How Private Equity Firms Structure M&A Deals with Jon Dhanawade

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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 A Science Podcast. This podcast is part of a mission to rethink how M and A is done. The old school seller led approach?

It's dead. Fire led.

M and A is all about strategy, alignment and efficiency, putting value creation at the center of every deal. It's not just about closing the deal, it's about making it successful. We uncover what truly works in M and A by learning directly from the best. For Episodes Resources Tools to elevate your M and a game, visit mascience.com, follow us on LinkedIn if you find this content useful. Don't forget to leave us a review on your favorite podcast app so others can find us too. I'm your host Kisan Patel, Founder and CEO at Deal Room and Chief Scientist at M and A Science. Joining me today is John Danawade, a PE M&A Partner at Mayor Brown and an Adjunct professor at Northwestern Law. John has extensive experience advising private equity funds, sovereign and sovereign backed investors their portfolio companies and other public and private companies on how to structure, negotiate and execute high stakes domestic international transactions, including mergers and acquisitions, divestitures, leveraged buyouts, joint ventures, recapitalizations, corporate restructuring and various forms of equity investments, including preferred equity investments. Jonathan also provides his client with strategic counsel on a range of general corporate matters and employment and incentive equity related arrangements. He basically does it all. In today's episode we're going to explore how to be an effective deal lawyer, managing legal risk and transactions and the evolving landscape of private equity. M and A. Jonathan, how you doing?

I'm doing well and thank you for making me sound so good.

Thank you for joining me live here in Chicago. We have an M and A science studio. It's been a little rusty, I haven't used it in a while. But we're here doing this in person. So thanks for making the time.

Yeah, absolutely. I'm happy to be here and it's a beautiful day to do it. So we lucked out.

This is the best time in Chicago. Let's kick things off a little bit about your background.

As you mentioned, I'm a private equity partner at Mayor Brown here in Chicago and my practice focuses on all the things you mentioned. It's evolved over time. What it means to be a private equity attorney. Years and years ago used to be just doing leveraged buyouts. They used to be really popular. Different market environment. Over the past couple of years the market has changed. We have a little bit more of the U word uncertainty and as a result of that, the types of deals and a number of deals that sponsors are looking at have changed. A lot of what I spend my time now doing are co investments, preferred equity investments, LP investments, back levered structures up top at the fund level. And it's been interesting to be a part of sort of that evolution of investment types that sponsors are interested in.

I was going to be excited to have the conversation because you do touch a lot of different varieties of deals. The adjunct professor, what do you teach?

I teach a course on private equity transactions at Northwestern. I went to law school at Northwestern. So for me it was a coming home of a kind. Where I went there many years ago. My background is I'm a first generation immigrant. So I showed up there. I don't have any lawyers in my family first and foremost. So I showed up and I had this image and maybe I should back up and tell you why I went to law school because I think it'll all sort of fit in. I'm a bronze level Indian gold Star Indian is someone who's a doctor, which my parents wanted me to be. I very quickly realized I had no science bone in my body. Silver medal is an engineer, also not the best at math. And so, you know, I went for sort of the bronze medal. It all started with mock trial in high school where I had a psychology professor. He started a mock trial team for the first time in my high school. And he said, hey, John, you should come out and do this. Now, of course, I'm not a trial lawyer and I'm not a litigator, but it created that interest in reading and writing and debating and crafting arguments. And that's how I ended up in law school and I got to Northwestern. And the first year of law school is all geared towards litigation. A lot of those classes don't really translate to what transactional lawyers do. And I started to have a feeling that I'd made somewhat of a mistake. But the nice thing is in the second and third year, you can start to take corporate classes. And one of the classes I took was an M&A one taught by, @ the time a partner at Kirkland and Ellis. That sort of got my brain thinking about a different type of practice and what I wanted to do. And the reason I teach this class now at Northwestern is I think about how ill prepared I was when I started at a law firm. Coming out of law school, I really lacked a lot of the basic foundational knowledge and skills that are required to be a successful transactional attorney. And my goal and my objective in teaching this class is to say, hey, if you're interested in private equity transactional work, then hopefully this class sets you up on the right foot. So when you join a firm, you know a little bit more than what I did.

That's actually a good point because a lot of people I talk to that are getting into a legal program, they are not familiar with any, just corporate law in general, specifically M and A. And then it's a good thing to expose them to it.

I remember, by the way, looking at law firm websites when I was thinking about what type of attorney I wanted to be and I'd look at capital markets, finance, M and A. And at the time I vividly remember thinking, they all sound the same. How do you differentiate it? As a law student who hasn't been exposed to any of those things, part of the objective of this course is, hey, even if you come out of the class thinking, I don't really like it, at least you know, private equity transactional work isn't for you. So I've at least given you that knowledge coming out of the class.

Hey, if we were to break it down real quick, because even my view, I always think there's large strategic you could work with and private equity, which I'd be curious to know how you would differentiate those two. And then you have a lot of things that we just described in the intro. You're where we talked about private credit earlier. We have all these other forms. Can we just walk through that quick comparison of like, fundamentally how your role differs in those environments?

I have the benefit of having started my career doing a bunch of strategic work, public company work, and strategic work when I came out of law school. And part of the reason I'm a private equity attorney now is I very quickly, after about three years, realized that it wasn't for me. I just wasn't having fun. And the nature of the beast is you spend a lot of time doing it. You sacrifice a lot of time with your family, friends, and otherwise doing the job. So there should be some semblance of joy coming out of it. And I realized I just wasn't having fun.

I'm writing down private equity is easier. Is that a big difference?

Strategic work is a little bit different because, number one, there are deals on a strategic side that move quickly, but private equity in comparison, across the board. I know it's an overgeneralization, but those deals do move, on balance, a lot faster than strategic deals. Number two, your clients are really business folks, at least on the strategic deals I worked on that my peers who focus on strategic deals work on. You have a host of clients internally at these large companies, some of which are lawyers, some of which are business folks, obviously corporate development individuals in a PE context. A lot of times the people who I interface with the most, including funds that have a legal function, are deal professionals. Stated otherwise, the people I'm corresponding with are people who are laser focused day in and day out on how to complete an objective. The objective being closing a deal. And what that means is your day to day looks very different because you're focused exclusively on items that matter from a commercial standpoint to get the deal done. Which is why the deals a lot of times can move relatively quickly compared to their strategic counterparts. The other difference, not across the board, but because PE deals can look very different, is a lot of these are private deals. Assuming you're under the HSR threshold, you can move relatively quickly, and documentation can look very different, particularly if you have a simultaneous deal.

Okay, so public company, you have to Deal with more people in general because you got their internal legal team, you'd be pretty robust. You have their corp dev team. You're probably dealing with different functions that have their own legal sort of perspective and interest. And then you got like regulatory components depending, you gotta file. Hsa, for example, that's a key part of it.

