How Synergies Differ in 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 MA deals. In this episode, Paul Tonola and I explore diligence and transactions Paul is currently the CFO of Paynet, a data analytics company for the commercial credit industry. With over 29 years of experience in M and A corporate development and financial operations, Paul has successfully closed 50 plus transactions. We discuss how the diligence process can make or break a deal, what happens when cultures don't mesh, and what it's like to encounter fraud. Post deal. Here's more on his background.

My name is Paul Tanola. I have approximately 29 years experience. 75% of that has probably been corporate development MMA. The other 25% has been financial operations and management. I'm currently the CFO of Paynet, which is a data analytics company focusing on the commercial credit industry. Prior to that I was a global Head of M And A at TransUnion, previously to that, head of Corporate Development and M and A for the Tax and Accounting division of Wolters Kluwer and prior to that I was head of Business Development for the Trading, treasury and Risk Management division of Sungard. Throughout my experience I've been fortunate to work with some great organizations. I've probably looked at well over a thousand plus companies throughout my career. I have led and closed successfully over 50 transactions and M and A is just a great way to continue to augment your growth and is an important part of any type of strategy.

Paul, I wanted to start the conversation with your diverse background in a variety of different transactions. Starting off with contrasting the difference between a bolt on transaction versus a platform.

When you look at a bolt on, I mean that's something that's for lack of better words, it's in your wheelhouse, you understand that. So you're looking to add on to your existing platform or solution. So it's a space, it's an industry that you know well. So you know those add ons, you have a better chance in terms of having the domain expertise to go in and evaluate that. So I mean again you know the customer segment, a lot of those opportunities are going to be cross sell into your own. So it's very important from a technology standpoint to make sure that you understand the technology, you know the language behind it, the architecture that's going to fit in and then also how's the user interface or experience going to be for the end customer And I think as you're doing diligence, it's much easier to do diligence on a bolt on versus a transformational deal because it's a space again that you already know. So I mean, you probably went through the build versus buy scenario. And the reason that you're looking at it is, you know, to actually buy it, it's faster, more efficient. Typically it's always faster. Maybe it's not always efficient to actually get that, you know, into the marketplace and get that into your solution and out in the marketplace.

So it sounds like when you're doing a platform, you're overcoming some learning curves in general. I guess I'm curious, is there some type of approaches around shortening that?

Well, I mean, sometimes it could be a platform in your own space, but again it's a bolt on or you're buying it a whole new platform. Again, it comes down to that build versus buy. And every strategic will do that. I mean, they have to go into it eyes wide open and saying, look, I have development personnel, A, how full is my plate? B, do I have the expertise? And then C, how long is this going to take? Because what we've seen a number of times, if you're building an entire new platform, I mean you're talking on average three to five years and by the time you actually finish that and get out there, the market's changed. So when you look to actually acquire it, you're buying something that's already in the marketplace, hopefully it's proven and then, you know, if you could bring that in into your own organization, that gives you that speed to market. So I mean, you're still kind of looking at the same types of attributes from a due diligence perspective. But a bolt on you're adding onto your system versus a platform while you're looking for an entire suite, you know, it's a much larger kind of end to end solutions. You know, it's a much broader type of diligence because it's a broader application or solution.

Now is that bolt on, would you say it's going to be more of a tighter, more templated process?

Typically it is, because again, you know, you're looking for something that's going to fit into your platform, so you have a platform. So again, you're going to be checking out the features, the functionality to make sure that works from an end user perspective. But then also the technology side, can I make this fit into our platform so it's seamless at the end to the customer? Because what you don't want to do is to say, all right here I have another solution, but I have to have another sign on or I have to go through another portal, I have to go through another system to get access to it. Because from a customer standpoint, if it's a bolt on, you're looking to expand the solution center, their workflow so it should be seamless to them. So again, you want to make sure from a technology standpoint that the architecture is right on your platform and on that product that you're buying or the solution for the bolt on that you could actually kind of pull those together.

That's interesting. I guess just diving a little deeper in your view on those bolt ons in terms of how you value it. Are there specific areas and I'm sure it varies, but areas of synergies that you would contrast with other areas. When you're looking at a particular bolt.

