How to Best Protect a Business Case in an Acquisition

I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Before we get started today, I want to let you know I recently published a book called Agile M and A. We all know the M and A process is highly inefficient and there's no real standard or evidence based approach to completing M and A deals. Agile M and A is a project management framework that emphasizes responding to changes, collaboration and continuous improvement. This means your team will improve identifying risks and opportunities during diligence as well as planning and executing integration so you can actually deliver on predicted value drivers. Get your copy of Agile M and A on Amazon or any major bookstore. Learn more@agilema.com hi, today I'm here with Ben Sutton, Senior Manager, corporate development at NCR Corporation. Ben's been working M&A for five years on the buy sell side and acquisition financing. Today we're going to talk about how buyers protect themselves and their business case in an M and A transaction. How are you doing today Ben?

I'm doing well, Kisan, how are you doing well?

Can you maybe kick off with just a little bit about your role at ncr?

Sure. So I am a senior Manager in Corporate Development at ncr. I've been here for about two and a half years. I'm on a small team that focuses on executing leadership's inorganic strategy here at ncr. So I break my job between two categories really pipeline management and deal execution. So unlike many other corporate development roles, my job definitely does not focus as much as deal sourcing that deals come to us via bankers or strategic plans developed by leadership team members. So with that said, my job around pipeline management is really managing the relationships with those bankers and and working with those leadership members to really identify what we want to buy or what we want to sell as part of their overall growth strategy. And then on the deal execution side we're talking more internal approval processes, coordinating due diligence and any type of follow up for post closing items.

What kind of deals have you worked on?

Yeah, so before NCR I worked in investment banking and I did work in corporate development at a different firm as well before ncr. So I have some advisory experience as well as some corporate development experience at a different firm. But NCR has been the most active role that I've played in terms of M and A. And here at NCR we've announced a couple deals since I've been here. But a couple that I would highlight is our stoplist acquisition and late 2018, our JetPay acquisition in late 2018, our D3 acquisition in 2019, and our Zentret acquisition in late 2019. So all those are our acquisitions. And my experience definitely is more around the acquiring side of a deal versus divesting or even merger. Technically Jetpay was a merger as it was a public deal, but even then it was still in the structure of an acquisition.

What's like the hardest thing for you when you're doing these deals?

Hardest thing would probably be balancing all the many items that are or many processes that are all going at once. I would say at ncr there's part of the process is, you know, getting internal approvals. But then the other part of the process obviously is managing the diligence process and managing the negotiations. And doing any one of those things is somewhat difficult but doable. But managing the entire process all at once, I think makes it a tough situation at times. Which is why sometimes you hear M and A professionals working long hours.

Yes. A lot. Around the actual execution and project management of the deal when you have to take rein of all the details.

That's correct, yeah. Yes, for sure.

So what's the process look like for executing transactions at ncr?

Yeah, so I imagine every corporate development team at every, say Fortune 500 has a similar process to this. This is, I would imagine, somewhat standard. But normally the deal comes from us, as I discussed before, either from that investment banker or we're reaching out to a potential seller and saying we're interested in your company. You know, once that company is identified, then we begin negotiations around a mutual non disclosure agreement or mnda. So we're interested in having an acquisition discussion. We want to talk about confidential information. So let's execute a mutual non disclosure agreement. So then once we execute that management presentations with the seller and gather as much data at this point as possible as they're willing to give us most for us. Mostly it's around getting technical information and financials as well, to the extent they're willing to share. And then us, you know, taking that information and developing some type of business case around what we can present and what kind of return we can provide for NCR shareholders. So once that is done, we go to what we call our investment committee, which is really a subset of our leadership team and we present our findings to date with the business case. And then we, we tell leadership this is what we want to do. This is why we want to do it and we would like to. And we see the process going in this manner. Really once we get approval from them, we begin discussions around a letter of intent, non binding letter of intent or loi. That process can take a couple weeks, even a month depending on what key negotiating items is important for the seller. Once that's finally executed, we actually will kick off the deal and what that means is we'll really begin to hire outside advisors, including lawyers, accountants, tax advisors, potentially other advisors as well, depending on the transaction. And then we kick off the deal with those advisors and our internal diligence team to discuss what we're buying and what we look and what we think confirmatory diligence looks like. So once we kick off the deal, confirmatory due diligence kicks off and we end up doing weekly check ins on progress and we get as much data as possible from the seller throughout that process we're getting updates from all the teams on what's happening. And simultaneously during that process we end up working with the outside legal advisors to begin the drafting the definitive agreement and we start taking due diligence findings and start factoring them into the definitive agreement as necessary. Once diligence is completed, we present really our findings back to the, what we call our investment committee again, which again is our subset of our leadership team asking for approval at this point to execute a definitive agreement. Once the investment committee agrees with the terms of the deal, we continue to negotiate that definitive agreement to really the last, last minute, you know, finalize all auxiliary documents and sign and close.