Public reporting requirements. If it's a public company. I remember early in my career thinking about, okay, we've signed this transaction, we're all exhausted, we've done the deal documentation. Then you have to worry about an 8k the next morning before the markets get going. In a private context, it's not a concern. You get through the deal, you focus on the deal. You may have regulatory approvals along the way, HSR or other regulatory ones, state agencies, but it just looks a bit different.

Okay, I'm adding reporting private equity, you're more straightforward. You're dealing with deal people. A lot of them, they end up becoming very pragmatic about doing M and A. They have specialized consultants to come in, come out. Okay, that helps to understand the difference. What about these other areas we've talked about, like private credit or some of the other types of transactions you work on? What are we missing?

Private credit has been fascinating. It's absolutely booming, particularly in the past couple of years. Historically, when you think about lending or financing in a transactional context, you have these banks who are lending money to help finance a transaction. And what's kind of happened over the past couple of years, particularly with the uncertainty we're seeing in the market, is private equity firms have said, hey, there's money to be made by being a lender. And so you have historically. What were private equity firms saying? Let's build out a private credit function, let's act like banks do. And because they fall within sort of that private capital landscape, they're able to be a little bit more creative. And a lot of times those structures vary and they can be as beneficial as they are from traditional banks. And they can also, from a structural standpoint, look very different. They just have a lot more flexibility.

How do you see the structure as different? When I think of banks, I always think of, I'm probably referencing more like small business loans that you go there, you get like a five to seven year term loan, it's amortized and you got some fixed interest rate based on. Well, they got rid of libor. What do they call it now?

Oh, sofr. Sofr, yes.

So whatever. Plus sofr rate fixture, floating. How do you compare that with private credit? I Haven't done a private credit. I've been looking at them sofr it looks like they're almost more favorable. They're going to charge you more but in some ways they understand what you're doing. Kind of buying something and you're going to do something with it and three years or so. So they set it up as an interest only type of terms and it seems like they're willing to structure it and make it easier to get into.

I don't know.

You're doing the real paperwork around this. What is the real difference?

Legally you hit the nail on the head and that's flexibility. The key to all these preferred equity, private credit and other transactions I'm working on is that the possibilities are endless and they're really deal dependent. The fun thing has been that they're pretty bespoke. You don't have sort of a cookie cutter approach that applies to all deals. Here's an example. On a back leverage transaction where you have a private credit firm providing a GP with a liquidity solution at the top level fund structure, those things can look very different from deal to deal, including when they're providing preferred equity. Here's an example. Where does a cash sweep come from? Does it come from specific portfolios? All the portfolios? What does the return look like? Is it a multiple of capital invested? Is it some form of interest? Is it both? This, Is it participating or not? The fun part for me is that on a deal by deal basis these deals can look very different and they're pretty bespoke.

What do we want to talk more about? We want to go to talk about that many deals because that's a whole topic of its own. Explain all that to me. I want to talk more about the PE stuff because we've done a lot of interviews on the corporate side. I think we sort of described it that there are more counterparties involved. I think a big piece of why you end up doing more work on those deals is because so much hinges around how the company's going to get integrated.

Yes.

So you're going to have an HR person in there. They're like, we're not going to do an asset deal, we're going to do a stock deal because we have people in all these different countries and we're not going to mess around with the HR or deal with visas or any of that stuff. And then all of a sudden you got pressure to do that while the tax person's like, hey, so I get that there is a lot of different interests that you're trying to balance on that. I just didn't hear it. You have more people involved. Like I said, there's just factors of how this company's going to get integrated that's going to impact things in general. I don't know the private equity side as much. Can you walk me through what does that look like? Who are your main stakeholders? What is the big interest? And how do you align strategically with the private equity firm to best serve them?

It starts with communication, which it sounds so simple but in practice so hard because when a deal comes in, there's a little bit of inertia built in. You start to think about, okay, we have an loi, we have a deal, how do we structure it? Let's move to paperwork as quickly as possible. There are of course, timing constraints. What I always try to do is take a step back and think about what is the objective of the transaction, what are we actually trying to do? If it's a platform acquisition, meaning a private equity firm is going to go out and acquire a company in a space in which it doesn't otherwise have an investment or another portfolio company, that's a bit easier because you're starting from scratch. You have new owners coming in, acquiring a company, and a lot of times you may replace management, but the infrastructure is there. What's a lot more interesting at times is when you have add on transactions, inorganic growth. So you have a portfolio company, it's going out and buying another company in an adjacent space or a supplemental space. And there it looks a lot like a strategic deal because you have a company with operations, with people, with infrastructure, and is looking to acquire another company in either case, whether it's a stock deal or an asset deal, the key word is integration. If you're acquiring assets, what does that mean? Okay, you're really. A lot of times it's people, property leases, contracts. How do you assimilate all of that, if not day one pretty quickly after acquisition? Ensure that transaction is in fact synergistic and adds to growth of the existing company. If it's an equity deal where you acquire a company, and from a legal standpoint it's a standalone company, you still have that same question. How are you over time ensuring that operations work together and mesh together in a way that help you sort of obtain your investment objective in terms of why you looked at that company in the first place? And the answer to all of that again is ensuring that you're communicating with the HR benefits, insurance accounting professionals who are both advising on a deal team and who already have that function internally at the company. And here's an example. When you acquire a company, sometimes when it's an add on transaction of the kind I require, maybe there's a benefits covenant which people sometimes gloss over. And what the covenant would say says is hey buyer, with an X amount of time after closing, you will hire all our employees and you'll give them similar benefits to what they currently have. And most buyers will look at and say okay, some version of that's probably fine. But here's a question. If you have an existing company with existing benefit plans, how do your benefit plans, how do your insurance plans, how do they compare to what they have? Are they different? Are they better, are they worse? Can you actually comply with that covenant? If the covenant says hey, you're going to hire these people day one, can you actually do that? Can your HR folks onboard? What if it's mid month? What if it's immediately after a payroll cycle? Having that communication to ensure that the words on that piece of paper that people are signing actually link up with the reality of the business operations in my mind is a critical part of all of this.

You have platform deals that's a little bit more straightforward early in the thesis of what they're doing. They buy that transaction, maybe it's a little more straightforward. But once they're doing add ons, then you're starting to bring a lot of commonalities with the strategics. Cause they gotta integrate the business. Is it as comprehensive as a strategic? Cause that when I talk to any of the strategics, I mean there's a big emphasis on integration. Especially if they've done some reps.

Right.

Where PEs aren't as known as integrating as well, that's starting to change.

It's sort of interesting you say that because one trend that we didn't talk about that I've seen over the past couple of years and absolutely right now is last year. So there was a slight uptick in investments and a slight uptick in exits. So we stopped sort of our two year slide. The number of funds that closed was down year over year. But what that means is that LPs aren't getting their money back at a faster clip and funds are slower to deploy capital that they have in that interim period of uncertainty. They're making some of the investments that we talked about, different forms of alternative investments, let's call it that. But the other thing that they're doing is looking internally portfolio enhancement and portfolio refinement. But there's an enhanced focus on, hey, we have this asset and right now there may be a mismatch between valuations from the buy and sell side, which is making it such that we're going to hang on to it for a little bit more time. How can we ensure that it continues to grow either at its existing level or at an enhanced level? And part of that is integration. How can we ensure that this asset continues to be accretive to the overall business such that even though we're not exiting it now, we can at a.