On deal, you are, I think you have to say what are you buying? So if you're buying the expertise and it's just a product, well then you want to make sure you have the product domain experts and maybe the technology coming with it. But the other pieces of the organization, if it's a bolt on, you should be able to leverage and get some operational synergies there that is back office, maybe sales. So there's potential cost takeouts or operational synergies there. I think also if you have a bolt on, do they have maybe another unique set of customers that you don't have? So you want to continue to sell that out to your customer base, but then it might be a good opportunity for cross of existing products. It all depends upon what you have on the bolt on. Is it a full company? So that basically yes, it has the product, it has the infrastructure and it has the customer base. Or are you just buying something that says wow, maybe it's a best in breed solution, but they hit a ceiling and they weren't able to get out there because they didn't have the resources to move that, move the needles in the day. So they might have the best mousetrap, so to speak, but they weren't able to get out in the marketplace because maybe they didn't have the right funding or the capital behind them. So if it is, then you're saying I can take your product and create a market for it versus do I have a product that already has a market and a customer base, then I'm now feeding into, you know, my platform within the day. Then you have to go through and say where do I Have overlap in terms of, you know, your sga. Because with a bolt on, there's going to be certain overlap because again, it's going to be complementary what you have on your platform. So again, you know, you would think that the product domain specialist maybe some development, that's going to be an area that you don't have because that's why you're acquiring them. But there might be some other, you know, duplications in terms of personnel and that's where you can get some cost savings or synergies.

Do you have a specific approach going about adding up the synergies? When you're doing your valuation on a.

Target, there's always two types of synergies. There's the top line revenue synergies and then there's of course, you know, your operational synergies that you get from, you know, kind of your, your scale and critical mass. So you want to be very judicious in how you do this. I mean, first you always start kind of standalone and looking at the business of what they can do. And then you have to, you know, you have to justify, of course, you know, the valuation and the price for this. So you do look at some of the revenue upside down to kind of build in for your synergies. But you don't want to always put all those out there. You want to keep some in your back pocket because everything always takes longer. That's in terms of an acquisition or building a new product. And I think, you know, in the operational synergies, what you have to make certain is that you stage it properly. Because I think, you know, in the past sometimes companies have looked at it and say, oh, I can have all these cost takeouts that are going to happen day one. You can't do it day one. I mean, again, you're doing a lot of your, doing your due diligence. You're putting together a hundred day plan and within that 100 day plan you're going to find out some other nuances of the business. Because now you're operating that business. So you really have to make sure that you go in eyes wide open and have a broader view on how, you know, how do I basically layer in these synergies. And you do it right, you do it right from the business standpoint, but also from, you know, kind of a personnel or morale standpoint. Because the last thing you want to do is that whenever you have a merger or a combination, there's always that uncertainty, you know, on the other side of, you know, am I going to be out of a job? I mean, do they have positions that I'm going to be a duplicate? And what you want to do is make sure that you're very forthright in coming out and having a game plan that first day and say, look, this is the reason why we're doing the acquisition. This is the opportunity. You know, of course, most of the time it's going to be strategic. So I mean, what you do, what you bring to the table is complementary to what we have. But we are going to be looking at ways to maximize the business. And if you do that, you want to make sure that you kind of have a good plan, but when you start having those operational synergies or cost takeouts, that you do it in a way that's saying, look, this is how I'm going to do it. I'm not going to do it piecemeal. So you don't have people basically being unsure for a 12 month period where they might be checking out, they're not there all the way mentally, which is critical for the first 12 months to make sure that you have everyone kind of focused. And what you don't want to do is continue looking over the shoulder saying, am I the next one? So you have to be very thoughtful in terms of how you deliver the message and how you execute that. I know that wasn't exactly your question, but in terms of looking at operational synergies, we take that into account when you model that in. So there's one just from the financial perspective, how you layer that in, the timing of you layering that in, and then also that you're also working very closely with HR to make sure you're doing it the right way. Because again, you're not just acquiring product, you're acquiring people within the day. So you have to look at it in totality.

So you're thinking integration very early on.

You do. I mean, my experience has been, is that when you start mapping out a business case or thesis for the acquisition in parallel, you start mapping out what the integration plan is going to look from a high level, if you really think about it, acquisitions kind of make or break in your analysis phase and in your integration phase. And if you can't go through and improve your initial business case or thesis, that's when you walk away or materially change the, you know, the parameters of the transaction. And at the same time you have to say, all right, well, what happens if I actually win this asset? You know, how do I make this happen? How do I have a playbook that I'm ready to go. Day one.

Is there certain things you do to do specific diligence on the team to get that kind of idea in terms of how they would come and play post transaction, in terms of what the reaction would be, where the cultures fit?

