How to Approach Deal Targets

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M and A practitioners. Again, that's mascience.com I'm your host, Kisam Patel, CEO and founder of M&A Science. Joining me today is Drew Whitcomb, Senior Director, Strategy, Corporate Development, M and A at Builders First Source.

Builders First Source is a Fortune 500 company that is a manufacturer and supplier.

Of building materials traded on NYSE under bldr.

Today we're going to talk about how to approach deal targets. Drew, how's it going?

All right. How are you today?

Hey, I'm doing great. Can we kick things off with a little bit about your background?

I have been in the transaction space in various guises for a little over 15 years. A number of different capacities, a number of different industries I've been in started in investment banking, did a few years in private equity for the family office and then into public corporations, then in oil and gas as well as building products, both the manufacturing and building products and the distribution of those products. So the last 10 years, roughly, I've been in the public corporate development roles.

And you've done deals?

Quite a few.

You weren't just stuck on a roll up doing the same light transactions. I take it you've had exposure to a variety, especially from the banking experience.

Yes, it's been in the last 10 years we've done deals in Mexico, the US, Europe, Russia. Before that I had done quite A bit in oil and gas, which is a very different world just because a very tangible asset set with producing oil and gas wells, it has a lingo all its own. It's in my few years during private equity, it was a generalist firm with a range of industries. Insurance, some services, some heavy manufacturing. So I have seen a range of things, but they've always generally been tangible businesses. Oil and gas production, distributors, manufacturers, not as much business services.

Now it comes out all this international exposure, the diversity across industries to follow that across the deals you've done. What percentage has been a proprietary source deal versus through an auction process?

If I look at the last 10 years, probably about a third proprietary and two thirds source through intermediaries. Not all of those have been auctions in the building product distributor space. There are some specialist brokers, but one third probably has been direct dialogue with sellers and with intermediaries involved. And the other two third.

How many deals we talking about?

25 to 30 in the last 10 years.

In terms of what percentage of the great deals versus not so good that were sourced proprietary versus through the auction process?

Always the size versus return trade off. The small proprietary deals, I would say almost always have a higher percentage return, but from the perspective of larger business, it's just hard to move the needle doing only those smaller deals. While I have a great percentage return, it's hard to deploy enough meaningful capital.

In only those and then a larger deal. Are you better off proprietary or you're.

Always better off proprietary, but the larger deal, the less likely it is to be proprietary.

All right, yep, fair enough. How do you approach deal targets?

Well, in our space currently with building products, we have the advantage of most sellers being quite approachable. A lot of these businesses are very customer friendly and pretty easy just to call a central office or message someone on LinkedIn and get a response. There's not as much screening mechanisms between us as outreach and the owners of the businesses. So it's generally a fairly simple exercise of sending an email or making a phone call.

Is that because of the industry or because of your brand?

It could be both. When I tell people who I'm with, they know exactly who we are. But sometimes, depending on the method of outreach, I may not actually tell people and if I'm leaving a voicemail, I won't actually tell them what company I'm with because there's always sensitivity around outing people that there's a transaction going on. So before I get my full spiel, I usually like to know it's a private conversation that I'm leaving a message on someone's cell phone and then I'm.

Talking to them directly so they take the impersonations. Friendly industry or hey, the Goldman Sachs or industry is ringing. Let's I'll take that call or take that meeting. What's your approach? Are you typically emailing people you said you called Is that first touch point of call LinkedIn, has it evolved the order priorities generally?

I'll talk to our managers in the region and see if they know of anyone in their organization who has a relationship. Our industry can be fairly incestuous. So much of the time as a sales rep or market sales manager belongs to the same country club as someone or has some other point of contact. So I'll check that first. If I get nothing there, then I'll usually just call the main office and ask the person. If I can't get through that way and it's screened, then I may if I can find an email or I may send someone a message on LinkedIn. I've had pretty good luck getting through to people that way, but it's certainly easiest if we have an internal contact within the company, then I let that person make the introduction to our regional management and to me. To kick off the dialogue, I should.

Step back a bit and get a sense of how do you decide which targets to approach in your pipeline.