Multiple in the future, hire consulting firms every V for a secret weapon.

That's right.

Can we talk about structure? So if you're like a large strategic, you're just flat out buying these companies a lot of times in cash, maybe you're putting some kind of earn out in there as well to bridge evaluation gap on these private equity deals. You got a lot more varieties. And I'm just curious what you've seen because I'm looking at small deals right now and I'm looking at, oh, I want the owner to hold note because it's way cheaper than private capital. Hey, earnouts could be great too. You can look at that if the right metrics are there. Rollover equity seems really interesting because yeah, sure, why not? You be part owner of this versus another investor, you're going to get higher insurance that were aligned on the same objectives of outcome. How do you see that in terms of the variety of structures? That good or bad thing?

That's another aspect of private equity that I find interesting where there are different ways to ensure that the cash portion of the purchase price that you're paying at closing is not the entirety of purchase price. You can slice and dice it any way you want. One means of doing that is an earn out. A component of the purchase price is paid to you in the future, assuming you, the seller, hit certain metrics and you mutually agree on what those metrics are. And the duration of the earnout can vary. It can be 1 year, 2 years, 3 years can be contingent on a variety of factors. The other two are fascinating. One is a seller note, which I've also seen an increase in or an uptick of, especially in today's current deal environment. And the final one is the most interesting rollover equity. The idea being, why don't you have some skin in the game, seller? Private equity professionals really focus on this. When you think about it, they're financial investors and the key to any successful investment is the operators that you have for the business. So when you're acquiring a Founder owned business, who knows that business better than a person who has operated it for a long time. And if you tell that individual hey 20% of the purchase price would other otherwise pay you or 30%, why don't you roll it into the go forward ownership of the business such that when we sell the business at that point in time you also get a payout obviously at a multiple because private equity firms are in the business of making money on your ownership stake of it. And that's a great way to incentivize that person to stay on shoulder with you as you grow this thing over the next three to seven years. My experience management rollover has been a powerful tool to ensure that folks have a little bit of as we commonly call sweat equity in the business.

We got these different tools earn out seller note rollover equity. This is spice of private equity. I guess I want to come back to the deal structure. What I want to do is you talked about mock trial earlier. Let's do a mock deal. And I want to blend in the risk perspective because that's what lawyers are really good at. That's what I learned. You have friends with attorneys who even just going out for drinks understand your liabilities, risk you're taking of how it progresses on how much alcohol you have and everything. We're going to play that out with the deal. So I want to understand it changes as you go through different stages. So let's make up a deal. I'm going to use the data room industry. Except most people listening to this know that's low hanging fruit industry I'm familiar with. And I'm actually looking at a couple of deals in the space. Let's do simple math. This is a company I'm looking at. They're doing like 10 million revenues, 2 million EBITDA. So it's like pretty healthy but flat business. Because most of these data rooms are now and we're interested in the customer base base primarily. We have a really cool buy side platform if you ever heard of it, it's called deal Room. But we see an opportunity to upsell our product. That's the thesis is that hey, this company has 500 customers. Even if we upsold 10% of them to our product because it's 40K ACV, that's significant revenue synergies there. There's obviously common backend stuff. We could combine and eliminate some costs and drive some efficiency. Pretty straightforward thesis. First of all we're getting an NDA signed. The one thing I'm curious is even at NDA Stage, we do own a data room business. We have another product called Firm Room, which is head to head with all the data rooms out there. So as soon as we start looking at NDAs, companies perk up pretty quickly that there is more sensitivity because it's direct competition. How do you start thinking about that as even just negotiating? We can generally talk about what NDAs purpose of it. How do you kind of get that right balance for both parties for me to do my diligence to get this offer in. But at the same time I understand from their perspective and that's not our intention is to get some intel to compete better with them. Walk me through that.

So your primary objective from the buy side is understanding, number one, the customer relationships that the target has and number two, bringing those relationships over. Is that sort of inaccurate?

It is. And I want to strike a line between we want to understand it so we know the business of what we're buying. Like, I want to know one, what's their saturation of customers? Those are a few anchors that we got to look at as big risks. How diversified is their customers and then how sticky their customers are. Hey, we're not trying to get a strategy to come coach all your customers. It's just this is part of us valuing your business is really understanding the strength of your customers. And there is a piece that we want to get a sense of. When we have a thesis of upselling your customers to our other product, our flagship product, we'd want to at least understand the profile. We want to know which ones are corporate buyers versus investment banks, that all they do is do transactional sales. Because that's not the winners for us, the ones that we can sell ongoing subscriptions, they're pragmatic about doing M and A, those are the winners. Is there like a line to draw in there?

It's sort of interesting because the number one consideration from the target side is exactly what you just mentioned. How can we share this information with you, the potential buyer, and ensure that you don't then turn around and solicit our customers if the deal doesn't happen and the right balance to strike is number one, can you limit the number of individuals who are given access to the information? From a sell side standpoint, you want to ensure that the buyer is able to conduct due diligence. And sometimes what you do is you have a smaller team of individuals on both the buy and sell side who share the information and talk about it and examine the information. So you can limit the people who have access to the information and are able to examine it on the buy side. That's one. The second is, and this is probably the easy one, non solicit of business relationships and executives at the target. The worst outcome for the target would be letting you in into the henhouse, sharing all this information with you. Maybe three, four, five, six weeks later you say, you know what, we're not interested, we don't have conviction about this investment. And then day one you turn around and start soliciting those customers because you've had the ability to investigate. So how do they protect against that? Having some form of a non solicit in the NDA that says, hey, we're going to share this information with you. Maybe we share it with a subset of folks on your side, maybe just even your attorneys. But for a period of time, if the deal falls apart, you can't then turn around and solicit, number one, our employees and number two, our relationships.

The limit who's got access to the information and then a non solicit would be the key clause that you want to have in there.

That's right.

Are there things from a buyer's perspective, I guess buyers, you get in there and just get all the information you can.

From a buyer standpoint, information is power. The more information you can get from a financial standpoint, the best would be having a one to one with the customer. As you can imagine, most sellers are not going to be comfortable with that, to have some sort of a customer call. Usually those customer calls happen really on the eve of a closing when you're very, very close. But how can you limit that information gap as much as possible? Part of that is financials, part of that is looking at contracts, part of that is looking at how much revenue they've brought in, key customers have brought in over time. Is this sort of recurring revenue for how long has it been recurring revenue? What are the contracts you're currently under? Is it just an oral agreement of some kind? You'd be shocked how many businesses there are out there where it's a handshake. There's no contractual agreement, there's nothing that binds that customer to keep coming back for services over time. That's a really bad place to be as a buyer. If you acquire business on the basis of the strength of customer relationships of a target. But the contracts, number one, are not long lasting. Maybe they're on unfavorable terms and you're stuck with those contracts.