That's a good question, a good point. I mean that's a large component of hr, but also it's with the various business leads that you have. I mean you're always, if you really think about it, it's one big interview process. From the first time you meet the company to the follow up visits, due diligence you want to see basically, especially as you're looking at key leadership and key personnel, how will they fit into your organization? And I mean sometimes what you might find out is that I've got a great company here or maybe a great product, but maybe, you know, we're going to have such a difference in the cultures, it's not going to happen. So either I got to walk away from the deal or I have to possibly change management. And I think that's an important piece that you just, you can't overlook because you can't force two cultures together. And as you're going through making that assessment, you'll see the best and worst of people during a transaction. I mean, as you go through it, everyone gets deal fatigue on both sides of the table. But as they always say, cream rises to the top and you want to see how do they kind of react in those certain conditions.

Do you have any examples of that not working out either during the deal or after?

Mainly on the smaller deals because if you have a larger transaction, I mean normally there are, you have the second lieutenant, so you have a very strong bench that you can say I can swap out. It's on the smaller deals, typically where it might be kind of founder led and there hasn't been a lot of secession planning and maybe you don't have that leadership that you can come up. But there were a couple transactions that we worked in and just one in particular, and I won't mention what organization or what company it was, but as we got into the ongoing negotiations, they just became, they became petty and they started kind of getting away from what the overall business was. And it was almost like every day there was just another kind of, I want to call it maybe a temper tantrum from the founder and the CEO. And we just looked at this and at the end of the day it's like, you know what, they're not going to fit into our culture. And you know he was such an important component though of the company to replace that we just thought was too much risk to kind of go in and say, well, look, maybe we can just do this for six months or three months. But we thought it actually might be detrimental to the transaction, so we just walked away. I mean, it was during due diligence and, you know, we weren't able to answer a lot of our questions at the same time. The major piece of it was just really on the HR and the cultural fit perspective.

What happens then?

They went out and they end up going about another 18 months. I think they did fold in with another company, but another company actually ended up doing a buy and fold on them. So they bought their customer base, sunsetted their product, and I think they kept only a few individuals. And we had actually contemplated that, but that just wasn't a route we wanted to go.

Interesting. So very important to make sure the culture fits.

It is. And if it doesn't, do you have kind of a workaround? But I mean, if it's so glaring, I mean, if you're at a 180, those are just kind of gaps you can never mend when you're looking at.

Getting some of those business professionals that's just networking with different consultants and advisors in that particular industry.

Are you saying internally or externally?

So I guess it would be both, but probably more so externally because assuming you would know, I guess that's part of it too, is bringing your internal team involved the right people to the transaction. And then when do you know when to bring external people in?

Well, I mean, past organizations I've worked with, what we've had is it went upon deal size. So I think anything over $5 million, you know, you had to bring in like someone from the big four to do the quality of earnings.

Okay.

And then, you know, you typically you would have one partner, but sometimes if it was a smaller transaction and you want to have the larger big four fees, then you might look to the next T like a BDO or Grant Thornton. But you know, again, it's kind of the repetition. I mean, if you find the right partner, you know, from a legal perspective and from a financial and tax perspective, well, they kind of get immersed in your process as well, you know who their A players are, and then they start having that repeatable sway.

Right. So you know who to go to for what.

Exactly. And then you also know that you're going to have a very similar approach every time, because what you don't want to do is to have a different approach. From any of those angles because they're just an extension of your team. So, like, why you wouldn't want to have a different internal due diligence approach. You wouldn't want to do it from an external standpoint as well. And if you bring in kind of a new partner, well, you have to kind of get them in. Now sometimes depending on the complexity of the deal, there might be some other types of consulting or research you need to do. So that might be people you haven't worked with, but that augments, you know, kind of your core base.

Have you ever done any advanced due diligence in particular case?

We did one particular time we were in an auction process. It was going to be a sizable transaction, you know, roughly about, you know, $500 million transaction. And while it was in our space, it wasn't directly in our space. So there were certain things that we assumed and we actually brought in a consulting firm. We hadn't won the deal yet. We hadn't put in, I think we had just put in a letter of intent. But we were probably one of four different companies that were still in the process. So we spent some considerable time in dollars to really understand the market segmentation, the market spend and also the forward spend to see whether or not this market would continue. As we kind of then looked at our perspective and how we build out the forecast and the market opportunity from a bottoms up approach. And even though we didn't win the transaction, at the end of the day, it was money well spent.

Right? That makes sense. Sometimes you got to spend to make the decision that's best.