So in our case, today our business is very market centric. The elements of any one market, say Atlanta, can be quite different, distinct from others, say Minneapolis. So we're generally looking at our business at a market or regional level and we want to have meaningful scale in each local market. We want to be top two in a market. Ideally, we want to have a rounded portfolio of products and services, which in our case means distribution of commodity, building products, lumber, feet, goods as well as millwork, the windows, doors and trim, as well as components, prefabricated trusses and panels, other elements used in construction. But generally when we're looking at the target universe, we're focusing on markets where we don't have that one or two position and trying to determine which businesses, if any, are available to achieve that. If we don't have a full, what we consider a full and representative product and service offering, then we'll look for businesses that have the elements we're missing to try and round out our business. Sometimes we're buying businesses that simply add new markets to us. We've made large acquisitions in the past year in Phoenix and New England for local leaders who help us establish a presence with the leading position just segmenting.

Your pipeline based on strategies within that. Is there a method or some kind of approach on consideration to know what to prioritize?

Management capability is probably the first one. One of our scarcest resources, the company is just management time and attention. So understanding who is managing the businesses that may transact in the market, whether it's ownership that's managing them, whether it's relatives of ownership, often sons, daughters, nephews, nieces, or whether it's third party non owners. The degree of professionalism in the management ranks because from our perspective what is ideal is to have a business that has a professional non family manager where the family can step away and the business doesn't break after we bought it. That's not always the case. Not uncommon, but it's not always the case.

You do your research to find that out. What does that look like? Are you using specific data tools to be able to figure that information out or is it all poking around online?

In our business it's mostly. There are a few industry publications that often have profiles about companies. So for the larger targets you'll have a lot of that information already. You'll already know it. It will be public knowledge. For the smaller ones, it's generally not available for any third party. It's more about what our people have heard and know from the market and the market interactions as well as just talking to them. A lot of times we don't know that much about a business for reach out other than the general hunch or reputation. And so we ask people straight up as you're going through dialogue and they're providing information, it generally becomes clear who knows what and who's doing what based on who can answer and address the various questions we have.

Now you prioritize the professional management. I'm just curious, how do you find out about if nepotism runs rampant the company? Are you like how many cousins and uncles work here?

We will ask that question explicitly what family members are in the business and can't find them all from last names. But we will look at the roster, see if we recognize any of the last names.

We'll ask is that a deal killer? I'm thinking of one deal I worked on and I remember that was the case. I think it was a total of 36 family members like including extended that worked in the business.

If I saw 36, yes, that would be a deal killer. I've never seen one that bad in a case would be where there had been a lot. There has generally been a big age gap between sellers Perhaps the seller was the grandfather and the grandkids were in their twenties and just working entry level jobs and so it was less of an issue. They weren't trying to hand the business management of business to those people. But it has sometimes been problematic. The biggest problem is usually though in our case when the person who's selling the business runs the business because then you just are going to have an inevitable conflict after a sale where they've just monetized their business but we're completely dependent on them to run it. That's not a tenable forward arrangement.

Is that the island rule hold true where if they have enough money on the exit to go buy an island, there you're gone, you're not going to count on them for anything?

Well, in our case we need a smaller threshold than an island.

Fair enough. I guess you got to adjust by markets.

But that's honestly one of the first things I do is I sit there, I look at ownership, I look at likely sale proceeds, figure out who's getting what, and based on what we do or don't know about people's lifestyle, does that seem like an amount of money where they're going to be unmotivated going forward?

Okay, you think through that, put in the considerations early about that general structure and then decide if you're really going to move forward. I want to go back from that first touch point because we're calling people, we're checking referrals. If we know somebody that's got a relationship that we can make the introduction, we'll call, which is pretty cool that you reach out first touchpoint call, you don't get through there, then what do you do?

I'll try all the methods I described earlier. Right. Calls, emails, LinkedIn outreach, none of that works. If I give it a week or two and I haven't heard back time again, right. I won't let it only do one time, but it appears that nothing's working. Then we'll talk to local management from our business and even if there is no preexisting relationship, we'll try a different route. Having people locally may be better known in the market. Reaching out. I've found that generally sellers fall into one of two categories in our business. I today would rather speak to someone from corporate because it avoids pitter chatter in their local market and the river mill. Or they're just not comfortable with the mothership and they would rather speak to someone that they know or are at least familiar with from their local market who has local reputation of being a Good guy or a decent operator, they.

Can'T help walking the door.

Right.

Roughly about 10 deals around there that you closed that were source proprietary. And did you have to kiss a lot of frogs where you find these deals? What does that ratio look like? Especially having a lot of these early conversations. Just want to get a sense of how much effort you actually put and then do you ever have a percentage of just people you can't get a hold of period?