These are good points on this NDA. If we're looking at a deal out of the country. The jurisdiction's always a big question. How do you sort of compromise that? Is there a standard on that? If you're a US company looking at something in Europe, where do you decide the jurisdiction?

That's where it gets tricky, especially when you're looking at cross jurisdictional deals. That's when you have to ensure that you're engaging counsel in appropriate jurisdiction. Because number one, enforcement can vary too. We think about the clauses themselves, but do they mean anything? Can you actually enforce it? Can you rely on the strength of the provision? And that's where it gets significantly trickier when you're looking at a business with cross border operations.

So that is tricky. What about IP? I had one of the NDAs where they wanted to strike out using the information to create a competing product, right? And it's like, well, the one thing.

That I frequently see is what is a use of the confidential information? When we think about confidential information, just for simplicity, secret sauce, what makes a target? And the target's going to say, I'll share all my secret sauce with you. You're only going to use it to investigate whether or not you want to do a deal with me, which I think is pretty fair. What they don't want to do is share all that with you. And then you turn around and use it to compete with them or otherwise do something that harms your business model. That then becomes the purpose of the use of the confidential information.

What's like the real recourse on this stuff? Like say you say, yeah, yeah, yeah, you know how people are. There's those people in business that are the shady ones. You sign NDA, you did this and all of a sudden you created a competing product and obviously you used the information we provided to do that. Is there some real recourse? These NDAs stand up.

Specific performance would be the recourse you.

Go to judge, sue the shit out of them.

You'd have to sue them and you'd have to say, hey look, we signed this piece of paper, this piece of paper said they wouldn't do this. And then the hard part becomes proving it. While the facts may ostensibly seem obvious, going to court and saying this person created this product on the basis of information that I gave them and now they're competing with me. That gets to be the harder part of it. Now I will say that reputation means something, especially in this space. So people tend not to. For that reason, you get the reputation of someone who gets the ability to look under the COVID and then walk away and compete with Them and do that a few times reputationally it's going to harm you.

Okay, so we get NDA signed, we start going through. I send an initial diligence list, usually like 10, 12 things.

I asked for only 10 to 12. This is why we should work together.

I'm doing really small deals. Just so you know, the fees are definitely a lot smaller when we start doing smaller deals. But there's always a starting place. I feel like it's a build a good relationship, get in early. So there are small deals that we're looking at and to only 10 to 12 items. You don't want to scare the small business owner away. We typically ask financials and then some of the demographics around the customer base employment and the typical things, outstanding lawsuits, stuff like that. Then we try to understand their tech stack, know what that's going to look like. So I will start building a model and start looking at what that's going to look like. So we get a sense of what valuation is going to be and we have some management meetings so we can really get some confidence that we're actually going to work well together. And then I get to that point when I want to start putting an loi. That's what I want you to teach me, some real negotiations. And I also want to understand the risk at the LOI stage too because usually you send something that's non binding. It's like I want to see if we can at least generally agree on a premise that we're going to make this deal happen before we start investing a bunch of time and money into this. Okay, so let's say we on the same deal, we got 10 million revenue, 2 million EBITDA. And I'm a value based acquirer here so I want to keep it pretty simple because I feel like what happens is there's flexibility, it's not direct, it's not like hey, I'm coming in to buy all cash. As a smaller company, privately held, I want to preserve as much cash as possible. Either a, I can go out and I can shop private credit. If the seller wants all cash offer, I can shop private credit and it's going to be high interest. I'm going to pay anywhere from 12 to 16% interest. So in that case I'm going to be more conservative in what I offer. I'm probably going to offer a forex, EBITDA, let's say $8 million now if the seller is willing to hold some paper and I'm getting more favorable interest term, 5%, 7%, whatever it is over four or five years, that's very much more favorable. I'm happier. More confidence means I'll pay more. Is there some rollover equity component also more favorable or earn out? And then with those things, knowing that this person's bought in with me, I would likely push that up to 5x EBITDA and say, okay, I'm willing to spend 10 million. Teach me how I should structure things. Do I start off low then come back with some of these things? Do I sort of offer multiple options on the table and be like, hey, let's choose your venture here? Do I sit down and really think about what my preferred is and push that way? Do I forecast of what their counter move is? Everybody always counters no matter what. Nobody accepts the first offer. Push me like somebody first time putting an loi. And how should I think about really structuring this deal?

It's sort of interesting because the worst place you can be is having agreed to something at the LOI stage, notwithstanding the fact that it's non binding. You start to work on documentation. You start doing more diligence. Yeah, that's the normal way you do it. You dig in a bit deeper after you have an loi. You then realize the business has issues that you hadn't previously identified, which go to price and then you cut the price. And I've seen that happen time and again. That's a really tough place to be. The number one thing I would say is build in some flexibility in the loi. You can say that here's our valuation, subject to certain assumptions and you should lay out those assumptions. And really good PE firms do a nice job of that. Hey, we will pay you X or some multiple of X or we're valuing your business at X, but it's on the basis of this. And that's subject to additional diligence, including accounting, financial and legal. And it sounds a little wishy washy. It avoids the harder conversation down the road, which is a seller feeling that you are walking back a deal, that's a much harder thing. And at the end of the day, when you get rid of all the paperwork, you're dealing with people. And if someone's lost their trust in you because they feel like you're backing out of a deal that they thought you had made, it makes executing that deal much, much harder.

I like that. Here I can start thinking about the terms, which I'm a deal guy, so that's why I probably jump on that right away. I like how you want to frame it with we're building it around these assumptions that your Q of E is good, you're going to have some solid quality of earnings. We're not going to see some surprises there, that there's some revenue that wasn't reported the right way.

Even taking your example, where the customers are important and you think you can upsell some of them, it's based on the assumption that based on what you've provided to us so far, this is what the revenue has looked like over the past 12 months or so or a longer period of time. And this is what we expect it to be going into future. And we expect that these three top customers stick around for an amount of time. Yeah.

Can you give me an example of that? I've seen that where I looked at a deal and it was three customers represented 70% of their revenue, then I'd a hundred percent want to have a contingency that hey, these customers renew a contract with us.

No, absolutely. And in businesses where I've worked on where the concentration of customers is limited to a handful of customers, the deal is contingent on revised contracts being in place with those customers from and after to closing stated otherwise before you get to signed executed paperwork that's binding on the buyer from and after to closing, you have to have revised contracts with those customers in place and usually long term ones to ensure that investment is worth it.

Yep. Protect yourself there.

Absolutely.

In this case, if I had a thesis that was assuming because I was saying, hey, we're going to upsell 10%, I would want to assume that 25% of their customers are corporate clients. And they told me that 25% is customer. But I would add that in is that this is subject to the 25% of your customers are corporate clients.

