they're going to get paid handsomely for it. That is a critical part of the success. You hope to pay out an earn out. Some people are like on a structured deal so I don't have to pay out an earn out. If you pay out an earn out and you structured it right, that means you're accomplishing the whole reason you're doing the acquisition. It is happening the way you wanted it to. The company's benefiting. There's revenue to be had and there's to be paid out in and or now. So for me, so much of the deal structure and the way you write out the deal is creating alignment between these two companies to increase chance of success.

You're talking about doing both, putting financing like a seller's note and an earn out.

Yeah, I always look at a deal as cash and the cash is upfront versus ongoing. So it might be, let's say it's a million dollar deal. Maybe I try and negotiate, maybe it's 250 upfront. I'm just making up numbers for 250 in cash at closing and then the next 750 is paid out, 250 a year over the next three years. Usually I like to do some sort of equity, not always, but where we're given some stock for our company and hopefully that's going to the individuals that are going to be retained and then some sort of earn out and the earn out again. I usually try and direct that toward the individuals that are going to be retained that are going to be contributing to the success. And the earn out creates alignment. So the deal might be a $3 million deal, some of it upfront, some of it paid over the next three years, some of it in equity and then the rest is performance based on earnout. So there's a bunch of different levers to be able to pull to be Able to structure a deal.

Yeah, I like how you're putting multiple because I feel like I'm pretty early in this and just doing our deals for the company and you think it's like cards you pick, but you're like, hey, use all the different cards in different ways. So that's one. I think that's a good thing to wrap my head around. I'm still trying to get a better understanding. It's almost look at them as the dials. I got these little dials, the ratios. It's hard to benchmark it. Me, ultimately, I want to risk as little as possible. So I like the whole idea of putting as little cash upfront because that's what I'm using to grow the business actively right now. The debt part, fine. Because if you play things out, you're going to have that and you don't mind using that to cover the basis of getting the deal done. So you factor in the debt, equity. You're right. I don't think about it that way. You're bringing them on. You already got equity for your other team members, so create a package around that and then the earn out as the other one. I'm not sure how much would you allocate to an earn out given you put that much, could I put another million into the earn out? If it's a $3 million deal, you got a million already tied up between the cash and debt. Maybe you got some of the equity you put in play, but then the earn out, how much could I put there?

It's something you fill out. But since a $3 million deal, you might have a million in cash, which is split between upfront and over time. A million in equity and then a million in earn out that's paid out over time based off performance milestones and integration milestones or things like that. And you could play that up or down. For our company, we're growing quickly, potentially a path to going public someday. And so some people are like, I don't want the cash right now, or maybe just a little bit of cash right now. I want more equity. Those are just levers that you pull. And I lost out on this deal. But we didn't really want to give equity. We didn't want them to have any ownership. We just, we wanted it to be cash and be done. My point is you've got a lot of different arrows in your quiver or tools in your toolbox that you can use. And everyone just thinks it has to be cash or it has to be whatever. Those are all the different things that I use to be able to negotiate and get a deal. And usually when I put out the number, the LOI, I say it's a $3 million deal. It's broken up like this. So they're like, oh, man, I'm selling my business for 3 million bucks. And you are. But it's just not $3 million cash upfront.

Do you come out with that? And hey, this is just like we talked through it and putting in the offer on the table. Is there any input you're trying to get from the receiver, the principal on the other side of what they're trying, their goals or what they're trying to ultimately get out of it?

Yeah, I want to talk to the CEO or whoever it is, and I want to understand what's their motivation, are they trying, what's really important to them. A lot of them will just say cash, and I'll write up front, say, hey, this is how we structure a deal. We like to think about these different ways. And I try and get a feel for how they're thinking about valuation. First. I'm not going to necessarily negotiate right on a call. I would prefer to understand how they're thinking about it, understand how they're thinking about valuation, understand what's motivating to them. And then I want to go draft an LOI proposal that is something that to me, is compelling to them and to us. Submit that and then give them a chance to digest it and then get on the phone and talk through it and negotiate it as we need to.

You give them time to look at it, review it. Ideally, get on a call and just review that loi. Talk through it. Yeah, this is good. I think this is the most helpful thing. Sounds like you're focusing on that seller financing as opposed to using third parties right now.

You can go and raise debt, capital or other capital to be able to do it. In my opinion, if you can just do seller financing, there's just a lot of upside in doing that.

A lot less diligence.

Yeah, it's lower risk. If you're going to raise money from a debt or investor, you're now bringing in a new partner and you're going to have bank covenants and you're going to have all these other things. I don't necessarily would never intend to do this, but if the deal goes bad and you haven't paid it off, there's. There's less recourse to it. And it shows that there's. They have skin in the game. There's Just a lot of benefits, in my opinion, to figuring out ways to have them carry some of the seller financing.

I agree. It's simple. You're dealing with less parties, basically.

Yeah, exactly.

Brock. This has been good. I got a lot. Probably going to have to follow up with this conversation. I'm going to have to out to Salt Lake City, apparently. I don't know if you hit the ski slopes, maybe that that's where we'll meet at next time we continue the interview.

Yeah, like I said, we've had some successes with it, we've had some failures with it. And I learned more from the failures than I do the successes. So if some of my mistakes are helpful to someone else, that'll be make me really happy.

So I got to ask my most important question is what's the craziest thing you've seen in M and A?

Oh, man. You hear horror stories. I don't know if I've personally experienced anything specifically, but you hear horror stories of people selling their businesses and they get in and it's just like the brochure was so not the reality. That happens a lot more frequently than we think. Even when we do a lot of diligence, once you actually do the deal, you realize, oh man, this is not what I thought it was. It's always messier. It's always less automated. It's always. It's just, it's different than what you ever you think it's going to be. So I don't have any crazy stories of what's happened to me or other things like that, but every single time you get into it, you're like, I.

Think that's the theme of our podcast here. Brock, you shared your three stories with your own deals and that was the big takeaway. They all are much more complicated than you anticipated be.

Yeah, no question.

It just sounds like ultimately you got to work harder. We outlined a lot of the key areas, but just doubling down on the actual work to do your diligence is the thing to protect you, even though you can't get full certainty out of it.

Yeah. And you know what? I would probably, I would go back and I think I would do all three of them again now. I would have done them very differently. I would have my approach, the diligence, the questions we asked. But as an organization, we're a lot better because of them. And we've taken even if that product didn't work exactly how we thought it would, the things we learned from the way they built that product, the way they were executing on that product. We can take away and go and build it in a different way. Or there's just there's been a lot of benefits to the way we think about our business and the way we grow our business, even though it didn't go exactly the way we wanted to. I hope I'm smarter on the next one and I hope that it will go exactly this was the problem. We acquired the solution and it just worked perfectly. Hopefully one day we'll be good enough where that happens.

I'm going to come down for that following interview. I'm going to watch you get two, three more deals. We'll chat again on the ski resort.

Let's do it.

Yeah, but thanks for taking the time to teach me how not to buy my first deal.

Thanks for having me on. I really appreciate it.

Thanks Brock helping me become a better M and A scientist here. Those of you still with us, thank you and till next time, here's to the deal.

Foreign.

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