All right, so you mentioned several different legal agreements and I'd like to just take each one apart and walk through the purpose of each of those legal agreements. Just like, like you discussed. Maybe we can start off with the mutual NDA.

Yeah, so kind of like I discussed, the mutual non disclosure agreement is necessary for every transaction to protect the, to protect information as much as possible. We always try to make it mutual as we're trying to protect NCR's potential confidential information as well as the targets, which helps create more valuable conversation when we set up management presentations. And like I said before, that takes maybe a couple weeks, but it's not a huge negotiating item. The next thing I would say is an indication of interest.

Real quick on the non disclosure. What like things would actually get negotiated on it? Because I, I know that when there's more at stakes, a lot of times these NDAs, there's little things in there that, that you go back and forth on and I'm kind of, I'm curious to know if there are certain things that you see that commonly get negotiated or would come up when negotiating NDA.

Yeah, yeah, that's a great question. Well, there's obviously a couple of them. So the main sticking points would be the length of holding the confidential information. So how long are we going to maintain your information confidential as well as the survival period of the actual disclosure, not of the actual agreement. Furthermore, there can be other things like non solicitation of employees or customers. And generally there's negotiations around whether we as a buyer can go to those employees and try to hire them if the deal fails or go to customers if the deal fails as well. I mean it obviously depends on the situation, but from a buyer's perspective, we generally don't like any of that language in there, but it's pretty common from a seller.

Gotcha. So they're, they're protecting themselves for all these different scenarios that could happen completely outside of this deal discussion.

Correct. As well as they're, you know, normally at this time, particularly if it's a marketed process, a business that is being marketed by an investment banker or some other broker, they know we're one of many buyers, so if the deal fails with us, they're going to want to protect themselves as much as possible. And so. But on the other hand, we're not going to sign up for a lot of stuff. Right. So there's a balancing act. Yeah, those are some common things.

And then for an indicator of interest.

For an indication of interest. Yeah. So this would only play a role in actually a deal that is being marketed. We're not going, we are not going to send over an indication of interest for a business where it's not actively being marketed by some banker or broker. Instead what happens is, you know, we generally go straight to the letter of intent. But in the case that it is being marketed by the banker or broker, we are, you know, we have to give kind of an initial read on what we think the value of the business is. The price will be in there, but it will be a range of prices and then there will be other high level terms of how we see the transaction moving forward. But it will, it will obviously be non binding and it is not negotiated. It is just a bid sent from us, the buyer to whoever that seller is.

Okay. So an IOI essentially is a tool that an investment bank would use when staging out their process. Because if they're marketing a company, they might have some very generic teaser sheet just to start collecting different interests and then from there they would invite these different parties to submit an IOI which states a formal interest. Does that sound about right?

Yeah, that's correct. And sometimes that whole process is outlined in a letter, well what we call a process letter. And the investment banker will provide a process letter and will require an IOI and an X date, but then also require a letter of intent at a later date.

And now if you're pursuing a company that isn't marketed through a bank, you would typically do an NDA and you're more likely go straight into an loi.

Correct. Or we would end up killing the deal before we would get to the letter of intent.

Gotcha. So if it did move forward, be a letter of intent or just deal dies.

That's correct.

All right, so let's talk about an loi.

Yeah. So letter LOI being a letter of intent, we make them non binding. They are similar to an IOI but they have more concrete terms to them as well as a fixed price. So they'll have fixed, you know, not fixed I should say. They will have certain items that are listed that will be further negotiated during the actual diligence process. But it will. These will be more of an outline for how that negotiation will go. So things that can be included would be the actual price as we discussed the exclusivity period, which would be the time in which we as the buyer have exclusive rights to just learning more about this business and they're not reaching out to other buyers. There will be discussions on holdback in escrow accounts or reps and warranties insurance. There could be discussion there around how we're financing the transaction as well as any type of networking capital or completion cash mechanism. So that's not a complete list, but that's some of the main items that you'll see there discussed high level how we're going to approach it during the actual diligence process.