And you know what, it's interesting. If the seller pushes back on it, the natural reaction there is. Tell me why. Because if they have said to you, hey, don't worry, that's true, it would be a cause for concern if they're pushing back on something that they'd otherwise identified as being true.

If there's something in the roadmap like they had a really cool AI thing they were building and we know we need their CTO locked in and committed, I might have that subject to a retention of your cto.

In fact, I was working on a deal earlier today. Large companies acquiring a startup and it's an AI based startup, but the key to the acquisition are the people and really two people. The entire premise is, hey, from and after to closing for a period of 90 days, a transitional period. These individuals are going to coach up our folks. We've identified 10 people. They're going to coach them, they're going to train them to use the AI product that we're acquiring. And the closing won't even happen unless those two individuals enter into long standing employment agreements and some equity agreements. It's sort of baked into the LOI quite literally. A few hours ago sent out the LOI for that deal that I just mentioned.

Those are common things. I can have my assumptions around what I expect the finance to look like. Certain things around the customers, certain things around employment retention.

That's right.

Any other things that you see is pretty common that you'd want to put in there.

Not all PE firms do this. Two other things are important is I know people don't want to incur legal fees at the LOI stage, but at least with the relationships I've built with PE firms, they feel comfortable calling me and knowing that, hey, at least John will give us a look over to ensure that there are no real issues. Two things that popped up. One is structurally, if you're telling someone that you're going to do an asset deal or an equity deal, it really behooves you to have a conversation with your attorney to ensure that that's feasible and gives you sort of the end goal that you're trying to achieve. And number two, that you're setting it up from an indemnity standpoint or from a seller obligation standpoint that protects you. Those two things can become real sticking points if there's a real tax consequence to the seller later on down the road or tax consequence even worse to you as a buyer that you hadn't contemplated down the road or you've identified issues that are massive issues, but your LOI says it's, let's say a walkaway deal with no indemnification that again puts you in a fork in the road where you have to have these really tough conversations where the seller said that's not actually the deal we agreed on a few months ago. And that's when emotions start to rise. It's better to have some caveats for those things or dig in with the help of your counselor or accountants at the LOI stage and you can do it efficiently. And I do it all the time. And I'll give you an example. I was representing a mid market fund and they have a really well run construction fire alarm business. They're looking to expand their footprint across the Midwest and they were interested in a business based in one of the midwestern states. And they had pushed forward with an loi pretty fully baked. But they know me by now. And they called me right before they signed and I looked at it and I said, okay, let me just look up this company. I looked it up and I had an associate run a few searches, come to find out. A few years ago, a predecessor to that company had filed for bankruptcy, and that had not been disclosed to my client. And then the founder started another business. And there's some legacy risks associated with it. And I'm oversimplifying at a high level not to disclose facts from the deal. But fast forward about a week later, the client, as a result of the issues we identified because of the call that they made to me, said, you know what? This actually changes our investment thesis massively. We're not interested in the deal. And I never want to be or have the reputation of someone who doesn't help. Lawyers should help facilitate commercial plans and processes. But the firm actually called me after the fact, said, thanks for helping me for making a big mistake. It was actually a massive issue.

That's a tough one. It's like, yeah, and you don't want.

To find that out 30 days into diligence.

I know that's like way more expensive.

And I don't blame them because none of this had popped up on their end and that's why I'm there.

And it just gets harder and harder to walk away from deal the more in you get.

There's a bit of inertia. You've gone to your investment committee, you have stuck your neck out there. You sold them on an investment thesis, you sold them on a company. You're really excited about it. You've gotten to know the owners, you've made all these visits to the site. There's a buzz created. The idea there is. As you start to identify issues, you try to minimize it. It's human nature to minimize it because you've built up this idea that we're going to acquire this company. So sometimes it's a lot easier to say, you know what, this is probably not the right move for us at the early stages. It gets increasingly harder further down you go.

I guess there's a structured component that you may want to think about, which is a tax perspective, asset, stock sale. And then what was the other one?

Indemnification obligations, which not all private equity firms do it, but some of my favorite clients do, where they take one of two approaches. One, they lay out their preferred indemnification structure in The LOI itself. There are pros and cons to that. The pro is you're very clear upfront on what the expectation is, so you don't have that battle.

And the con is you scare your seller away.

That's right. And it forces you to have that conversation upfront with a seller. You have to strike that balance. It should not look like an indemnification provision in a purchase agreement. That's where people go off the beaten path and it's a bit too much. But the flip side of that is if you tell a seller, particularly a founder owned business, owner of a founder owned business, hey, we're going to acquire a business and you get to walk away, you get to go retire and you start to do some diligence and you identify some real issues. Let's say it's a car wash business, I've had a few of these, go to acquire it and folks have been dumping chemicals in the backyard for a while. There are some real issues with the business. That real issue requires you as a buyer to come out of pocket for some of those losses. That doesn't seem fair. And you want the seller to be on the hook for stuff that they've done historically as it relates to business before you showed up on the scene. There should be some concept of that in the loi.

Interesting.

Otherwise the seller is going to say, you told me, look, I'm in my mid-60s and I thought I was retiring and going to Florida. Now you're telling me of the 2 million you're going to give me, you're only going to give me 500,000. It doesn't feel like the right deal.

What about other things? I feel like when it comes to the wire you start bickering about working capital adjustments and things like that.

So far we've talked about high level purchase price components, but the real meat and potatoes is the business operating in the way that you've represented to us. And once you start digging on the Q of E and networking capital and how far back you're looking for purpose of establishing a peg. Those are always tough conversations to have with people.

Those just naturally have to happen later because I feel like otherwise you're front loading way too much.

The way I've seen clients cut it is they agree at the LOI stage that there may be a purchase price adjustment escrow and they just leave it at that. Like high level, there'll be a reasonable mutually agreed upon purchase price adjustment escrow and a mutually agreed upon purchase price networking capital target.

Makes sense.

I do think the balances not being too into weeds that you scare away your prospective target not being so high level that you forget to identify an issue that may become a bigger issue down the road.

Can we go back to the negotiating the deal like the raw meat terms I gave you my range 4 to 5x, we're kind of between 8 and 10 million. It's almost like look at the purchase price but then there's structure this way and I wanted to use those different tools and we could make it funny just to I wanted to know like how you'd use each one. I also want to learn what's the market range that you typically see. There's obviously cash which if I have cash, I have cash or I go get the private credit, good old private credit market, just boom, I have that expensive cash to put in. And then there's a bucket for the.

Seller note which is cash later. I view it as cash now and then cash later.

