How Strong Relationships Lead to Successful M&A

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. Scott Kayser runs corporate development at United American Security, a security agency. In this interview we touched on a range of topics from how they handle hurdles that come up post, closing surprises, deal disasters, integration, management, and the keys to running a successful process. Here's an intro on Scott's background from.

There I ended up taking a role with Sterling Partners, a private equity group here in Chicago with offices in Baltimore. I worked in their accelerator program which was a program intended to link up and coming business leaders with CEOs of Sterling Partners portfolio companies and that was a great experience. I was working with Kevin McAllister at the time who's since started his own private equity firm called Access holdings and the portfolio company I was working with was Livingston International. My role there was to help them build a corporate development team and function. They really had not built out a corporate development function and an M and A program. I helped them build that entire team as well as develop the strategy, the M and A and roll up strategy for that particular company. Livingston International was a customs broker and at the time they were solely focused on customs brokerage and trade between the US And Canada. And part of my strategy and thesis was to help them grow their business to focus on trade between the U.S. and Mexico. So we did some deals on the U.S. southern border, did other deals throughout the U.S. helped really create a North American company instead of a Canadian company through Mac and that was a wonderful experience. I left Sterling Partners and that accelerator program after about two and a half years. I was having a family here in Chicago looking for a role here in Chicago and I joined the corporate development team of Wolters Kluwer which is a Dutch based information services company. It's publicly traded on the European Stock Exchange. I took a role as the director in their corporate development group that was a much larger company doing deals for a very large business. We were still looking at small deals, but also identifying some new geographies and new products that we could integrate into the Wolters Kluwer portfolio through MA from Wolters Kluwer. I actually had a great opportunity. I was contacted by a headhunter for LaSalle Capital Private Equity Group here in Chicago for my current role, which is leading the corporate development function for one of LaSalle Capital, La Salle Capital's portfolio companies which is United American Security. It's a security guard business uniform, security guards. It's a very fragmented, segmented space. Over 8,000 different targets in the US alone, which makes my current role and the opportunities in front of me really exciting and really fun. So I've been doing that now for almost two years and it's been a great run. I'm enjoying the corporate development experience and opportunities there and doing some great deals in the security guard space.

Great. Tell me a little bit more about the deals you're doing today. What do they look like and how long are they typically taking?

That's a good question. The deals are pretty small. They range anywhere from we do even a million dollars of purchase price all the way up to $20 million of purchase price. So, you know, that's still, I think, going to classify as a very small deal. Thankfully, there's a lot of small companies out there that were able to identify and work with either the seller or a broker and get a deal done. The process we've streamlined over time. I've been working with the CEO who has since retired, but had been in the industry for 40 years, has really honed the process in the security guard space. So we know what we're looking for in due diligence contracting. And so the process can be pretty straightforward from start to finish. We could do a deal in two to three months. And if there's extraneous factors that slow us down, it could go slower than that. But ideally we'd be doing deals in around that three month time frame, start to finish.

Now, what would you say is different between doing those smaller transactions versus some of the larger ones? You worked at the previous role, you.

Had smaller transactions, you're working directly with the seller. Even if they have a broker or an advisor, a CPA and a lawyer, you're still interacting with that seller and building a relationship with that seller in a much more intimate setting than you would in a large deal that has investment bankers on both sides or brokers and legal teams. It's a much more casual environment where you're working with that seller to understand their business, understand their people, really try and understand what the value drivers are that helps them win in their specific geography or with specific customers and making sure that we're able to replicate that once we take over the operations of the business so that we're not losing customers or key employees under our ownership. And I think that really separates us as UAS in terms of what we're doing and the size of deals that we're doing in terms of what we need to make sure we do correctly and how that differentiates us from doing other larger deals in the space.

Interesting. So maybe just having fewer people involved in the transaction decreases the complexities.

Definitely. And it's nice in that regard. Even from a due diligence perspective, you're not trying to diligence 25 different product lines and the various growth drivers underneath each product, really looking at maybe just 25 customers. And they're all essentially getting the same product, making sure that you understand those customers and the service, they're getting any nuances that may exist. So diligence is easier. The connections to key management are easier. If it's an interview or two, that's probably all that we would need to make sure we really understand the management of the organization as well. So that even if there are various functional areas, sales, finance, operations, customer service, that sort of thing, you're still only dealing with a few people that you need to gather information from. And that clearly streamlines and simplifies the process.