What about a breakup fee? Is that going to be included in a loi?

Yes. Yes. That's another good one to include.

Now is this legally binding?

If there is one, right? If there is one, yeah. But this is a non. Yeah, this is normally, you know, from a, from NCR standpoint, I imagine a lot of other large buyers, you know, we are focused on a non binding at this point of the process.

Gotcha. But now if you did have like a breakup fee and things like that, then would it be a more of a binding agreement?

Yes. And on top of that, I would say that that kind of thing is more associated with public transaction. Right. In which you Know, has an almost completely different process than what I've already described. And that's largely because, you know, there are public shareholders. So that's a whole, you know, kind of different situation from normally what we do. But yes, you're right there. If it is binding, there will be some type of breakup fee.

Gotcha. And then this is where most of the negotiation happens, is right here on the loi.

I would not. I would say that there's a lot of negotiation that occurs at this point, but I would not say that this is where the most is. I would say that when you actually get to the details of the definitive agreement, you're really going to end up negotiating a lot of those terms a lot more in detail. You know, there will be a couple very big points to negotiate at the LOI stage, which can include price, which can include, you know, what hold back, we're going to aim for and other things like that. But there's also a fair amount of negotiation that occurs during actual definitive agreement.

But now the, the big terms, right, the price, the time frame to do the deal.

Yeah, the big. Yeah, yeah, yeah. I think that that's. Yeah, the big terms. Let's, let's say that.

Okay, so that. Then that's fair. And the. In your purchase agreement, or as we refer definitive agreement, we're going to iron out a lot of those details, which may be a lot more little things to negotiate, but the larger general terms are all going to be outlined in the loi.

Yeah, I think that's fair.

Cool. What's like the thing that people go back and forth the most on in an loi?

I would say obviously the price, but then also the escrow accounts that are going to be set up, the networking capital mechanism and how that's going to be addressed. Probably those are the three main items, I would say. Cool.

Now, from there, the big main event is going to be our purchase agreement, also known as a definitive agreement.

That is correct. Yeah.

Yeah. I think there's a few ways to go about that as well.

Right. And so the agreement will reference what's in the letter of intent, but this is the actual agreement where all the details are hashed out on those three main items I just mentioned, as well as anything else associated with the transaction and what the buyer and the seller are going to want. They're also going to have many auxiliary documents to them as well. So to support the definitive agreement. So it is a long part of the transaction process.

I guess one of the things we referred to earlier is the private versus public transaction. How would a purchase agreement differ between public and private?

Those agreements can be pretty significantly different, and that's in large part because in a public transaction there will be no form of recourse for the buyer. Instead, what happens is at time of close, there really is no way for the buyer to come back to the seller and recover any losses in the case that there are any losses. Furthermore, in a public transaction, you're going to have different types of agreements. For example, you'll, you know, likely have a merger agreement instead of a, say, stock purchase agreement or a asset purchase agreement, as well as you'll have documentation that needs to go to the public shareholders, which includes include tender offering material. So honestly, the public transaction discussion is potentially for another podcast episode and I'm going to focus on the private acquisition in this.

No, I appreciate you outlining the difference. Even looking at a private transaction and that purchase agreement, usually you see two different types of asset and stock. Could you explain the differences between the two?