Your seller note, it is cash later. So I'm going to be paying you over a period of time with interest, which I like. So it's like you're going to get that money, you're just going to get it later. And then there's the other bucket, the earn out which is similar but different. And maybe we can talk between a little bit of the difference between those two because it is like payments pay later. But I'm going to hold you on the hook to certain milestones which I think doesn't end up well. We'll talk more about that because I'm curious your perspective. Then there's rollover equity which it seems like more and more interesting that when I start seeing those as opportunities to bring in folks to go for the ride to.

No, absolutely. And rollover equity to me is. It's sort of interesting because it kind of depends on who the seller is. If they're advanced in their career where they don't contemplate doing what they're doing for much longer, then the concept of not getting cash at the time that they close and instead getting an instrument of security for which the payment may not be made for three, four, five or longer years. Obviously you're going to get liquidated at the time that the private equity sponsor sells to the company in the future that may not be as attractive to someone who's towards the tail end of their career.

So it would probably be more preferred for somebody that I can keep in the business for another three or four years.

Exactly.

To come along for the ride.

A motivator for you and for them to have that person side by side.

Because if the person is going to be out in a year, then it's going to want them on the cap table because they're not, they're dead weight at that point.

The consideration there is if they are going to be out of the cap table and you're giving them substantial rollover equity, stated otherwise, you don't want to pay them a lot of cash. The conversation then becomes, okay, what sort of control rights do they have associated with that equity? Do you really want to have a passive owner with substantial consent rights? And that is always a tricky situation to have.

And then at that point you might as well get a PE that can actually be a right. PE could be more accretive.

Now I've seen that happen a ton where folks have said, you know what the right way to do this is? Maybe a club deal, we put in 70% into cash, another sponsor comes in for 30%, maybe that's a better way to do it.

And then we just give the cash to the seller.

Right?

Okay, so if you're in a roll of equity, it sounds like you should have high confidence that this is just like a P partner, a real partner that you want to live with.

And if it's not, if it's a person who's leaving in a year, one solution is an earn out that you pay them in a year at the time of contemplated retirement, but it's contingent on hitting some transitional goals and metrics over the course of that one year.

So you've seen that earn out as short as one year. Just saying, hey, I want to make sure you're doing a good. What would be examples of milestones to.

Have you'd set up key transitional metrics. Let's take the data room business and let's say there's certain tools built in into the data room that you're acquiring that you'd like to ensure that your team knows how to properly utilize effectively within six weeks. And maybe that's one example. And I'm thinking, actually I'm thinking of a deal for which I signed an LOI earlier today where the idea was we want these handful of people on our team to know how to utilize this AI technology within six weeks. Not just use it, but to use it fluently. And of course a key legal term is in the reasonable discretion of the buyer ability to use this tool and is up to speed in the reasonable discretion of the buyer.

So we really build on what are those key things that need to happen in this case it's a one year transition. If we had that more partnership alignment for long term, hey, we wanted this person for three or four years, then we may stretch that earn out for a longer period.

Yes.

And it'd be based on totally different other milestones.

It would have to be.

It could be integrating technology together. It could be revenue type of finding someone else.

Let's say the person's a CTO helping attract and train their replacement. Maybe that could be train a replacement to your reasonable satisfaction.

I would generally prefer to do a seller note just to make it so straightforward.

So how do you use seller notice? Do you look for, instead of balloon payments, do you look for sort of payments at set intervals over time? Is that how you.

I'm used to, yeah, more of a conventional amortized. I want it a little longer, like five year. Yes, but you see everything I've seen on private credit. So interest only with a big balloon payment.

That's right.

Which in this market, there's so much money floating around, it's like, yeah, somebody at some point will either redo that debt again and keep it an interest payment going forward or you swap it out for equity.

I ask because that's what I'm more commonly used to seeing is some sort of an interest accrual of interest pick which is picked over time and then a balloon payment at the end of it. That being said, there are exceptions and I have had deals where a seller note is cash pay. So you establish an interval, set intervals and you pay. Now, it's not nearly as common as the first scenario I described, but I have seen that there are real issues there. Does the business have cash to make those payments in the future? That being the key concern.

Oh, so they would have big chunks of cash that gets almost like the buy down of okay, year one, we're going to pay you this big principal payment.

Yes. Obviously you'd have to ensure you get a basket in your senior flow and.

It'S tough to even amortize a note. Now back in the day when valuations used to make sense, you could do that. You could be like, hey, hold this five year note, like finance 80% of this and we're good. You're going to have a great healthy note. You got confidence, I'm going to pay it. It's a win win. Nowadays it's like that's the interest only at the high interest rate makes more sense to do versus having something that's amortized with the directly the seller.

If I was representing the seller in that circumstance, that's where you do a little bit of reverse diligence. Are you confident in the fact that you're going to get this payout in the future on the time period you expected to get paid out, or is it going to be a situation where the note needs to be restructured or may need to be structured at some point?

I'd give them a high level of confidence.

That's right. And I've had that happen over the past couple of years. Unfortunately too, where portfolio companies are going, undergoing restructuring, out of court restructuring specifically. And in those situations, you have to examine the indebtedness of this portfolio company, some of which are notes, some of which are true traditional third party lenders. Those are painful conversations to have.

Well, I mean, do you look at the financials? Hey, this is like a two to one debt ratio coverage. It seems like it's pretty healthy.

Part of it is also looking at the reputation of a sponsor because ultimately when you think about it, who is a sponsor, who is acquiring that business and what have their portfolio companies look like and have they been in a situation like this before and if they were, how do they address it? It takes a little bit more diligence on the sell side, but it's an important investigation to undertake, you know, so.

I, I kind of figure out the path we're going based on the scenario of what makes sense in this structure. Obviously I want to deleverage the risk and get the right balance. That works for both of us. In terms of the negotiation, how do I make sure I don't do too much or too little? I don't want to come in too low, offend a person and they write me off. I don't want to come in and say, hey, here's my highest and best offer. The 5X owner holds 40% as a note and they come back and we want 6x. I'm like, no, this is the best offer I got. It's sort of a take it or leave it thing. How do I get that right balance so that negotiation goes smooth? Do I take a person out, get them a couple drinks and then pull the offer out? What's the best way to make that as smooth as possible?

It's funny because just by happenstance, my career has over the years woven through various industries. Over the past couple of years, a lot have been in the H Vac space. And I only bring that up because they're businesses that are truly people, driven for people. And the one thing I've seen, sponsors, especially the ones I work with do really well is focus on the individuals. So before they get to a point in time where they're talking about purchase price and what a consideration looks like, they've really gotten to know the sellers really well. And that is getting in the same room with them that's going to their place of business, that's getting to know their interests. And by the time the purchase price conversation comes around, you're talking to someone who you know really well. They're a friend, they're your friend. It's a lot harder if you get an offer out of the blue from Joe Schmo and he says, hey, this is the best offer I have. You're probably, it's probably easier to write that person off if the offer doesn't fit what you're looking for. But if someone has spent two, three months with you and we've come to your place of employment six or seven times and taken out to dinner a few times, and you've talked about interest, maybe you've gone to a few games and they've shown real interest in the business and they've shown you that they want to grow the business and they show you why they care about it and then they give you an offer that's just a different conversation. The reality is in any M and A transaction, sellers are going to want more and the buyers are going to want to pay less. And I don't think you ever get away from that balance. But the way you balance it out, the best way is getting to know people and spending the requisite amount of time with them.