So let's talk a little bit more about diligence. What are some of the important things or the things you've really learned from your experience in these multiple roles you had running acquisitions?

Yeah, another good question. And diligence is a real tricky area because you can get yourself into trouble, whether if your process isn't streamlined, if deal fatigue is real. So if you're trying to enact an enormous diligence process on a small seller who's trying to handle all the requests himself, or with one advisor, you can put a good deal in jeopardy if your diligence process isn't streamlined. Making sure that you've got the key questions that you need to get answered and sticking to that, I find even, you know, even in the instances where a large company is buying a small company, you have this notion where everyone at the large company on the buyer side has 100 questions that they want answered. And I think from corporate development standpoint, a good corporate development professional will be able to take that list of 100 questions from each functional area, and there may be 10 or 15 functional areas and narrow it down, make sure there aren't duplicates. Getting to the real core questions of what you need to know and validate in order to validate your pre loi valuation model and assumptions. And there are many things that are nice to know about a company you want to acquire, you may be acquiring. You can do some of that learning as part of the integration process. You can do due diligence forever. The business is changing over time. You're going to learn more information over time. Obviously, you need to find the key drivers, any major red flags, any issues, you need to make sure you uncover those. At the same time, if your purchase agreement is structured appropriately, you're going to have some protection there too. And I think a good corporate development professional balances all those factors to make sure that you're not overburdening a seller with extraneous questions or processes that you wouldn't necessarily need to put them through in order to validate the significant drivers of the business.

Okay, so making sure you don't inundate your potential acquisitions with too much diligence requests, is there anything else that may be helpful in terms of delivering a smooth diligence process?

Yeah, of course. You know, I think just making sure that you're capturing the back and forth that exists with a seller. You know, there's conversations that take place and you're gathering information there. And then there's data transfer. Whether it's in a data room, sometimes they may email you document. Outside of the data room, you may have third parties that you're engaging with to help you perform some diligence, whether it's QOE or legal or tax, and making sure all of that information gets consolidated into one place, one so that you can always reference it. If you have to go back and look at a piece of information or an answer to something, you can reference it yourself, but also you can then disseminate it to various team members so that they can all share in sort of that collaborated learning and make sure that they're not asking the seller questions that have already been answered. And that type of stuff ends up annoying a seller, typically, or seller's broker. So streamlining that process is useful as well.

How much of your diligence process do you end up outsourcing for us?

It depends on the size of the deal. On those small deals, a couple million in purchase price, we won't outsource anything. So it's really incumbent on me and my team, and when I say my team, it's the executives at my company to diligence the business. And we'll do a lien search, make sure we understand what liens have been filed, if any, against a target as we get larger in purchase price. 10 million plus, you know, they think the first stage would be to engage with financial advisors for a quality of earnings analysis. Just have another set of eyes on the financial information and hopefully a layer of drivers below that to make sure that if we're relying on certain Financial statements to base our valuation and purchase price on that. Those are real. And, you know, that has another set of eyes looking at that data to make sure it is what we all believe it to be.

How would you go about determining what parts of diligence are you going to outsource versus keep in house?

Depends on the expertise we have in house. Things like legal, you know, we don't have internal counsel, so we're of course, using external counsel for that type of work. Whether it's just contracting or specific diligence on a lien or a lawsuit or a claim that we want to just make sure we're protected against, we'll use specific experts in that case. Legal tax is another good one. I mean, we can always reach out to a tax advisor to make sure we have clarity on what our rights, obligations and risks are related to tax. And tax tends to be a functional area that people avoid like the plague because, you know, I don't want to have anything to do with tax laws or understanding. And when I was at Wolters Kluwer, we were doing information services and software acquisitions. And so in that case, we were using some third parties or even some software to identify uses of source code, open source code, and various code that was quite technical. Just making sure that if a software seller claims to have ownership over the code behind their software, that we were able to validate that. So that's where you end up getting out of functional area expertise that I would have or my team would have. And then you engage in a third party and hopefully they do a good job and don't charge you too much.

Have you ever walked away from a deal?