Overall you do, you try to spend that money after the fact and you find out they're the wrong assumptions, it's too late, right? I mean, that's the cost of doing business, the cost of doing a deal. So I think when it becomes, again, this is more of a transformational deal. So it was dollars that were well spent. And again, if maybe if we had done the research earlier and we had that already built in, you're ready to go. But I think, you know, kind of forward looking, if you're looking at transformational deals, that's a lot of times you want to do market research ahead of the time. So if that transaction does become available in the marketplace, you've done your homework. So you know, you know the various attributes of the market and the opportunity as well as what you need to focus on from a diligence and an integration perspective, rather than trying to do market research at the time you're doing diligence which can be very difficult.

Paul, I want to go back when we're looking at one of these bolt on transactions or anything particular, when you're valuing it, you're looking at the synergies, you're coming up with your investment thesis on it. How do you take that into the negotiation table? Because you kind of had this thought in mind. But hey, is it what the market bears? Because your synergies may be substantial higher than what the target otherwise get.

And typically that's the misperception because anybody that's coming to you, they're smaller, they're saying, well, you have so many synergies, you'll have all these costs takeouts. So I'm going to factor that in. And what we've always said, it's got to be a measured approach. I mean, yes, there probably are some operational synergies, but as a strategic buyer, you can't give those up to the seller. I mean, you have that because you built the scale and critical mass. So it's just a very delicate balance when you're negotiating with them. And what you're trying to do though is that's why everything is based upon projections and the assumptions and the key drivers behind them. You have to understand, you really triangulate between what are the comparable publicly traded companies out there, the comparable transactions that you see, and of course your own dcf. So you have to come back and say, look, this is market and this is what we're willing to bear. And then maybe at the end of the day we're kind of negotiating on, you know, what we believe in terms of maybe market size and growth potential, what we can execute. Because then it comes down to execution. And sometimes with more entrepreneurial or kind of emerging growth companies, that's when you look to do kind of earn outs because you're not going to agree where they are today, where they're going to be in five years, because they're going to come back with a hockey stick. And they always do. Especially they're saying, you're larger, strategic, you've got this customer base, you have this distribution channel, you overlay our solutions that and you can, you know, you can grow this five times in two years. And it just never happens that way. Everything takes a little bit longer. I mean, the potential is there. And that's why you say, look, we're just not going to say you're going to go from say 10 million to 50 million in two years. We don't see that happening. But if you do, we'd Be willing to pay you. That's why you consider maybe an earn out.

Earn out. That's interesting. Do you have any general rules of strategies that you follow when negotiating? I tend to start off with half of what I probably would pay.

I've done different types of scenarios where we start trying to start very low or half of what you're doing. And I finally just got to the point where saying, look, guys, it's a dance. And just to be transparent, what we're giving to you is what we feel is kind of a market value. What I try to do is maybe stay within maybe about 25% of that. So you do have some room to negotiate. I found that if you go maybe 50% one way or the other, it can actually be insulting to the other side and they might not take you seriously. So I kind of try to keep it, let's say within 25%, but it depends upon the deal size. As you get larger, well, then you have to kind of shrink that number. You start getting above like $100 million or so. I mean, if you're talking 25% or $25 million, that's rather significant. So you have to kind of fine tune that. But I think, you know, you kind of fine tune that. That's why you always have a number of different scenarios going in with your, with your projections and your forecasts. So you always want to have your base case, but then you want to kind of look to say what's your upside case and your downside case. So I always like to try to hedge at least first a little bit between downside and what we think our base case is and go with those numbers. And then you have to find out and then what you find out as well. If you're proactive on that, I think that definitely works better in your favor. But if it's in an auction process, well, you have to be much tighter in terms of your valuation because you know it's not going to be based upon price, but it's also going to be based upon the markup of the purchase agreement at the end of the day. So there's a number of other factors that really impact that.

That's true. When you're looking at a deal going closer to the next stage. What are the top things you look for during diligence?