There are. There is a percentage of people you can't get a hold of. It has declined over time, I think probably for two reasons. One, because the business cycle and building products has matured and it become a been a lot of activity in the last year or two with everything going well. Let's go with housing boom and people wanting to sell. And I think the other is the scale of my employer has grown. When I started I was with company called BMC Stock holdings, also public and that's been merged into Builder First Source. So the number of potential acquirers has shrunk as well and people have probably fewer options and more of a need to entertain a dialogue in terms of who their acquirer could be.

So it's gone easier. Is there any like ratios that you can reference?

I have actually gone back and measured it. I have evaluated about 300 opportunities in the last. That doesn't even count teasers that don't get into serious evaluation. I actually have 300 folders full of documents from the last four and a half years and we've probably closed high teens number of deals during that time. A lot of those are inbound brokered transactions. A meaningful number of them are attempts at direct outreach. So it's just, it's hard to say. But the ratio is as you can imagine, fairly small. Right. There are a lot of frogs. There are a lot of people you never get in touch with. There are a lot of people where you do talk to them and you don't really like what you hear. And then there are a lot of people where you have a full conversation, you make an offer and it's not mutually agreeable and you move on.

The takeaway I was trying to get to is you got to hustle hard for this. It's not easy. You go on a couple of dates and boom, deals done. You really got to work hard to get a deal to go all the.

Way through these unbroken deals. There's no advisor the seller. They're usually a six or more month timeframe.

Do you feel it's better? I always go back and forth on this, it depends on the market. Sometimes there's good markets where an auction's a good way to go, but otherwise you're operating on these artificially compressed timelines. I feel like you don't get the quality of the process to make the a nice transaction. And I don't know if you sense that between like you even mentioned a proprietary deal would be longer timeframe versus doing an auction.

I see the truth in that. I haven't experienced it as being a problem.

Probably because you don't integrate the companies.

Oh, I'm not even thinking about integration when I think about. I'm just thinking about getting from the first conversation closing the poor person that's.

Got to integrate everything. It's how much Runway do they get to actually prepare and figure things out for us?

There's sort of two categories there too. There's asset deals and there's stock deals. If it's stock deal, you don't have to finish everything on by day one. But if it's an asset deal, you have to do some preparation, get them on payrolls, those other things. So that helps determine that as well.

That's a really good point on that. When we have this first conversation, reaching out, looking at get the interest expressed in their business, what is that conversation? How does it go down? Do you have an outline? Actually start with what do you do to prepare for it?

See if there are any articles in the industry, rags or just Internet search Google people's backgrounds to try and understand how long the business has been in the family. Which family members are not involved in the business. To have some sense of where someone's coming from. See they're feeling therapy interest the owners. There'll be news articles about organizations they're involved in. I don't try to directly reference them. I just try to get a sense to the person. There's some business owners will be all over local news and they're very involved in the community. Some people are very private, just trying to have a feel for the person. But I'm generally very forthright and it's not terribly helpful to beat around the bush with a cold call. Tell them who I'm from and why I'm calling. We're interested in learning more about their business and asking them if they've ever thought about evaluating a sale in general. I'll get a fairly straightforward answer.

Wow.

If they say no upfront, I try to keep them talking. I try to understand why. Why no. What are their concerns. I understand whether it's something that's Addressable.

Or not, you don't have the angle of a I want to have a conversational interest in your business.

Maybe there's opportunities to partner or lead.

In with something like that. I don't know if you're trying to stage yourself for an upsell, but is that ever part of a strategy?

Looping back to an earlier comment where if I'm not sure that I am on a direct channel of communication, sometimes I'll use those kind of references to get someone to call me back without necessarily telling their secretary or whoever took the message that the businesses in play. But when I know that I'm talking to someone directly, I don't generally beat around the bush like that because we're honestly not interested in partnerships.

You could be in a corp dev situation where that could be part of the strategy, but on your mandate it's not. So you don't mess around with it.

As you said, there's a lot of legwork, there's a lot of outreach. I want to have conversations with people who ultimately are willing to transact their entire business. And so I don't see any point about being too indirect.

Be upfront about it when you do get no, I even imagine somebody that maybe caught off guard or something like ah, no, you want to keep the conversation going. What's your approach? How do you do that?