Oh, of course. Yeah. I think any deal professional who is claiming or has done enough deals is probably at a 25 to 35% hit rate of deals you look at and then possibly walk away from versus closed deals. Depends on how you define walk away from a deal. You may get a SIM and start the process, do a little diligence and realize it's not for you, and you're gonna walk, not make an offer. That happens quite regularly at a PE firm, of course. Hopefully their deal flows in the hundreds a year. And obviously you're walking away from almost all of those deals, are doing two or three. So, yeah, you definitely walk away from a lot of deals. The deals that are harder to walk away from are those that you're 90% of the way to the finish line or even further. And then something comes up where it gives you reason to pause or you try and renegotiate a purchase price. Technically, everything has a price. So if you're 90% of the way through diligence and something comes up, one of the key customers is about to leave or just left. Now you're going to either rethink your willingness to do that deal or you're going to talk about price with the seller. And hopefully you can still come to terms on something that's fair for both parties.

Let's talk more about the deals you walked away from during diligence, because I feel like that's really important that you're invested in. If you've hired third parties or you spend time yourself. What are other reasons that you've left transactions?

Thankfully, I haven't had a lot of instances of fraud or whether it's fraud or just a purposeful lack of information provided to me as a buyer and then having found out something to where then I get disappointed or upset with a seller and walk away for those types of reasons. Deals can fall through for all sorts of reasons. One story, when I was at Wolters Kluwer, we spent four months working on a very nice transaction. For us, it was a complimentary, synergistic transaction in South America. It would have been a great tuck in to a deal we had already done. We did all our diligence, we did almost all the contracting. We had really spent time, energy, money, third party resources in the process and the deal. And, and at the very end of the process, we had the seller walk away. So a little different from your initial question, but we had a seller walk away for odd reasons. At least the reason we were told was that he had changed his mind. He was interested in running for public office in this particular country. And he got wind that selling his business to multinational Dutch and US organization would have had negative implications on his political career. And he walked away from the transaction literally at the signing table. I mean, it was at the very end of the process. So, you know, that was an instance of a seller walking away right at the end. And obviously we had invested plenty in the deal. And I've had deals fall through at various stages. You know, it's tougher once you have an LOI signed and you go through diligence and you start finding things that just don't match up to what either was purported pre diligence and pre loi. You know, in those instances I've had deals just sort of fizzle. You don't ever say to a seller, I'm not buying your company anymore. You ask for Some more information, you point things out, you let your LOI expire so that it, you know, if the seller wanted so your exclusivity expires. If the seller wanted to go find another buyer, they were free to do so. And you just talk less and less and all of a sudden there's just no real current action. And the deals can kind of fizzle in that regard. And you know, those are proprietary style deals. On broker deals, if there was a seller that was really motivated and had a broker, if a deal fell through, that broker is obviously incented to go find another buyer. So that happens too. You know, it's various reasons. Whether it's financial, you realize the numbers just weren't there. You know, hopefully it wasn't that you made a bad assumption on your side from a synergy standpoint that you realize you're not going to be able to take advantage of. And so I would put that type of instance more on the corporate development team. If you know they're sharpening their pencil too much in order to get under LOI and then you get all your functional areas involved in diligence, you're not going to hide a bad assumption in that instance because you got a lot of cooks in the kitchen, you got a lot of people looking at the deal and validating those assumptions you made, whether it was new product growth or cost reduction. And, and if you have to walk away from that because you weren't able to justify assumptions you made pre loi, that's a tough thing for a corporate development professional to have to handle.

Right? So it could be a lot of different things and sometimes it's poor judgment. Now in that case where the CEO changes his mind about selling the company, is there a penalty or hit that he takes for doing that?

We did not have any breakup fees in the deal, so no. And obviously deals can be structured with breakup fees for either side. I think typically if a buyer walks away then a seller is rewarded with some type of breakup fee. But my deals right now are way too small to be structuring that type of stuff. So not in this particular instance, but it can occur.

Let's talk about after the deal. What kind of post closing surprises have you come in face with?