Yeah, and technically too, you can also have a merger agreement as well, which there's some legal differences between a merger agreement and a stock agreement, but they have a lot of similarities. But between asset and stock, if we're looking at asset, I would imagine most buyers are going to want to do an asset deal and this of course means that the buyer is only buying the assets of the business. They're going to outline in the purchase agreement what assets they are requiring and then what assets they're not requiring, as well as what liabilities they're acquiring and what liabilities they're not acquiring. Which, you know, hopefully should allow for a cleaner looking business at the time of close for the buyer. There's also tax benefits to an asset deal that can be favorable to a buyer. Many times you can write up the value of any fixed assets or inventory that you are actually I don't think only fixed assets that you're buying and then that can cause increased depreciation that's going to go onto your income statement post close and lower your taxable liability moving forward as an example. But one negative for the seller on the asset deal side would be most sellers are going to have to go through some form of double taxation during an asset deal. And that's because the seller will pay a tax on selling the assets themselves, but then also pay a tax on paying a dividend to themselves post the transaction because the legal entity post close will remain after an asset deal. So there are all this money that's paid from the buyer to the seller will go into that legal entity and then that legal entity will have to pay dividends to its shareholders, which in a private deal, you know, may only be a couple. There are a lot of times there can be double taxation in an asset deal. So a stock deal, on the other hand, is a lot of times more seller friendly. The buyer has to acquire all the entire legal entity and all assets and liabilities associated with that legal entity. But there are some benefits to it which can include if, you know, in the tax realm, if there's a net operating loss that the seller has, it will come with the business or the shares of the business. It will not. Generally speaking, it's not going to come in an asset deal. So if you're a buyer and there's value to you of a net operating loss, it can lower your taxable liability moving forward. Also in contrast with an asset deal, you're looking at no double taxation for the seller, generally speaking. Instead, they pay one tax on selling a share of the business. Some type of capital gains tax, whether it's an asset or a stock deal, is going to be negotiated though, generally speaking, at the time of or letter of intent, not at the time of the definitive agreement.

So it's interesting, there's a lot of various tax implications around how you're structuring the deal. I actually recently interviewed a few folks on the HR side of integrating M and A deals. And what was interesting was their input in that decision based off of how the employees are going to be carried over post close, because that could actually make implications on what the challenges are going to be there. And also if they're international in various different countries, and then also if you have folks like unsponsored visas and things of that sort, where one scenario may may not allow them to be able to continue that same level of sponsorship. So it's interesting to see how some of these other factors outside of just tax implications can affect that decision on how to structure the deal.

Yeah, I would highlight the fact from an HR perspective too that in many cases in an asset deal, you actually have to hire the employees on day one of the acquisition. So there's an entire other kind of work stream that has to happen for the buyer around onboarding these individuals really on day one. In a stock acquisition, that doesn't necessarily have to happen. Right. Those employees will remain a part of that legal entity that the buyer just acquired. And so there's a longer process to move them over to, you know, from an integration standpoint, move them over to the buyers systems and stuff. But in terms of NASA deal, most of the time you end up actually having to fire the employees at, at close and then hiring them kind of on a simultaneous basis.

Yeah. So that, that's kind of part of why there's a lot of things to factor there on the HR side. Exactly what are representations and warranties in the context of M and A and why are they important?

In a definitive agreement you're really going to outline what is going to be bought and transferred from the seller to the buyer. And what representations and warranties are is that they precisely describe the state of the business and the circumstances of the transaction to the best of the seller's knowledge. And sometimes, you know, there are things where there are legal items called or legal terminology which is called knowledge qualifiers, where the represent the seller will try to represent that they only know so much about certain facts or of the business. But that's obviously negotiating standpoint. But anyways, these facts or reps are traditionally broken into two categories really based on importance. So there's fundamental reps and there are general reps. Fundamental are more or the most important going to general reps. And so fundamental reps can include facts such as the seller's authority to sell the shares in the first place, the title, meaning that they have title to the business. And it could also include capitalization of the business, who owns what and other negotiated items. Whereas general reps are far more encompassing which can include financials of the business, employee benefits, customer and vendor contracts, insurance policies, et cetera. Really the one other that I would kind of highlight within these set of facts or representations and warranties are intellectual property reps. If you're a tech buyer in particular, and I imagine it could occur in biotech or some other industries as well, Intellectual property is kind of the core of what you're buying and that means you want to protect it as much as possible. So a lot of times those reps will fit somewhere in between fundamental reps and general reps. Got it.

And then these reps and warranties, they would admit certain identified risks. Right.

They would disclose certain identified risks. Right. So they would say that here's a risk, we know about it, we're going to disclose about it and then we can talk about recourse later on. But here's a risk, let's disclose it. And normally there's a disclosure letter to disclose stuff that they know about as well as in terms of risk as well as just other facts that you want to expand on. You know, the financials are not going to sit in the main body of the purchase agreement. Instead, they'll be in a disclosure letter. So any identified risk should be disclosed in that auxiliary document called the disclosure letter or schedules.

Now, this is coming from diligence reports.

Yes.

Is it usually third party or can your internal ones count?