Well, I think you have to really look at the critical X factors at the end of the day. I mean, there's always kind of like, you see these due diligence lists and sometimes they could be like four 500 items, right? Maybe five, six pages. But through my experience, you really can distill by every major stream like 10 major questions or maybe kind of data gathering attributes that you're looking for. And I think as you start going through those critical 10, across finance, across operations, sales, customer service, technology, HR, et cetera, you can get a good feeling on are you hitting the major points, I mean, on the larger deals. We want to make sure that especially if you're talking about, you know, software technology, that first you go through and then you can confirm that they actually own the ip. Do they develop themselves? Do they have all the assignments and inventions? That's a key one. And the second one, you know, largely the transaction, you know, QOV or quality of earnings, that's very critical. I mean, what you want to do is say, look, you know, at the end of the day, are we buying? Are we getting what you purport that we're getting in terms of the financial statements? And if you see any type of materiality gaps on that side, well, then you have to go back and start kind of revisiting price right away. I mean, for example, maybe just because of their accounting treatment, you might be looking at a company that was $25 million in revenue, reporting 40% margins, but maybe they really capitalize the number of expenses they shouldn't have, and at the end of the day that the true cash flow and margins are closer to 10 or 15%, that has a material impact on valuation. So while in your initial preliminary diligence, you might have received the other financial statements, but you didn't have really kind of the backup to how they were, you know, the revenue models or the revenue recognition. And as you dive into that, you know, it's really making sure that you can kind of at least validate the current financial health. And then again, if it's technology or it's product, you know that that product is stable and it's what you think, you know, that you're really buying at the end of the day. I mean, every deal that I go into, you kind of have kind of top five lists of what you're looking at. And you really kind of just, you narrow that based upon why are you buying it? You know, strategic value, bolt on, you know, is it a tuck in, buy and fold? I mean, there's all different parts, but you know, you really have to go in and say, all right, there's always kind of like two or three critical areas and it depends upon the transaction that you want to make sure you validate early on. But again, most of the times, if it's software, it goes back to, does it work, is it scalable, do they own it? A lot of times we've had to walk away from deals because they've had outside contractors work on the application. And what happens is that, well, then you don't have 100% of ownership. The last thing you want to do is go through a transaction and then you have someone else that says, you know what, I have claims to this. And given I have claims, I have claims to the revenue and the profitability. We found that a number of times during diligence. It's not atypical. So what you can do is that it's conditions, precedent to close that you clean that up, that it comes back, that you can actually ascertain that you have 100%. But if you don't, and let's say it's a materiality factor, that's the point where you have to walk away. And we've done that a number of different times. But again, I've also been other transactions where we found out, you know, we didn't have it all the way locked down, but we went out and made sure that we got the right, you know, approvals and authorizations that we did at the end of the day. So no one else could have a.

Claim for reasons of a deal falling apart. We have poor culture. We talked about earlier, current IP ownership. What are some other reasons you've bailed.

Out of deals, suggesting we start retrading? So, I mean, you start with a deal, that's why you have kind of a term sheet or indication or letter of interest. And what you'll find sometimes is that as you're going through diligence, and that's why you have exclusivity periods, is that. And this hasn't happened many times, but it's happened a few times where basically the seller starts getting stars in their eyes. So, you know, you're having meaningful discussions with the team. You're talking about integration at the same time you're talking about diligence. And all of a sudden a light bulb goes on. It's like, wow, we're really important to your organization. We're worth a lot more. So I'm gonna go back and retrade. And you're typically in your trading up, right? So, I mean, sometimes you might say, okay, well, maybe you're trading because all of a sudden your sales pipeline might be a little bit stronger than you initially thought. All right, well, that's something we could pay for. But sometimes, you know, we've seen it where, you know, what, yeah, the number I had before that it should just be maybe 15 or 20% higher. And then you just kind of draw that line of sand and say, look, we came to agreement on the structure of the price. This is what we're going through. Assuming that we can go through and prove everything out satisfactory from a due diligence standpoint, you know, we're ready to do that. But you know, sometimes you find that they want to retrain and move back. And the other reasons sometimes you pull out is that, you know, you're agreed on everything else, but you get down to the purchase agreement and it's the reps and warranties that they might not be willing to make. And again, you're trying to find things that are market. But again, it goes a lot of times to, to come to knowledge and you know, to different types of, you know, caps on liability. That's where you can see things break down. And sometimes, you know, I'd say maybe 20% of the time you can't get past that. And either they're getting bad advice or sometimes they're getting advice from their attorneys, but they're just not comfortable with it because, you know, they want guarantees that if I'm going to give you a check for $100 million, I get to keep that hundred million dollars. But yet in the days, look, if you made a fraudulent claim, there's not a, you know, and it comes back and we buy this and it's $200 million, we can go after you for that. I mean, there's no caps on fraud.

Right.