Yeah, that's always a good question and thankfully nothing too massive. There are always instances and thankfully this was not me, but some other deal professionals and executives where your diligence wasn't thorough enough. And there are some real potholes that you find after diligence, after closing in integration that materially impact the business negatively and that's bad news. You have customers that were already planning to leave and you didn't talk to them or you didn't have a long enough hold back or something like that. And then those customers do leave pretty soon after a transaction and you're stuck holding the bag on something like that. So that thankfully didn't happen on my watch. But I know that kind of thing can happen. You know, your diligence is only as good as the people that you have on your team and the various support you have doing the diligence. So things can always get missed. So hopefully there aren't too many of those, if any. I've had some nice surprises on the positive side where just building the right team, bringing a seller on board within our organization has motivated them and provided them with the resources necessary to really knock it out of the park. By that I mean going to win some new customers, growing the business a lot faster than expected. And those are great deal stories. That's what we're all looking for. And you have certain growth assumptions and then when you blow those out of the water, that's a nice surprise to the upside. And I think a lot of that in my experience is based on human nature, human interaction and motivation. People's ability and willingness to really go out there and go above and beyond once they sell their company. And building a relationship during the deal process I think is definitely a key factor in being able to to get something like that done.

Have you ever done a bad deal and had some lessons you've learned from it?

Any deal professional that says no either hasn't done enough deals or is lying. But yeah, I've of course done at least one bad deal, possibly two. The first one was just a function of something we were talking about earlier where we as a huge organization, this was thankfully not in my current role in a huge organization. We were buying a tiny company. It was just a seller and his broker. There were eight people in the organization and we ran them through a diligence and contracting process that probably Yahoo will be going through. It was an insane process. We spent tons of money. We had 15 professionals from various functional areas on the buyer side, all guns a blazing at the seller who was totally overwhelmed. Of course you're going to find things that are less than ideal with that type of cavalry coming in to analyze a business all the way back five plus years of financials and operations and legal. And it was a small seller who was just managing the process himself with one very probably underpaid advisor or low paid advisor. And we dragged out the process because we kept finding little things that in the big picture weren't a big deal. But when you get too focused on one little thing, when their corporate organizational documents weren't filed exactly properly or they didn't maintain their S corp status for 10 years, the tax benefit from the step up value was almost negligible in the deal anyway. It was a tiny company, you know, so in the grand scheme of things it didn't really matter. And yet all those little things like that added up to where you're slowing the deal down. You're creating a lot of deal fatigue. The seller who was really paramount in the business still went through with the deal with us, but the minute the deal's done disappeared basically. And soon thereafter the key staff at the business disappeared as well, took different jobs despite retention bonuses that we had structured for them and the company effectively fell apart. Right. So it wasn't a material impact on the buyer's side, but it was material from the fact that we invested in it. And then the deal didn't go very well after closing. So in that instance, my lesson learned was to really make sure you're balancing the size of the deal from a buyer's perspective with the size of the seller and impact that that deal could have on the buyer. So making sure that you just recognize when a simplified deal process is going to be sufficient. Do an asset purchase agreement so you have some protection on the purchase agreement side from historical liabilities. And you just need to make sure you're not going to overwhelm a small seller with a buyer's process.

That's interesting. So really adjust the process based on the attributes of the company that you're looking to acquire.

Definitely.

Very cool. What's your other story about?

Oh, you know, hindsight's always 20 20. We did a deal in the coal industry space not that long ago and we all knew what shape the coal industry was in. It was a very good price and the price was reflective of the struggles of the coal industry. But you're struggling to then grow post closing in that deal and it's still a good price. The customers have all been retained, but there's been some reduction in service levels. Not overly material. But you look back at that and say, well, I had to write a one page brief on why this is still a good deal even though it's in the coal industry. And now I look back at that and say, anytime you have to write a brief that is justifying a deal in Sort of a negative headwind. Maybe you should rethink that deal in the first place. Just because when you're fighting those negative headwinds, you know, there's everything's highlighted, you know, things that go wrong get pointed back to the deal as opposed to just natural macroeconomic factors. So it is what it is. But you know, obviously finding those industries or geographies that have some tailwind so that once you do close, you really have positive momentum behind you, ends up, I think, creating better deals and just a better environment for integration and evaluation after closing.

Okay, interesting. So keeping macroeconomic things going on in.

Mind as well, that's easier said than done. Obviously we all want to do deals with industries that are growing at 40%, but you're not always going to find that. So I think just looking at some of the big picture items on certain deals, and it depends on your requirements for deal velocity, for returns, obviously, but making sure that you appropriately evaluate the deal given some of those factors, the industry, the geography, that sort of thing, and returns required, if you're looking for more risk, then yeah, you can go after some of those deals.