Usually I'll ask about why. Why they're not interested in learning more. One of the most common elements is that people aren't ready to retire. They want to stay involved in the business. So then I will talk about how in most cases there are acquisitions fall into one of two categories. Either the owner does want to leave and has other management in place where the owner isn't quite ready to leave. And as I mentioned earlier, we don't want to have situations where the business is entirely dependent upon one person who's the owner. But we have had a lot of companies where owners still work for us as employees. So that's not necessarily a problematic outcome and it's actually quite common. And so I try to portray to people that is a potential option if a transaction does not necessarily mean they won't be involved in the business.

Is that almost like they're giving you an objection and you're trying to rebuttal back and overcome it? Because it's almost like you're getting the no, but you're trying to discover why they're saying no.

I'm just trying to get any sort of context, anything to talk about so that I can away concerns If I truthfully can't, does that happen a lot?

Do you get an initial no, then you've been able to talk through it and be able to get them to elaborate those concerns that you could address them and change the no to yes.

I'd say the likelihood of having someone give an absolute no is lower than having someone give an initial no and then coming around and being willing to discuss them.

I mean, at that point you're convincing them to sell their company.

In our business at least, there's a lot of generational succession issues. There's a lot of people reaching retirement age who are owners of these businesses. Everyone knows they're going to need to sell their business or dispose of it. They're either going to sell it to a third party, they're going to sell it to employees or friends or family, or they're going to bequeath it to someone when they die in the chair. It's not a foreign concept. It's just helping people wrap their minds around something that they may not have actively considered. Until your conversation brings it up.

I keep reflecting on sales. I'm working so much with our own sales team and it's like you got to discover the problem and provide the solution. And here it's the problems, succession or exit. And that might not have been the top of. Because like typical problems, we don't consciously think about it. And now you're surfacing that in this dialogue. Discovery, basically asking them questions, learning. And that's what's getting them to put more consideration around. Yeah, maybe there's a timeframe to think about an exit or what those actors would include to make that decision. I don't think. Then where do you go? What do you usually hear? Big reasons why people say no.

Not being ready to leave the business. Also not knowing what to do with the money they would make. I've had a couple conversations where people say this business works well for me. I get a good return. I couldn't get a return on my money better than this anywhere else. As long as I'm still happy doing it, happy spending the time and energy on it. And until that changes, I'm not interested in selling.

How do you overcome that?

Frankly, I can't. People who really hold that view, I've not successfully overcome it yet because I think it's fairly sound logic on their part. Assuming they're not 85 years old, usually the people telling me this are 50 or younger, still have energy and interest, and if they're smart, they have non family managers already. There which has created some flexibility in their lifestyle. If it doesn't require an inordinate amount of their energy or oversight, then it is hard to overcome that argument.

That makes a lot of sense. Yeah, I can imagine. Cause somebody's really got it good, especially after they've gone through all the heartache of really building a business. And someone like myself that's. I'll never do that again. I'm just going to ride this one out as long as I can and call it a day. I could see that. Are there other reasons that you get to know?

Those are the two that are well articulated and common.

Keep working and then what would I do with the money?

Wanting to keep working, wanting family involvement to continue and what would I do with my money? Those are the top three. Other than that, I think there's just general caution people have around entertaining a conversation with in many cases a competitor.

Do you ever get like the anti sell, the big corp, I don't know. Personality?

It has been articulated, but it's very rare someone just say that straight up. That sentiment exists but it's usually not thrown in my face.

We got these different things and some of them you could overcome. Talk through what goes after that. What's the next step?

In the case of direct outreach, it's to set up a meeting. That's to go meet people in person.

So at this point you've got the phone conversation. Whether you got a direct yes or you open a conversation. Learning more, you know that there's a buy in that they'd be interested in having that conversation around the nature of selling their business. And that's now it's time to go meet them in person.

Well, so there's two possibilities. One is where they're comfortable not having met, maybe doing video call, but signing an NDA and providing some preliminary information. And that is usually when people say yes, I am interested in having this conversation and are comfortable doing that. In cases where people aren't quite so positive or forthcoming, then it's more of a visit. And usually I'll go do that with local management, with one of our political division president or regional US Presidents and go establish dialogue with them from a corporate development perspective, but also with the person who would oversee the region, who would be their main contact from an operational perspective.

What are you asking then? How does things progress?

We like to see your facility. Sometimes they want us to do that after hours to avoid suspicions. Sometimes they'll just march us through during the day because they'll have visitors and they don't View it as being anything unusual. And then we usually like to sit down, discussion about the business or do it over a meal, just have time with them, get them to talk about their business. Usually people are happy to do so. If they're willing to have you come visit them, then they're happy to talk about their business, everything they've created. So it's just getting information. And if we haven't had an NDA and haven't provided the request list before that meeting, then generally the follow up out of that meeting is that we say this is the next step for us is to get enough information to be able to give you an indicative valuation. And at that point, very seldom are you told no if they've been willing to have you come visit.