Yeah. So it can be both. Right. It just depends on what's identified. Say you have, say the seller did not know about some tax liability because they were not compliant in sales tax in a certain state. But through the diligence process, our tax advisors found that that issue either needs to be satisfied before close or it needs to be disclosed properly in the disclosure letters. And then there would be some indemnification process for us as the buyer when that tax authority comes after the buyer for whatever that liability is.

But you wouldn't necessarily be incentivized to disclose all this stuff. I think the less is better for you. You as a buyer, I think you.

Would want as Right.

You're almost tattling on yourself saying, hey, we found this thing, but we're going to put it out there so we're not covered on it in our policy.

Versus, I think in bet. Yeah, I guess I would push back. In some ways, best practice would be to disclose as much as possible. Because if we're a year in after acquiring the business and, and some liability didn't come up from diligence and it's not addressed in the purchase agreement, hopefully there's some type of language in the purchase agreement to protect ourselves from that liability that came up. I mean, in some cases, unknown risks like those that you discussed are not necessarily covered as part of the recourse process. So I think I would in some ways disagree. You would want to disclose as much as possible.

Okay. Interesting. Yeah. I'm looking at the other side where let's keep the known unknowns unknown.

The seller may, you know, the seller may not want to try to disclose as much. Well, that's probably not true either. The seller is going to want to disclose as much as possible as well because that protects them. Right. So they're, you know, they're explaining everything they know about the business as much as possible, including any potential liabilities attach them. And if you can't disclose against something, ideally there's some rep in the purchase agreement that is going to protect you as the buyer, though. So, you know, an example I guess could be, you know, and this is oversimplifying it, but there are no tax liabilities. Could just be a very, very simple rep, except for what's disclosed in the disclosure letter. Right. And so if we delete the except for what's in the disclosure letter, then the risk in that case would be on the seller because the buyer would be able to go after the seller if there was a tax liability. I think it's in both parties interest to have as thorough of a disclosure letter as possible.

You're a good guy to do deals with. So mechanically, how is identification or recovery addressed in a purchase agreement?

Yeah. So post closing of transaction, any of these reps or facts can basically be proven to be false in some manner or other. And the phrasing for that is a breach of a rep. So again fixated on the tax liability here. You, you know, you identify some tax tax liability that you know was unknown and undisclosed. And but the rep indicated that there was going there was no liability in this area. And so our tax expert or subject matter measure matter expert would identify that liability, calculate the total losses associated with it and let corporate development as well as our legal team know that that's occurred. Once, once we've identified that potential loss, we there, there will be a process in the definitive agreement on how to make a claim on that potential loss. And it'll be outlined and it's specific to every deal. But normally it includes some type of letter that is sent to a, to the seller rep of the of the seller and then they have a certain amount of time to respond to that. And then if there's any dispute about the amount there's a resolution process and that's going to be outlined in the disclose in the definitive agreement as well. And there could be a third party arbitrator that comes in as well. In terms of recovery though, there's a couple different methods of recovery. So at the time of negotiating both the letter of intent and the definitive agreement, these will be main areas of negotiation. So the first one is a holdback let's say. And so what happens is at, at close a portion of the purchase price will be held back from the seller and it's just held with the purchaser or the buyer. And that money is held for a certain period of time and it's held. And so the amount and time it's being held is kind of a negotiated item. And so that could be funds for recovery. The second source of recovery could be an escrow account could be set up. So a third party agreed upon escrow account, you know, normally with the bank or sometimes law firms themselves will open up the escrow accounts on behalf of their clients at time of Close. Instead of the money being held with the buyer, the money will be funded into this separate escrow account. There will be a process in which the buyer has to send a letter to the seller rep, but then also send a letter to whoever the agent on the escrow account is and then that will be your source of funding for any loss. And then the final way, in a little bit newer way, is what's called reps and warranties insurance. And instead of funding a specific escrow account or holding back a certain amount of purchase price, you make an agreement, a policy agreement with an insurance company and you end up funding a premium in retention or deductible with that, with that insurance company like any other insurance policy that would exist out there. So the premium is normally paid at close and then the deductible is paid at the time of, of making the claim of whatever was breached. So really just depends on the situation and all. In some cases you can have all three methods being used as your source of recovery.

Are reps and warranties and other items subject to different limits of liability?