What are some things you've learned about running an integration process?

It's hard. That's a lot to do. Hire a good project manager. Thankfully, in my roles as a corporate development professional, I have more likely had a steering committee role for integration as opposed to a project management role or a full time integration function. So again, I've had thankfully good project managers who have a title or a role that's specifically invested in the integration process so that I can sort of step back, make sure that some of the big ticket drivers and assumptions are being followed through on and carried out, whether it's cost reductions or emphasis on new products and sales and something like that. But integration is hard and I always say the transaction is about 10% of the process of a successful deal and integration is 90%. Because yeah, you can do a great deal, you can get a great price, or you can do it really efficiently and everybody's happy at closing. But now the real work starts of merging two companies together. No matter how similar corporate development professionals claim the two companies are, there's always going to be either cultural differences, system differences, process differences that are requiring intelligent people to understand which process is being adopted, or is it a merger of the two and, and then understanding how to combine them in a manner that's not overly burdensome on either organization. Right. If it takes a lot of money to create a link between data transfers or software or information or even financial information to get an acquired company's information into the buyer's systems. Unless you specifically accounted for that in your valuation model, which is probably really rare. You know, those types of costs add up and could very much detract from the success of a deal. So getting folks who are comfortable from a project management standpoint, who are smart and just understand the bigger picture of running a successful business and merging two businesses together is important. Obviously in a large transaction you're going to have many functional areas that all are going to have experts on both sides, the buyer and the seller side that are going to need to get integrated and work together, merging processes, things like that. So I mean, I know there's third party consultants that do a lot of work on post merger integration and I think if you can afford that in your deal, it's a really wise thing to do.

What are your thoughts about running an integration process? Doing as much as you can as soon as you close it versus spreading it out over a period of time or doing the later integration?

Just specifically in terms of the role that I currently have in our industry, we're buying assets and there are some legal requirements, state requirements on some of these deals that would require us to do certain integration items immediately or within a week or two. Things like change the patch on a uniform, get licenses transferred over at the state level, at the ownership level. So there are some required things and deals that are going to be immediate and that need a lot of attention right off the bat, right after a closing. And then there are some things that can take, I think again, it goes back to that integration lead and the integration project management to be able to prioritize which items you're going to need to do right away, which items are material, and that person hopefully is able to evaluate which items, if left too long, could create a problem and tackle those right away. Versus as you said, things you can push back maybe two, three, six months after the deal, a year after the deal. You know, everything is a prioritization. You know, you only have finite resources, even in the large companies. So making sure you're utilizing your resources appropriately, you're not trying to burn folks out and evaluating certain Items from your 100 day plan, from your 100 day integration plan that need to be prioritized and doing those appropriately. I guess that's a good point. I mean, having that good 100 day plan that's specific enough to allow for evaluation of criticality is a good thing to do. And making sure you have that planned and disseminating with the team, getting input from various sources will hopefully help you identify which of those integration items need to be done immediately, whether it's legal requirement or just a good thing to do, and things that you can then delay over a period of time and still maintain a successful acquisition.

Have you experienced an integration process that went terribly wrong?

Well, other than the one that I mentioned, obviously we didn't integrate the two key managers very well because they left. Thankfully, I haven't had that many experiences of bad integrations in my current role. I would say we're actually very good at integration. Now, the security industry is simple enough that it allows a small team to get our heads around the integration of the business. But we have a tried and true process for hiring the guards within two weeks, within their first paycheck. So all of the employees effectively become our employees on our paperwork, on our payroll system within two weeks. Pretty fast. You know, obviously there's some vendor payments that can take time, going out a few months, even getting the vendor set up. And you know, if you have a vendor that is still charging a seller and the seller is paying that bill, that seller is going to get ahold of you pretty fast to let you know, hey, I just paid your rent for this month, or I just, you know, paid your cable bill, your Internet bill, you owe me, however much it is, and they're going to show up with that bill very fast. But in the security guard space, we don't have too much of a proliferation of vendors, so we're able to transfer those vendor relationships and processes over pretty fast. We have a streamlined billing, payroll and scheduling software system that we migrate legacy customers and employees over to immediately the employees as part of their hiring process. Customers, we typically get a flat file out of their system, whether it's QuickBooks or there's some other software packages in the industry, all will be able to create flat files of information that we can then import into our instance of our software program, effectively a mini erp. And that goes pretty seamlessly as well. There may be data that we need to clean up or fields that are missing that we want to get answered through contacting a customer, contacting an employee, but usually it's a pretty streamlined process. So thankfully, going back to your question, the integration process for my current role at UAS is a pretty streamlined integration process, and we haven't had any disasters to speak of. And knock on wood, we won't have any.