So you do your homework while you're out there, before or after getting some of that request material. Build a model out, build your case on doing the deal and how much you're going to spend to do the deal. What's the timeframe for you to have that meeting, get that information to delivering an loi?

Well, it all depends how quickly they can provide information, but from the moment they give it, I'd say there's several weeks with everything else going on, three, maybe four weeks for us to adjust it, have one or two sessions of Q and A to ensure we've understood everything appropriately, see if there's any additional info for clarifying facts we need and then being able to share the evaluation. So usually we won't go straight to an loi. Usually if it's direct, have a conversation about the number and describing them, what the asset purchase nature of these smaller deals. It just varies based on the dynamic of people, at what stage you put it on paper versus how far you go with it. Just being a conversation in terms of.

Coming up with that number, the analysis. Could you walk me through the initial diligence questions? I'm curious if you can even separate information versus the things that you're having conversations about and doing more as a qualitative diligence.

Most of the qualitative this discussion about the business hopefully has been addressed during our visit. Understanding the mix of their business, how we're running it, whether they have sales force, a salesforce, whether they don't, who controls the relationships with customers, getting a sense for the efficiency of their operation, understanding whether they have capacity for expansion or not, talking about some of the key customer relationships. Most of that qualitative info is what we hope to get with a visit at a dinner or other meeting. Then the More factual or tangible data requests tends to be around things like real estate. Any information on their property and whether they've had appraisals done, whether there are leases in place presently, whether it's third party related party leases, typical financial information, are they audited, are they reviewed, are they doing their financials on the back of a napkin too? What the compensation arrangements look like in the business with a heavy emphasis on family members and ownership and who's in senior management. Trying to discover instances where management is maybe getting paid well above what we would consider market identifying any nepotism issues, as you mentioned earlier, understanding where owners have been taking out above market comps. We can try and understand what the profitability will be under our structure.

It sounds like there's the hard info component, the financials, the comp, like getting the assets, things of that sort. But when you talk through the qualitative part, what I picked up was understanding their go to market, their sort of salesforce, maybe a little bit about the tech stack behind that, which I guess leans more into the second one which is around their efficiency, which is understanding operations, how they run. And then when you talk about expansion, it's their vision. Where do they see themselves going?

Capital deferred capex to in our business instead of different degrees of capital intensity depending on what they're distributing, depending on where they have any fabrication or manufacturing operations. So trying to understand what the deferred capital is that we're about to step into.

Would you talk through that or is that hey, I'll pick that up in the financials and ask questions about it.

We talk about it. We asked to see their rolling stock information to understand general age. When we were going through the facilities, you get a sense for manufacturing operations as to the age, how tired it is or isn't and whether it will need near term replacement. If there's a lot of that. Well actually for a list, one of the early asks will be a fixed asset listing to be able to see the more to see the particulars about equipment.

You got any interesting questions that you ask in diligence? Any dark questions or something that'll help you get the spidey sense if something's up with the company.

I don't have any zingers.

I've noticed a lot of people in our industry are very type A. Is there things there where you just pick up? I remember talking to one CEO. He told me I'll walk around the office and I can tell from that if there's a culture fit or not. We Talk about out of box thinking and diligence. How you're like, you can't put that on a checklist. But how do you teach somebody that? Because it's so much from experience.

The thing that comes most to mind is how in command of the details. Who is in command of the details? Is it the owner? Is it a manager? Is it a son? Is it a daughter? You just know whoever is in command of the details and can spit off facts and you go look them up, you know that they're the one managing the business or managing a particular function.

I like that.

We hear a lot of tales about who does what and sometimes it smells wrong because the person who in theory is supposed to be in charge can't readily enough produce answers to questions you'd expect a true manager to know. There's no rocket science to that. But that's one of the feel things that we're trying to do.

Look for that flow of information. Teach me how to negotiate.

Teach you how.

The last thing I want to do.

Is overpay for a business. And I feel like the first negotiation is don't throw the first offer out. I feel like that's the first rule. Just don't put the first offer out.

You ask what proceeds people are hoping to get. Sometimes you'll get an answer rarely. Usually people know that rule.