And like I said, nine times out of 10, that's not an issue. But sometimes, again, for some of these smaller owners, I think that scares them and maybe not because it has been fraudulent, but they don't know what they haven't done in their business. Well, what if someone else did come up with this? I don't know about this, or there's someone else out there in the marketplace that has developed this, you know, they're saying, I have to my best ability. This is the knowledge I have. But if it comes back and it's fraudulent, that you've made a claim and at that point you have to know whether or not it's fraudulent or not. You know, those are just repercussions you can't walk away from. And most organizations very much kind of draw that line within and say, look, you know, we'll have caps on, on different types of claims that can come up. But if it's fraudulent. No, because we have a much greater value, actually a greater liability potential on our side by going through with this.

That's interesting. Are there insurance policies to cover that specifically or.

There are some insurance policies out there, they're becoming a little more prevalent, they're pricey. I have not purchased any of them, any of the organizations I've worked with, but I know that some of those organizations are taking a look at them. Kind of a diligence insurance policy.

Yeah, it's interesting. It's like a trending. So it seems like we have the culture of the IP ownership, committing to reps and warranties, things around valuations. I guess anything more unique that pops.

Up during diligence, you try to forget some of the horror stories. But I think most of the times if you have a very solid framework, the diligence process, it always seems to flow, it's always harder for the seller because again, these companies don't set themselves up to say, hey, we're going to sell our business one day. So they have great businesses, they're great strategic thinkers, great product people. But a lot of times they just don't have maybe the back office in proper working order for diligence or all the various reports or documentation that they need. So I think that's the biggest challenge for them, just trying to assemble that information. Now if they've worked with a banker, the banker hopefully spent some time with them to assemble that information. So when you're ready to do this, there's a data room. But half the time I think you're kind of working without a banker and without that information. So trying to think of any kind of negative aha's that come up. I mean the big ones are you go into it thinking that they own the application and they don't and they knew it, they knew it up front or that they're going through. I mean this was a transaction approximately a year ago where we're looking at a company and we're very close to closing. And then we found out in diligence and it was just, it was actually didn't even come from the CEO of the company we're looking to acquire. But they had lost a customer and they didn't tell us about it. And it was a customer that represented about 25% of their business. And we could have actually made the adjustment in the price. But you know, the fact that it was a fairly material, you know, circumstance, you know, or situation that happened during diligence and we weren't notified by them that just turned us off from the deal and we walked away from it.

Wow, that probably was a good lesson.

No company's perfect and that's why you have diligence and you find ways to mitigate that. And I think, you know, the ones that you know, you find out the deals you really like and they're keepers are the ones that really try to work with you and say, all right, let's find a way to mitigate this. You know, we want this transaction to happen. And nine times out of 10, you know that management team is coming along and they're going to be part of your management team because they just see the higher growth potential and the synergies on that side from an operational standpoint. And we find, you know, maybe you discover some of these negative AHAs that they didn't know about, we didn't expect. But when you work together collaboratively and you find a solution from behind it, then you're like, again, it just kind of bolsters why you're going after this company. It tells you about, you know, I think their integrity and integrity is not one to be undervalued.

Right. Paul, what kind of post closing surprises have you seen?

Earlier in my career we had one. It was a sizable transaction that we know we did our diligence both internally, we had external financial due diligence and after the transaction we found out that the company was actually had manipulated their financial system with financial. So I mean it came out, it was actually fraud and it was a great, great business. It was a solid business and it continues to be a very good business for specific organization. And we were just dumbfounded by it. You know, the person that was the founder and the CEO quickly unfortunately was unwound from the company and then we had to go back and find out, you know, how much did we kind of overpay and you started looking at claims. But I think that was the only time that we actually ever saw anything, you know, from a fraudulent perspective. I mean, most of the other ones you find out that, you know, maybe there were certain investments that weren't made into the business that you assumed and you checked in diligence and you had to maybe catch up. And again, I think that's more of a shame on you because again, as the acquirer you should be. That's one of the things you want to make sure. It's like, what am I buying? What should the P and L look for this business going forward to make it healthy? Have there been underinvestments and if so, what investments need to be? Which a lot of times that can drive down the price as well too. Like an earlier question that you had about how do you really kind of position that? Because sometimes you have to have that straight on there and say, look, I have to make some investments. That's why I'm not paying, you know, what you think is full value. Because I have to maybe put $5 million of capex into this business. But sometimes, you know, you find out until you really get into the business, maybe there were some things missing or maybe there's some things that were misinterpreted that now I have to make, catch up and make some investments. I mean, I had that situation in a transaction we did, you know, in Brazil. It was a great transaction, it's working out very well. But within the first hundred days, I think just because of some of the language barriers between English and Portuguese, even though that we had a consultant, a translator, is that there was a situation where I thought, you know, the distribution channel had X number of salespeople and it was considerably less than what we had. And this was going directly into our sales forecast. Now the good news is that we found a way to kind of accelerate that and then we looked to really expand the internal sales force and we ended up, you know, surpassing the first year's numbers. But for two or three months it was a little bit of a harried situation where basically we had a lot of catch up to do.