Yes, generally they are. And so that's in large part why they are categorized in different groups. So fundamental reps are going to have the highest limit of liability. They are normally capped at the purchase price. Sometimes they have no survival period, as in they live indefinitely. And so if someone lies about, or not necessarily lies, but misrepresents that they had titled to the business, that's fundamental to what we were buying. So we should, we as the buyer should have full rights to reclaim the entire purchase price that we, that we paid to acquire this business. General reps, on the other hand, are going to be more heavily negotiated in terms of there are limits of liabilities. Generally it could be limited to whatever holdback or escrow account that was set up, you know, the total amount that, that's, that's there would be the limiting factor. We can't go after the buyer cannot go after them beyond the total amount that's in escrow or the total amount that was held back, or it's whatever is agreed upon with that direct insurer. In the case of reps and warranties insurance, the one caveat here obviously is IP reps being somewhere in between fundamental and general reps, and those generally will last longer than the general lapse. They'll have a higher cap somewhere in between the purchase price and that escrow amount or that holdback amount. And that's obviously a key negotiating point during the definitive agreement. Finally, I'll mention the fact that A lot of this limit of liability discussion has kind of changed over time. You know, historically there was in some cases either no cap or all reps were just capped to the purchase price. And escrow accounts or holdbacks were only set up for easier recourse, at least legally speaking. So you don't have to go through any arbitrator or any other type of process to make a claim. And you know, the funding is there in the case of an escrow or holdback or reps and warranty insurance. But in the case that there was a bigger breach, it could go beyond those amounts. Over time the M and A market has kind of moved more towards a seller friendly kind of environment. And this has caused more limitations on a lot of general reps. And it's why you see so many agreements capped at the escrow amount or the holdback amount or whatever is agreed upon with the insurer. So just something interesting to think about.

Well, how can sellers protect themselves from small claims?

Yeah, so a lot of times that'll come up. In the case of a buyer making a relatively small claim that's not really material to how the business is operating. You know, some financial account was slightly misrepresentative and there's some loss associated with that, or there's a very small tax liability or someone's HR benefits weren't properly processed and some employees owed money or something like that. Just a small example. And so generally what will happen is that there are indemnity baskets set up in the definitive agreement. And so that means that the claims have to hit or the losses have to hit a certain amount before you can actually you as the buyer can start making a claim. And so they normally come in kind of two forms, either a true deductible or a, or a tipping basket. So in the case of a deductible, it's more akin to car insurance. You know, the claim, the loss itself has to be bigger than that deductible. And then you as the buyer, or maybe you split it up seller, but again per the negotiations of transaction will fund that deductible. And sometimes there is no funding of the deductible, you know, as it's not necessarily going to an insurance company, it's just what's agreed upon in the transaction. So you kind of just lose out on that amount of money. Right. But any dollar above it, you as the buyer have right of recovery. Tipping basket, on the other hand is more buyer friendly. The buyer will be able to add up all their losses from all claims and Then once it hits that total amount for the tipping basket, the entire amount is reclaimable by the buyer. And that's why it's called a tipping basket. It'll tip, the recovery will tip over it and you, as the buyer will have the right to reclaim all of your losses.

What's an example of a more unusual reason a holdback or escrow account was set up?

So kind of what we were discussing earlier about known risks or unknown risks, sometimes there are risks that are identified that diligence has, that diligence has identified that the buyer will want to protect itself from. And so a specific escrow account will be set up for that risk. And so an example I'm seeing more often would be an escrow account set up around data protection rights. So Europe, the European Union recently passed the General Data Protection Rights Law as part of operating or doing business in Europe. And because of that, any business that has any tangential exposure to Europe has to be compliant with those, those rules. And there's some ambiguity on what truly is compliant. And there's a lot of risk around it. So a lot of small sellers may not necessarily have the proper protections in place or may not have done an external third party audit of their data protection processes. We will, we or any other buyer will identify that in diligence and then set a specific escrow account with this known risk in mind to fund both a audit of these data protection processes as well as any remediation that's going to need to be corrected to be compliant with gdpr. It's an ongoing process. But you know, every deal is going to have individual escrow account oriented protections in them just in case there's a known risk that's identified. And we want, and we almost are certain we're going to have to spend money on it. We being the buyer, we know that money is going to need to be spent on it, but we're going to try to negotiate with the seller how to properly fund it. Right. And from our, from a buyer's point of view, you're going to want anything they've done in the past to be properly protected post transaction. So that's just one example. But there's, you can obviously set ones up for tax potential issues. You can set one up for any other legal issues that you saw litigation that came through it set up a specific escrow for that. So obviously very specific to every transaction.