Is that the first. That's. Can we agree on that? The first thing you should do is don't put the number first. You get the number first. Don't pull one out. Get one.

A lot of people know not to do that.

Okay, so qualifying. Are we dealing with sophisticated or unsophisticated seller? That's, I guess, what we're trying to get to.

Right? We want to get a number out of them. If they dodge that a few times, and we will give an initial number, but it'll be on the low end, trying to take advantage of the anchoring effect.

How do you nudge. So is there any approaches about getting somebody to put the number up? And I'm imagining, hey, if we really were putting something together, like what would it take? What, did you have something in mind? Is there something that you do to try to get there?

It's that question, if you're thinking about selling a business, what sort of proceeds are you looking for? But I always ask the question. I don't try to get too cute or too insistent on it because in our industry there are three or four very common publications, they always have articles by people about valuation expectations. So everyone has some businesses are worth more. Some businesses are worth less. But everyone for the most part has some sort of floor valuation. And you always have to try and get people to give their number first because you don't want to throw more money at it than is required. But I haven't really had a case where people haven't had some idea of what businesses in our industry are trading for.

Do you fish that out? You like? What do you think your business is worth?

Sometimes it depends who I'm dealing with. You can get a sense for people's degree of sophistication and if you really can't, then it's just the initial offer will start blowing. You'll work your way up if necessary.

We can't be overly pragmatic about this. It's definitely the art. The deal comes right here. What about the relationship that you build with this owner? It sounds like you're dealing with a lot of owners on this stuff. Can you walk me through that? Because you seem like a really direct, straightforward person through this whole interview. I'm curious to know if that is a part of it. Hey, we're going to do the tour of the building. We'll have the meeting, but why don't we grab a drink afterwards and go talk through which games, what sports you're following. How's your golf game going? Something to get to that point of talking of more of a casual tone.

One family that we called ended up not our first meeting, but after two meetings, the guy cooked a pork butt smoker and we all had a very delicious dinner at his house. So that stuff happens. But a lot of times, given our national scope, I haven't found that's terribly common. Just because even the sellers, potential owners are approaching it professionally and you go to have a nice dinner with them and yuck it up, share a nice bottle of wine. But of course talk about everyone's interests. Fishing, hunting, sports, whatever they may be.

You're not talking price or valuations at the dinner table is basically what you tell me.

Usually not, but sometimes people bring it up. I don't usually bring it up at the dinner table.

I come from Indian heritage and I feel like it's our customary to bring this up at the dinner table. It's all numbers. Everything is a negotiation. Going back to the negotiation, we don't get that indicator. Might get the range, but maybe we don't get anything. Dealing with a professional. Took them out for drinks and still. Nah. We'll get back to you. We're going to see what you come up with.

Most of the times if they start with a number, it's a really high number.

Okay, so we'll vote do both scenarios. If you get that the hey, we're talking a business that probably fair values 50 million and they're asking for 200 million. Is that usually that absurd or is it just.

There has only been one case I remember where it was that absurd and that and we probed around it, figured out they weren't kidding and we were done because there was no point in wasting time or energy. Usually it's not that kind of discrepancy.

In terms of magnitude talking about 2x10%.

30%, 20, 25% plus. Okay, it's a large gap, but it's not necessarily a we just need to stop talking gap.

Probably here's the highest I got from the last three bankers that maybe took.

A spin at pitching us or my accountant my business. And the accountant has no clue about industry specific dynamics.

Oh he's got the calculator, the website. You just punch into some numbers.

I know someone's talked to their accountant when they're giving me a multiple of earnings as in net income. No one in our industry talks about that.

How do you work with that? When the expectations up there probably a good 30% above.

Yeah, usually so I won't respond with a number, but I'll easily try. And over the course of a couple I used to say that that's way above where things trade. Just say that, put the marker out there and then you'll talk to them about where in our experience most things do trade in terms of multiples. If they're really out in left field, talk about where our broader company trades. And a large publicly traded company, if it's trading at you want a multiple that's way up here and a public company is trading below that, then the little privately held business is not going to trade. That's going to trade at a discount to the bubble company. And it in fact does. Having done a lot of these acquisitions and you just start trying to set people's expectations accordingly and the desire is to do that in a couple different have a couple conversations like that. So that when we actually make our offer, they've already been somewhat conditioned that it's not going to be what they might have initially expected.

But do you intentionally go lower knowing that you're likely going to get pushed back up to say company 50 million. We say they're asking 70 million, something like that. And then instead of coming back at 50 and here's the take it or leave it. You go down at 30 million or something. What's your move?