That's good to hear. Let's step out for a little bit and say you were to Go back and see yourself 10 years ago. What would be some of the key advice you'd give to yourself?

That's a good question for M and A. I think just again, making sure you build your relationship with the seller. I found in my career that's what's helped me be successful in the deals I've done. It's a personal process. From my perspective as a buyer, it's not exactly my money, but I treat it as if it is. And from that standpoint, I'm invested. It's my career. The seller obviously has a lot invested in the cases of the deals I'm doing. It's their baby. They're a founder, owner, operator. And so it really matters to those sellers who's buying their company, how you're buying their company and how you'll treat it and their employees or customers going forward. Building a relationship with those sellers through dinners and conversation and face to face meetings or phone conversations is vitally important. And I couldn't emphasize that enough to a deal professional. Just making sure that you're building that relationship with the other side of the table. Hopefully it's the seller directly, maybe advisors or brokers, but that's definitely a key piece of advice I would give to myself 10 years ago or any deal professional. Just emphasizing the softer components of a deal. And it's not all numbers and Lois and purchase agreements, but that it's interpersonal relationship as well that helps not only get a deal to the finish line, but make it successful after that.

Do you have any tips for doing that in terms of building the relationship with sellers?

Alcohol, take them out for drinks. Okay, right. Well, obviously that helps whether it's just loosening people up. And I don't mean going crazy, but having a nice dinner always helps. I think just taking the relationship out of just the work environment or a conference room or something like that. So you're at dinner, naturally conversation comes up about personal life or hobbies, families, vacations, that sort of thing, which helps create a connection that transcends just the deal and the numbers and the integration planning and that sort of thing. All that relationship building, the soft side, the softer skills I think make a difference. So dinners, whether maybe it's an event, you know, you go golfing, or you, you can do just about anything. I mean, you go charter a fishing boat or you spend time with that seller, maybe outside of the standard deal process is a wise thing to do to help build relationships. And then on the specific side of things, you know, I was just having this conversation with My CEO yesterday, starting from a position of fairness I think goes a long way with sellers and advisors and brokers as well. I've seen some purchase agreements and or other components of a deal process that are very one sided, whether they're very protective in their legal language or maybe you offer a great price in the purchase of the company. But all the terms are really nasty. You've got long holdbacks and things that an unsophisticated seller might not catch immediately, but then they're going to catch as the deal progresses. Whether it's terms in a contract or a document or terms of the deal. Once they get other advisors involved, starting from that position of fairness helps you build that relationship with the seller sooner than later. They realize, look, this needs to be a good deal for both of us and if it's not, you know, it's either going to fall apart before we close or there's going to be problems after we close. You know, from a seller's perspective, I never want a seller to leave a deal, a transaction and feel like they got ripped off because sellers are some of my best referrals to new sellers. So when I have a seller that feels like they got a good deal or a fair deal and so do I, then that person immediately becomes a reference for me for a new seller and I put them in touch. They can converse sort of seller to seller. I was in this process with Scott and he treated me fairly and I think having those types of references and relationships go a long way towards doing good deals and making sure you're acting appropriately. As a corporate development professional.

I'm Kisan. You just listened to Scott Kaiser with United American Security. Scott is looking for security agencies that are primarily unarmed with a focus on commercial work. If you are interested in getting in contact with Scott, feel free to reach out to me or check our show notes for ways to get in touch. This podcast was brought to you by DealGroom. Deal Room is a technology company that helps corporations on both the buy and sell side minimize risks and maximize value On MA transactions. We take the mess of data rooms, spreadsheets and emails and replace it with one easy to use process management tool. This results in big improvements in collaboration, security and risk tracking. Learn why deal teams are switching a deal room@dealroom.net.