That's cool. So you can actually use escrow as a tool to overcome major known risks.

Exactly. It has to be agreed upon though. Right. With the seller, because that escrow money is essentially deducted from the purchase price. Right. So, you know, the other option would be instead of sending up, setting up that escrow account or holding back a certain amount of money, just reducing the purchase price at that point in the first place. So it all just depends on what the seller and the buyer can agree to. If you just straight up reduce the purchase price, you end up, not you as the seller, are not going to be able to cover any of it. And if you do set up an escrow account, there's a chance that not all of it will be spent. Right. And so you will have some money that comes back to you.

What are the major risks of not properly negotiating indemnity measures in purchase agreement?

Yeah. So every transaction that a buyer is going to work on, there's going to need to be a business case set up. And really that's around developing proper strategy and projections associated with the business or really the projections and the associated strategy with acquiring that business. And those projections are going to be used towards the modeling effort from a corporate development standpoint. So to look at the DCF value, any accretion dilution impacts to us as the buyer, obviously we're public company, so any business we buy is going to have some type of effect to our earnings per share. And so if you're not properly protected from any of these items that we discuss, that's a, those are expenses that can directly hit the business case that you didn't plan for and can materially change the DCF value or how accretive or dilutive the business is. Right. You know, in the case of it being an expense, it can, it will only make it more dilutive. So that's, that's something that's pretty negative that, you know, we're not going to want to tell leadership, leadership's not going to want to tell investors. So it's very important that any buyer protect themselves from these issues. Coming, coming up, what are like some.

Surprises you've seen in some of the.

Deals you've worked on occasionally? So sometimes, you know, I think in context of this discussion, a lot of times what will happen is, and back to the how much you're disclosing. You can have someone not properly disclose everything and then you are exposed to something maybe you didn't properly protect yourself in, in terms of reps and warranties. And you know, that could happen in terms of asking for your top 10 vendor list. But it turns out that another vendor learns that, that a big buyer Acquired, the small business learns of the transaction and then. And they're outside of the top 10. And then suddenly they want to. To raise the, you know, their fee as being a vendor to some ridiculous amount. And I've seen that kind of thing before, and it can be somewhat, you know, of a danger area for the buyer. And then there has to be an entire other process, you know, potentially to mitigate that issue. But the best way to protect yourself, really, is to get that the strongest rep as possible so that you're not. So the rep is covering you beyond anything that's necessarily disclosed.

Yeah, it's interesting. I heard a very similar story in an interview I did not long ago about some of the vendors switching up their terms right after the deal.

Right. And I think that that's probably a pretty common one associated with a big Fortune 500 company acquiring a smaller business just because that vendor knows that big Fortune 500 company has much deeper pockets than the small company that was their previous customer.

Yeah. Anything else? Have you ever seen any interesting surprises that come up maybe after the close?

You know, most of what I've seen post close would be small claims that come up or something that was improperly disclosed. In terms of surprises, sometimes you'll see something more in a, you know, somewhat in an ambiguous way that, you know, us as the buyer can think that they didn't properly represent that they think they properly represented. And so. And sometimes there's that kind of ambiguous gray area where, you know, there's just a dispute between the buyer and the seller. Right. But it really just depends on the context of the situation. I mean, from my standpoint, and I haven't. I've only been working roughly five years now. I haven't seen anything major come up, you know, anything that hits the level of fraud or, you know, materially misrepresenting some item from the, you know, something material misrepresenting something about the business. But, you know, it's always, always a risk.

You'll have to let me know so I can come back and interview you again.

Yeah, I would have. Yeah, that would be great.

Okay, so since you're on the buy side and obviously working at a larger company, give me advice as somebody that's selling a company and giving me some tips in terms of, like, how I can really protect myself and what are some of the things to think about.