The discrepancy has never been that high. But let's say someone.

I made that up. Give me a more realistic one.

Trying to think of the last time someone came up with just a big number and spouted at it. It's probably been over a year since those happened. But it depends on how far out they are. If they're high but they're not ridiculously high, then I'll probably start with something lower. And it's just the old psychological meet in the middle sort of the anchoring. Everybody's got their anchor point. You're going to inch towards each other. If they're way high. It depends on whether we're really interested in it or not. We're really not interested in. If we're not seriously interested. If it's not a high priority for us and the number is way high, then we may just tell them what that's not realistic. This is the range. And depending on how positively or negatively they respond to that conversation continues or doesn't. If they are a very high priority, then we may be more willing to just give them a true number that we're willing to pay. You don't want to tick people off, but you do have to manage their expectations.

Okay, so there's a few considerations that'll influence how do you respond back. You want to know how my immigrant parents taught me how to negotiate?

Yeah. Because I'm sure they negotiated every single thing.

It's interesting. This formula actually works on literally any deal. But you take the asking price and you divide it by two and then that's your counteroffer. That's where you start from and go from there. And it's worked really well. But no, you don't want to do it on a job offer. You're probably not going to make any friends. So I guess there's a winner.

Where to apply that, that's just putting anchoring into play every day.

This upcoming market, you might be able to use that negotiation approach to the other situation where I can't get anything out of them. I can't. Hey, the pressure is on us. You guys are the big shot in town. You guys do all these deals. Builders, first source. Everybody knows you guys done a bunch of these deals. You tell me what company's worth.

You're role playing the target, right?

Yeah, basically. Yeah. So it's like it's on you to come back and give an offer. So how do you respond? Like what's the steps to go through.

And provide them one how we actually value the business.

That's a little unique in the industry. You would come up with a valuation, deliver an loi. What does that look like? I guess more than the format. Hey, I'm going to come back, I'm going to set up another meeting or present an loi.

Assuming it's one of these direct, unbroken deals, we'll just give a verbal indication.

You would verbally put a price out and say, hey, we think your business is going to be worth about 50 million.

That's usually the first attempt to flush out where people are. Okay, maybe it's a business where someone said they wanted 20 and you said we could make an offer in the 11 to 13 range. And then you see how hard they protest and why and just how they respond. Right. And you play the game from there. It's easier to do that verbally than creating a bazillion pieces of paper.

I agree. How much of that have you had where it's a meeting, get that idea. Put like an offer, come back. It's like this sort of volleyball of an exchange per encounter of a counter move versus you're actually sitting down in one meeting and going back and forth then and there to get to a subtle price.

It's very rarely one, very rarely one meeting. It's usually a sequence of conversations and.

Or meetings and it's because the other stakeholders are reviewing it. You got an executive going home, talk to his wife about it or husband.

Yeah. It's usually because there's more than one stakeholder and not all of them are part of the conversation. And even if it's two people and they're part of the conversation, they want to go confer.

Okay. I'm curious about the variables you get on the counter moves in those situations. You put an offer out. Is it just unpredictable how people respond? Do you get people to take the first offer?

No one's ever taken the first offer.

Nobody's taking the first offer.

No. But there's one experience in particular where I think we moved once and not by much. It was almost equivalent to taking the first offer.

Wow. Okay. And then what about the other, the extreme where it's just they came back with extremely high counteroffer, keep going back.

And forth, making little moves or not making moves again. It's a dynamic of how bad we want it. Right. There have been cases where culture out a number and they come back with a much higher number and we say, no, we'll make a token move. To show them that wherever we end up is going to be far closer to our first number than to their first number.

You got to build a business case for this deal to get it approved and run it up to whoever C suite board.

Correct.

When do you start building a business case and where does that sit when you're at this stage, when you're starting to put these first offer out? Do you already got a green light and everything?

We've already built the business case before we ever share a number. So you know, we have a view of just. I try to be fairly Bayesian in this. I just try to think that no business is that extraordinary in the long term that it's all going to reflect market level growth. And then any deviations from that have to be attributable to specifically identifiable factors, whether that's cost, synergies versus cross selling or other kinds of opportunities. And then sometimes you're just willing to pay more for something that is actually strategic. It's a number one or number two position or there's a scarce. Or if you're trying to fill out a product hole in your offering and there's not many options, then you may just value it more highly and be willing to pay more.