It's the best advice that's tried and true and it should stay at the top of mind as I work on a company's first deal.

It's particularly true, I think, for their first deal because I tell this to young associates all the time. Because when you're working on a deal and you're a junior associate, disclosure schedules and diligence are the bane of your existence. And sometimes when you're working with founders, you're explaining to people who have a full time job, hey, you have to disclose all this stuff on all these schedules as an exception to the reps or as responsive to the reps. And sometimes associates get annoyed with that. They're like, oh, this is taking longer than it should. I'm up late at night, this person's sending me one off comments. And I say for a moment, just take a step back and think, this is a seminal moment in this person's life. They've worked on this business for sometimes a decade, sometimes longer than a decade, it's been in a family. And this is a big payout for them. This may be the most important point in their life. Think about it through those lens and then approach the task on hand. And I think it'll give you a different perspective.

That's almost the same view of being the counterparty too and building that relationship. But you're so right, it is. I'm looking at two deals and I'm struggling with that because one deal, I'm going down that path and I'm taking the time to build a relationship proprietary deal. The other one has an advisor. It's not an auction, but it's still represented and they're still soliciting offers and doing like a semi sort of targeted process, which I don't like because they are, they're gatekeeping. They're literally throwing the fence up. They're taking the founder off the CCC threads and it's like talk to us and then we'll set up another call with them. And it's why this is already a turnoff. This is like hard to I gotta go through your parents to go on a date type of thing. That's not fun.

It makes it hard. It's funny because that brings me to another point, which is choose your advisors carefully. Because when you think about it, your advisory function, whether it's a banker or lawyer or accountant, is to help facilitate the deal. The worst mistake that I've seen people in my position do is to be abrasive or otherwise be an obstacle to deal getting done. That's not your job. Your job is to advise your client and the overall objective is to get a deal done. And you advise your client of the risk and liabilities along the way. Of course. But don't get in the way of a deal getting done.

That's a really good point. Sometimes I communicate with them and I think they mean well. I just got to get them to stand. I need to have six, seven visits.

It takes time, but that's how mid market and lower mid market PE firms have been doing it successfully for a very long time.

And that's one of the deals I need to focus on, is the one that I can play a little longer on. I got a little bit of that. You've probably seen I just a little impatient, want to get deals done. But it's almost like you want to grade your relationship to know that you have high confidence in the relationship to sort of have that confidence in the foundation of doing the deal. And then the rest of the stuff will actually flow a lot easier.

And that's the key difference between what you were describing. A proprietary deal which is really required some relationship building over time. You sourced it through a relationship based channel versus an auction process that's come in here. Who's the highest bidder going to continually get pushed for best terms and then one person gets picked up. Yeah.

What would you do in the situation where you have the advisor they're pushing to get some early terms on the table? I want to build a relationship. They want to know is this worth investing our time? They want to see the early terms. What would you do in that situation? I'd almost want to.

The way I might approach it is maybe almost back into how you arrive at those terms. Okay, so they're pushing you for terms. I assume they're economic terms is what you're referring to. What are you going to pay us? You sort of level with them. You say, look, I would like to provide you with those terms now. But to do that I need a little bit more information. Some is specific to a target, financial and otherwise which we can diligence. Some of that is getting to know the seller. And in the absence of that I can't get you the information you need. I understand why you need it, but to get there and we have the same objective to get there, I need to be able to do xy. That's the way I would frame it. And frankly if at that point in time they continue to push back, then that to me is a red flag as a buyer because that advisor is serving exactly what I said as an obstacle to getting the deal done.

Yeah, I might be able to go back and say hey look, I'm really interested in doing the deal. But there is some even VP of engineering brought up. There's some big cultural differences between our engineering team. It's like I can't really move forward until we really have level of confidence in how that's going to play out. Is relationship management team and the leadership.

Team, which is fair. And frankly I would think that a seller where certain employees are going to get assimilated into the go forward business would share that same concern. I would hope that they would want that same objective to play out. Cool.

Let's talk about diligence. One of the pillars of buyer led M&A is synchronizing diligence and integration. This is the crux of making deals successful is when you have integration well thought out. Really making sure you have a clear executable Plan from day one. What are the biggest legal red flags that you look for in diligence just to really ensure issues don't become roadblocks after the deal closes?

The first is how is the target currently conducting its operations? How are they currently doing the things that they're doing? And two, where it takes a little bit of analysis. How should they be doing it? That's an examination from a purely diligent standpoint. Hey, they're a payment processor, they're subject to these regulations. They should be doing X, but they are doing Y. And then of course, you give your client the remedial actions that you think need to be taken post closing. That's where an advisor really adds value. The second piece, just from a deal execution standpoint, is looking for items whose resolution is outside of your client's control. Are there liabilities associated with the business or that have been incurred already and you don't know sort of what the quantum is that your client's going to be on the hook for? How do you address those? Are there consents you mentioned sort of the data room example, is there a contract that Target Data Room has with their number one customer that says in the event of a change of control, that customer gets a terminated contract immediately? That's outside of your control. How do you manage for that risk? Let's go back to a data room example. Let's say there's a key customer contract, that's a 10 year contract. So you're going to be on the hook just for example purposes for nine years post closing. What are the terms of the contract? What are you going to be bound by from an after the closing? So what are the shoes of the seller that you're stepping into?

Obligations. So how your business operates, what are all the obligations? What are the obligations your customers have to you? There's a change of control, they can just walk away and say goodbye. You sort of figure out how to mitigate that risk. You got some crazy long term vendor agreement you might not know. You might be some licensing, some code somewhere that paying an astronomical amount and.

Some of those you walk away from. Real estate is a classic example that everyone gives. You have a business that has a bunch of leases everywhere and you have a landlord with 2,500 square foot spot somewhere in the middle of nowhere who wants to play hardball. They want an uptick in rent because the consent's triggered under the lease, but it's not really material to the business in that situation. Maybe as a buyer you say we'll close over it. Landlord wants to terminate the lease. So what? Doesn't matter. But if that's the headquarter location for the target you're acquiring, that's a totally different consideration. Right. If you're counting on using that space for whatever target may do, then you're going to pay attention to it.

I remember having one of those conversations before.

I had one. It was remarkable. Sometimes when you read these leases, it says change of control, landlord consent required. One of the things the Go Forward acquirer needs to provide is proof of financial solvency that they have the resources representing a large PE fund. We're acquiring this business out west. And the landlord was like, I don't know what this PE firm is. And we were like, here's a website and see how much assets under management they have. Very well established fund. And they were like, yeah, that's not good enough for us. We need financials.

And wow.