Yeah. So if you're a small business and you're sell looking to sell, you have to be aware that everything you're representing to the buyer, the buyer is going to take very seriously. And in that context, that means if your systems are not up to great, up to date, you can't readily pull data to properly represent the business. That's going to be a potential issue for you during the acquisition process. It's going to end up causing more work for you on your end and you're going to have to potentially be exposed to more risk post closing if something comes up. And again, you have to be reminded as a small business owner, let's say that your business will now be part of a bigger business and this bigger business has potentially much more notoriety than your business. And things that you think were not a risk for yourself could be a risk for you in the context of being owned by a much bigger organization.

So really be prepared and have all your stuff in order so that the process can be comprehensive and things sort of get done the right way.

Yes, agreed. And some people like to make jokes that, you know, you may want to just hire, you know, maybe a team or at least a banker or whoever, depending on the size of your business to really dig and do as much, do a lot of that heavy lifting that you as the business owner are not going to end up wanting to do yourself necessarily. Right. Because the work has to get done. So if you do end up hiring that, you know, investment banker or whoever, other type advisor, and you're obviously going to have to hire a lawyer, but you're going to also want to hire potentially other, maybe even accountants as well to really help you with all with this entire process. And I think the way a small business owner can think about it is it's just a, it's a transaction cost to you. Right. It's essentially a reduction in what purchase price is going to come to you. Right. There's obviously many different firms to choose from and the bigger ones, you know, a lot of times will charge more than the smaller ones. But it's just something to be mindful of. Otherwise the process can drag on for a super long period of time and you'll never actually get your money.

Yeah. What's the craziest thing you've seen in M and A?

I have seen. I think the craziest thing would be some of the emotions that come out during negotiation when certain cuss words come out and people get very emotional about the process because maybe you're at a certain point in the deal and negotiations. So there's really not a turning back standpoint, but you really don't want to sign up to those terms. And so maybe emotions Come out and potentially you say something that you don't want to during the process. So I've seen that definitely from time to time and I'm sure it's somewhat common, but it's, you know, it can be a very emotional event as you, you as the seller want to make as much money as possible and retain as much purchase price as you can and then you as, and avoid as much, you know, taking on as much risk as possible as well as the buyer is going to want to avoid taking on as much risk as possible. So it can be much more emotional potentially than I would have ever expected before getting into ma.

I've had it a few times just in finance deals.

Yeah, exactly. Whenever you have a lot of money involved and there's a lot of risk associated with completing the transaction and post closing risk, people get emotional. Believe it or not, again, prior to getting into M and A, I would have thought everyone was basically happy with their somewhat big check, but I've seen that that is not the case.

I think people underestimate how taxing the actual sale process is. I think that's a big factor of it. And yeah, I'm kind of curious, like what, what type of blowouts have you seen? Is it people just getting upset and they're throwing the F word around or you seen anything beyond that?

It's that, but then it's also, you know, people shouting potentially or saying that, you know, this is not what we agreed to in a, you know, at the LOI stage or another part of the process or that's a ridiculous request of us to disclose all that. You know, that's going to take us way too much time. And so actually I should bring that point up then too because the emotions could just be around time and effort that needs to be put in and properly disclosing items. Right. So, and then there could be emotions around that where that's just going to take us too much time or we need to focus on something else. And so it's kind of all, you know, I've seen all the above and again, from my standpoint, I, before getting into M and A, I just would not have thought it would get that way.

Did things come back together at closing dinner?

Yeah, generally they can. And part of our strategy, a lot of other tech industry strategy, I mean, we are never focused on any form of cost synergy or removing any headcount really. We're focused on retaining those employees, which many times includes a large section of the capitalization table or especially the founders. So it's definitely a balancing act to properly get them, you know, back. You know, we're, you know, you're going to now be part of one team, and we know it was emotional before, but now we're part of one team and we all have one goal. And if everyone's hitting that one goal, well, multiple goals, but the one goal being hitting the business case, any of those risks or issues are going to be mitigated, really. But yes, it's a balancing act. And sometimes we'll put together retention agreements with employees to try to protect around, especially those employees. For shareholders, we'll put retention agreements to try to incentivize them. But sometimes you can only do so much from a retention standpoint. So it's a balancing act for sure. Moving from maybe the heated negotiations to post closing, we are now part of one team trying to strive for one business case.

So at the end of it, you got to embrace them as a family member. And all those emotions were all part of it.

Exactly.

Awesome. Ben, thank you so much for your time. I really appreciate you taking the time to do a breakdown of the deal process with myself and our audience today.

Thanks Susan. I had a great time.

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