Who's in that conversation? Is that just within corporate development with.

C suite with board, the first round? Unless it's a very large business where we bring the CEO in, generally it's CFO me and the operator overseeing the geography. The person who will have P and L responsibility for the business after it's acquired.

And then you can conclude, hey, this is the target range you want to get this business for.

This is the number beyond which we won't go. This is the place we're going to start sort of playing out your framework.

And they send you out guns blazing. Is this story from the business case something that you repurpose to give your validation on the offer that you're putting to that company?

You mean does the business case sometimes follow the number or is it repurposed?

You got this, this story you built internally on why we're going to do this deal and justify the value. But then in negotiations they're pushing for this offer when you're trying to validate it and saying, hey, we did put a lot of consideration in this offer. I'm curious if there's elements or things of that business case that you end up using when you negotiate for the price of the deal.

It certainly becomes part of talking points, especially when there's a recent sale and example where we put out a number and sellers weren't pleased with it. But I don't think they had any other higher numbers. And so you're just explaining the rationale behind your number and yeah that touches on the way we're actually looking at things in terms of perhaps a facility really is they don't have room to expand so that they're putting they want a high value on their business and talking about how the sky's the limit. There's all this great potential and we'll be talking about the reasons why we think it is a great business. But it's somewhat restricted as it currently exists and all the work to grow it is going to be in the future. And that's not something that we are valuing. Shouldn't have to value. There's all kinds of talking points that come back from that.

A lot of things to think through when you get to that point. You come to terms and you agree probably lawyers involved got signed. Loi how did things move into formal diligence after that?

I don't think any surprises sharing or Folsom but the complete diligence request list with them according how we're going to exchange the information. And usually if it's a small direct deal that can take a while for people to pull all that information together unless they have the foresight to already get started. In some cases they may ask for that list so they can get started.

Who's running that. Do you have a director in your team or somebody that really manages all of that coordination because between the company like your size can imagine there's so many internal stakeholders and getting that information back and forth from the target company.

We have our normal points of contact across the departments. Once an opportunity becomes available we create we give all them access. We'll probably spoon feed them a little Just describe to them what's been provided where they should start their review and if there's anything salient we already know we'll point that out to them. But generally for dev serves the traffic cop in that information exchange. And we do depend on the departments to do their review. We know hot button items that we're always on the lookout for.

You really control your process from the buy side. It's a banker control process. You got to go through the banks process. But it sounds like the proprietary deal you're staging things and driving the process.

Yes. We don't want to invite people who haven't already hired some advisor to go hire one that complicates the whole process. So we try to ameliorate that by serving as the organizer of things.

Any other advice you'd give myself, other practitioners listening and some of the stuff we talked about, getting in the door, getting some of the negotiations and getting these deals done.

I'm probably on the opposite end of things from your immigrant parents. I'm more of an Anglo mentality. So the whole horse trading element of this is something that did not come naturally to me at first, but I've become a whole lot more comfortable with it just through practice. So if you're from a Saxon stock like me, with a Anglo view of the world, then, yeah, you need to get comfort with. Get comfortable with horse trading.

Yep.

Because there is no truly objective measure and there's, I guess, an objective band of value. And then where you end up with that, it's just a matter of where people can agree.

You gotta be logical.

I have tried to read a lot of behavioral stuff like Daniel Kahneman and other things, talking about just all the common cognitive biases of anchoring and things like that. I think it's a good background info at the end of the day. Practice and experience is what gives you a feel for those kinds of dynamics.

Especially this part of the deal. Everything he talks about, how you nurture those relationships to get to those conversations, get to that point in the business, you'll transact. But you taught me a lot. I feel pretty pumped up and a little more confident if I get the opportunity to do another deal here. I got to ask, what's the craziest thing you've seen in M and A?

One guy had a gun collection on premises at his business, and it was like he had machine guns stuff where he has to have an ATF license. So he proudly showed it to us, and we just told him that afternoon. It's all great. You have to have all this out of here before we close. And when we did our walkthrough, we actually made sure it was gone.

Okay.

Yeah.

Another good thing to pop up for a public company.

I mean, it was a cool collection. I just didn't want it on site when we closed.

It wasn't worth the business.

No, it was an excluded asset.

That's so funny, dude. Thank you so much for taking the time to chat with me. I enjoyed the conversation and learned a lot.

Sure. I appreciate it. Thank you.

Cheers. And here's to the deal.

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