It's interesting, I was just reading recently how much firms typically spend on pmi. I was curious, how do you go about budgeting that?

We actually looked at it from different ways. A lot of times you might have dedicated PMI people. We did early, let's say, at Wolters Kluwer, and it worked very well in terms of kind of leading the process. But then what you've also found is that you have these folks really kind of. You're talking about post integration, correct? Right. Yeah. That's a tricky one because it's such an important role. What we ended up doing is that we would actually find someone within the business and find a business owner that we would bring along and get incorporated in terms of due diligence and then make that person the integration leader going forward versus just having like an integration manager that you can put on multiple deals. I mean, I see the value on both sides. If you're doing enough transactions, then I think you should have a dedicated PMI person and then you could basically split them depending on the scale and magnitude of the transaction. If you're not going to be a serial acquirer though, I think it's very important to say, and it's a great learning opportunity that you get someone from the business, a rising star that understands the business, but you put them in charge of marshaling that plan going forward. So you have a point person. I mean, you're always going to have the M and A or corp dev group that's still going to be involved, but you need someone from the business that's immersed in the business day to day that's going on so that they're making sure that all the key Items on the 100 Day Plan and all the right initiatives are being tracked, they're being fulfilled and they're being exercised.

How early would you bring that person in the deal?

You identify them. Right after about the time that you're getting approval from your executive committee or your board to do the loi. You start bringing them in right before due diligence or at due diligence. It's critical that they understand, you know, the business that you're acquiring and you know, all the various pieces of the business as they come together under diligence. I mean, that's why when we do diligence calls, we don't do separate calls. Just like with HR one day, finance the other, you do them all in one call because you can't do it in a siloed fashion. I mean, everything cuts across and there's so many interdependencies. So you bring them on so that they actually understand what's going on and they can get the key learnings of the transaction as well as the key risks so that they're very well aware of them going into it. Day one.

Gotcha. I want to back up when you mentioned the deal in Brazil. And I know there has to be some interesting nuances that go with doing international transactions. And I'm curious to hear a little bit about your experience with that.

That was a fascinating experience. I mean, we had spent almost two years of doing market research in Brazil. So we really wanted to understand the competitive landscape, the various market, the market sizing and who are the different players. And when we picked the space that we're in, we looked at the top three players in terms of size and capability. And as you go in, they're all viable candidates. And the one that we ultimately picked with was definitely a winner. But you know, there's so many different challenges doing a cross border deal. I mean, especially a cross border deal when you have different languages. I mean, you have English and you've got Portuguese and you know, there's the cultural piece, there's the language piece and then there's, you know, you have to understand all the various country specific rules around tax, which there's so many different tax laws, you know, within Brazil. And the employment components were key. So having really strong partners on the diligence side, both on the financial tax and legal were critical for us as well as just marrying up the commercial and business side.

Interesting. So just really making sure you have some good help to be able to navigate those challenges on a cross border deal.

You do. And you also want to make sure that you have folks that have done a number of these cross border deals. So if you have a foreign investor coming in, what are the pitfalls so that you can basically look out for those and then also what are great lessons learned going through the diligence process. And once you find out doing a cross border deal, typically the diligence does take longer. It gives you a better opportunity to know and appreciate, I think the market, the target, the employees, the entire ecosystem. And there are so many different things. But again, you're going into a market that we didn't have any type of business operations or business dealings. So there's a lot more complexity in terms of what you're learning because you're not just doing diligence on that company, you're doing diligence on a market. And like I said, we had spent considerable time and energy on doing primary and secondary market research before that, so we went in. But you're validating a lot of that market research while you're in the field.

It sounds like there's more risk factors in that regard based on your understanding of that market.