It ended up being more so of a headache than it should have. And believe it or not, the CFO of the fund had to put together a letter of some kind to get this landlord comfortable. For strategic reasons, this location was important, but it was just one of those examples where it was so obvious we were good for the money, but seller kept pushing. And in this particular case, our client said, you know what, it's important enough to us. Let's just write something up and get it to them.

How does this work? We're going through this deal, we're going through diligence. You're obviously working on the purchase agreement like what you just described. I can't be in the weeds of all this stuff. I count on ICO and our functional leads. You have a CFO there, we have an HR lead, and then we have some of the department leads. How do I orchestrate all this to pick up on those things that you described so we don't miss something and some of their concerns get addressed as well.

It's an important question because frequently what happens is once a deal's in motion, the key is, are the right stakeholders getting to look at and opine on some of these things that you're agreeing to in a deal context? The one thing I always ask upfront is who are the right folks on the buy side who I need to be interfacing with? So I always proactively ask the question, ensure that they have an opportunity to look at the right, not just agreements, but even schedules. We've talked about disclosure schedules and otherwise ensure that people are getting eyes on it. Have an opportunity to look at it before the train has left the station. So I always focus on ensuring that the right people get eyes on it. And the second is, so I put the onus on myself. Number one, ask the question and socialize the information. And number two, being available, your job is not to be in the weeds, but my job is my team has to be really in the weeds and ensuring they're corresponding with all the right stakeholders.

Make sure they're all talking to you.

I always ask clients, who's advising you. Setting aside sort of internal stakeholders, who's your benefits advisor? Who's your insurance advisor? If you have one, who's your accounting advisor? I just get all their data points. Because if I have a question on insurance and how insurance policies work or benefits, it's just a lot easier for me to pick up the phone and call Joe, who's representing you on benefits, and say, hey, man, I'm seeing this from a diligence standpoint. This is how the agreement set up. Does that work? Does that make sense? It's a lot easier for me to have that conversation. Guess what? By the time I get it to you, it's synchronized in a way that reflects what your advisors as a whole think is sort of the right answer.

Can I just put you in a slack channel?

It's funny because we have teams chat. When I started practicing, no one texted or did. It was always very formal. And now I have, at least internally, I made it super informal. Text me, send me a Slack. Send me a teams chat. Call me at my cell. People are scared to call people. I believe in calling people. You have a question, pick up the phone and call someone. It's the easiest way to do it. Don't send me an email. Don't send me a treat. It's just call me.

Yeah, let's keep our paper trail light. We're not working on those deals yet, but do the whole deal over phone calls.

What are the biggest mistakes people make.

When it comes to M and A during diligence or even early? Teach me the things not to screw up.

It again, sounds super simple, but a lack of communication sounds so simple and so trite. But you'd be shocked how many deals happen where right people are not talking internally on the buy side. And that's when things tend to fall through the cracks. If you don't, as an advisor, have the right lens through which you're approaching diligence, you're probably missing what's important from your client's perspective. And here's an example. If a Target has 300 customers and you want to move really quickly on diligence. One question I always ask is, hey, look, you want to move quickly on diligence. Let's say it's an auction process. You want to make a bid in a week, we have access to data room. You really want to have a high level of certainty. And of course, hours are finite. What if we look at a list of the top 20 customers over the past four years? We identify the customers who are really important to you. What if we really dig down really hard on those customers? Does that work? Simple question. A lot of people just forget it. There's no benefit to you. If I look at all 300 contracts, there's a massive benefit to you if I drill down to the core of the earth on 20 that are important to you. That's just one example. So communication. The other thing on the legal side is getting caught up in inertia. These things are hard. When it's 2 or 3 in the morning, you're working in an agreement, maybe you're on calls all day till five. That's when you start drafting stuff. And your human nature is, I just need to get this off my plate. I need to fire off this email, I need to fire off this document, then I can go to bed. Fight that instinct, go a little bit slower. I prefer when people are slower, but they get it right as opposed to moving really fast and dropping stuff. I would rather tell the client, I'm really sorry. I know we talked about you're going to have this at 5pm I'm going to need an hour or two longer to make sure it's right. And I'll get it to you when it's right. Then to get it to you at 5pm and then have a bunch of comments where we just miss stuff, obvious misses. And my clients know me enough to know that when I ask for a little bit more time, it's because at the time that I get you something, it's the end product you're looking for.

So are you trying to save yourself some headaches over here when I've called you at midnight, John, where the hell is this contract?

It's funny and I've developed really good relationships with clients where that sort of relationship we have, they'll call me and they'll say, look, this is a hard ask, and we know it's a hard ask, but take the time you need to make sure it's right. And I'm usually pretty upfront about it. If I had a deal over the summer, last summer, July 4th weekend and nowhere accelerated to where we really wanted to close this thing for business reasons. But we were really far apart, including on fairly early stage diligence because it kind of was sputtering for a period of time. The client called me and said, hey, can we close it by X date? You never want to say no. The idea is to get to yes. But it was July 4th weekend and folks were out, so I had to sit down with them and say, why don't you give me an hour to kind of look at where we are, canvas to landscape and I'll come back to you with a timeline that I actually think we can hit. More importantly, we can hit it and do the job well. I came back, it was slightly longer than what they had initially asked for, but the sellers agreed to it because guess what, they themselves weren't going to be able to sort of match the speed that the buyer wanted. And it was done right and everyone was happy. Sometimes it's that and sometimes you know what the flip of it's true too. There's a real reason to get it done and we all need to suck it up and do it. And that happens too.

Get the right people involved in diligence and take your time. Don't miss important details. What's the craziest thing you see in M and A?

For me, what's always fun is when you're acquiring a founder owned business and it's been owned by someone or it's been in your family for a long amount of period of time, they have something off their side that's also running through the payroll of the business. And I've seen everything from One was a fried chicken restaurant associated with a business that did absolutely nothing with it. Another guy had a large Ferrari collection.

Another guy had a very Ferrari collection.

Ferrari collection. So you see a whole lot of things happening, particularly when you have unaudited businesses. We found our own unaudited businesses. One guy had a large art collection in his office and we were like, hey, are you going to remove it? Does it come with the business? These seem like strange questions, but questions that pop up all the time when you're doing these deals with again, someone who's run this business from the ground up for a very long time. The craziest thing is always when you don't think similar to the story I described, you don't think a deal is going to happen or it's not happening at the pace that you thought it was going to happen. And almost overnight it's get it done.

This is a fun and great conversation. I appreciate you taking the time to help me become a better M and A scientist.

Thank you. I appreciate the opportunity.

Fellow M and A scientists love to hear from you, especially if you've made this far. I really appreciate you listening in. I hope you learned some things. I love to get feedback on this. I know we've been diving deep on a lot of more legal topics lately. If you have some other ideas of topics I haven't covered yet, reach out to me on LinkedIn and feedback in general. However, I can get better at this. I'll take the criticism till next time. Here's to the deal.

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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 Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.