There are. I mean, I think anytime you look at doing a cross border deal or a transformational deal, when it's outside of what you do today, there's always considerably more risk because you know what you know and you don't know what you don't know. And I think you know, it's making sure that you know you have the right market intelligence and market research behind you to really back up of what you're doing. But then again, then you have to have even a much more robust integration plan on how you deal with that. I mean, with the transaction Brazil, we had some operations from another sister company that was in Brazil, but it was nothing within our division. So we didn't have any type of operational scale there that could help us. So I mean, it was really important to make sure we had someone, you know, on the ground working with the team. But then also at the same time we couldn't, because of the culture side, you couldn't just bring them into the organization day one. So you wanted to make sure that you start bringing some best practices. And again, looking at the reverse assimilation. So, you know, the cultures are very similar, but you want to make sure they're blended so they felt part of the larger organization. So we start putting in more of the standardized policies and procedures. But she did it kind of slowly. So I mean a, they were branded day one, you know, the organization. So that's key. You want to make sure they're part of that. But then also you want to make sure the things or the processes that work for them to be successful before that you didn't take those away, you want to build upon those, you know, with the foundation that you have. And again, just, you know, anytime you're doing a cross border deal, it just, it takes longer than anticipated.

That's a great perspective. What's the craziest shit you've seen?

The craziest stuff. Think about that. I mean, the one time, like I said, when we had fraud, you know, we actually had that person went in and inputted, you know, the false information into the ledger system. That just kind of blew us away because this company had been around for a while and it was a marquee name and it was just like the last thing you would ever expect.

What was the magnitude of that?

The transaction?

Oh, the fraud.

Oh, the fraud. It was about three or four million dollars worth of revenue.

Okay.

That wasn't there.

So that probably would have been a significant chunk of value, maybe 20, 30%.

Yeah, it was about 15% of the deal.

Okay.

It's still significant because those were lost revenues, especially with the profitability of margins that the company had.

That's a few nice beach houses and cars for the owner.

Yeah, yeah.

Looking at your past experience, what would you say? I guess giving advice to the young and up and coming corp dev professional would be some of the biggest lessons that you've learned.

Really understand the business. I mean, I think, you know, if you're going to be a very good corp dev or biz dev person, you want to make sure you partner with the business so that you understand their strategy and how going from an acquisition standpoint is going to augment that strategy. I mean, at the end of the day, it's not a numbers game. You want to make sure that you're buying the best assets or opportunities out there that are going to really complement and build your portfolio for the next 20 or 30 years. So I think the key is to really make sure you understand the market, the strategy, all the various players in there, and make sure you meet the various players so that you can approach this way and you know, the industry or that segment inside and out. You want to make sure that you're going after, you know, the top one or two companies in that segment, not going after number 20. Right. Because they're available. You want to make sure that, you know, you get in there, you do your diligence and you do the deal for the right reason. You're as good as your last transaction. And you know, basically success begets success. And I think, you know, if you're, if you have a proper framework and you follow that framework, at the end of the day, you're in good shape. I mean, you have to follow the same steps whether you're doing a million dollar deal or you're doing a billion dollar deal. I mean, there's more complexity in those steps, but it's the same step, it's the same framework. And I think if you ever think that you can skip any of those steps, that's when you see, you know, miscalculations happening or lack of a word, missteps.

So really learn the business as much as you can and develop a framework you can continuously improve on.

It is, and make sure you get yourself immersed with the business. I mean, there's one thing knowing it from the 50,000 foot level, but you have to be able to go in there and help the business kind of distinguish why is company A different and better than company B or C? And a lot of that you have to rely on the, the business domain experts, so that's why you have them. But you have to kind of cultivate your Corp dev or M and A expertise with their business expertise. So then you can carve out and say, all right, let's go out and make sure that we've got the best company out there. And if we do, let's build a business case that is defensible, that we understand the key drivers and the assumptions and then we can prove out those assumptions. You know, during diligence, if you can't prove those assumptions out, that's when you know you have to walk away.

Thanks for tuning in to M and A Science. I'm Kisan Patel. You just listened to Paul Tanola with Paynet. We hope this episode provided valuable insight into M and A regarding Bolt on transactions, synergies and post closing surprises. If you have interesting MA stories or suggestions to share, reach out to me. You can find my email in the show Notes. For more resources including links or tools mentioned during the show, visit. Dealroom.net podcast join us next week when we uncover more secrets to successful MA transactions. This podcast was brought to you by dealroom. Dealroom is a technology company that helps corporations on both the buy and sell side minimize risk 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 to deal room@dealroom.net all views or opinions expressed by any individual in any form of communication on this podcast, written, oral or otherwise, are personal and do not represent the companies, firms, institutions, organizations or otherwise that they are associated with.