How to Build a Deal Model That Beats PE on Price

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I'm Kison Patel and you're listening to M&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&A deals.

Hello, M&A scientists. Welcome to the M&A Science Podcast. This show exists for one reason, to learn from the best practitioners actually doing M&A, not the consultants and the academics talking about it. We track down the top operators in the world, get them on a mic and pull out what's really working, then turn what we learn into frameworks, playbooks, and the only certifications built on real practitioner experience, not recycled textbook theory. That's the whole engine behind Buyer-Led M&A, the operating standard for buy-side deals with a buyer-drive strategy, alignment, and value creation from day one. Instead of letting bankers and sellers run the process, It matters because the old sell-led model is why most deals underdeliver. Buy-led M&A is how the best operators flip that. If you're serious about getting better at this, check out the M&A Science Certifications at mascience.com, built from 400+ interviews with practitioners who've actually closed the deals. Lead the deal, own the outcome. Let's jump in. I'm your host, Kison Patel, Chief Scientist here at M&A Science. Today I'm joined by Jeremy Siegel, Executive Vice President of Corporate Development at Progress. Progress has publicly committed to doubling through M&A every 5 years, which means Corp Dev isn't just a support function there, it's a growth engine. Jeremy's been one of the architects of how that machine works, with deals ranging from a carve-out of ShareFile at a cloud software group, competitive win over PE on the Chef acquisition, to MarkLogic, another sizable scale-up acquisition. Today we're going to talk about how Progress models synergies well enough to outbid PE without overpaying.

What happens to your M&A program when the public market cuts your multiple in half?

And how to make the call on limited access deals where the seller is playing games with information.

Jeremy, how you doing today?

I'm doing great, Kison Patel. It's great to be back with you. Looking forward to the discussion.

Hey, it's great to be here.

Progress, world headquarters here. Corporate headquarters, Burlington, Massachusetts.

I don't know how you get the air so fresh in this office.

Oh yeah, it's special.

It's like being in a Vegas casino, something that as soon as you walk in the building, you just feel like elevated with all this oxygen. Can we kick things off a little bit about your background? Sure. This is like your third or fourth time on the M&A Science Podcast. So if you like hearing from Jeremy, there's definitely more episodes. Just search for it.

I've been doing M&A work for over 25 years in the Boston software scene, a long tenure at Akamai Technologies where we saw the business go from $100 million to over $2 billion. In revenue, then jumped over to LogMeIn, which was a great run. We saw the business grow from $300 million to over $1 billion in revenue. And again, in less than 5 years. And then lastly, I've been at Progress Software for the last 6 years, helping to execute on our total growth M&A strategy, which, as you alluded to, is focused on how do we incorporate inorganic transactions to drive growth for Progress. And double the size of the business from a revenue standpoint every 5 years. We've already done that once. When I joined 6 years ago, we were a sub-$400 million company. Today we're nearing $1 billion in revenue. It's been very exciting to see how M&A can be a major contributor to the success of a company.

That's your biggest driver is through acquisitions.

Yeah. Progress has been around for over 40 years, public on the Nasdaq for over 30 years. So as you'd imagine, organic growth is slower. So how do we double the size of the business every 4 to 5 years? It has to be through M&A. It has to be doing scale transactions, companies that can have an immediate impact on the top line and where we have room for optimization and can really execute on the Progress M&A playbook.

How does that contrast with organic growth? Do you have certain expectations on your current business organic growth? And then when you look at deals, is there expectation of what their organic growth looks like?

On an organic basis, you think of our growth as a low single-digit growth rate. When we're looking at acquisitions, because of the scale that these assets are bringing, and we talk about adding anywhere from 5 to 20% of Progress revenue. So think of $50 to $200 million on the top line. As you can tell, on a CAGR basis, that's going to significantly increase your growth rate. But for us, the kinds of assets that we look at tend to be assets that have a similar profile to us from a growth standpoint. Growing mid-single digits to maybe growing low teens. That tends to be where our sweet spot is, tends to be where we have the greatest valuation calibration with the sellers, with their investors. That's really where we focus.

I was going to say, what's your total body count? What's your total deal count on career span?

Oh, career-wise.

Can you say body count? Do you get in trouble for that?

Career-wise, probably coming up on 50 acquisitions over my career. Give or take. You put in a little bit of corporate venturing and some strategic investments and divestitures and joint ventures. It's been quite a fun 25-plus years for sure.

Out of 50 deals, let's say, just use figuratively 50 deals. How many of those would be deals that you'd either say like bombed out? You know, you could be off 10, 20% or accelerate and win, but like we missed the mark on this one.

Yeah.

I mean, It's hard to really pin a percentage. There certainly are deals where the strategic thesis did not play out as we expected. There certainly were times where maybe we bought an asset and it needed more time to marinate/mature, but we got so excited with the technology, maybe we brought it to market a little too fast, a little too early, so the market wasn't as ready. There's certainly reasons why not all deals have been a success. At Progress, I'm very happy to say that we've really been laser-focused on finding assets that we know we can optimize, that we know we can integrate well into our platform and into our business. And we've seen tremendous success with the acquisitions here.

Being that M&A is such a key part of your growth driver, how do you think about the cadence and volume of deals that you do?

It's a good question. Yeah, we're not an acquirer that's going to do 5, 10, 15 deals in a year. We're very selective and we're selective because we're a financially disciplined buyer. So we're not just going to go buy assets at 10, 15, 20 times revenue multiples. It's just not in our DNA. We have a core set of financial parameters that assets need to fit to be able to get through the process of an M&A deal here at Progress. If your value expectations are too high, we're not going to be able to get that deal done. If your growth is significantly higher than where we tend to look at assets, you're probably looking at a multiple that's outside the scope of what we'll pay. We are very comfortable remaining disciplined, adhering to our financial parameters, and buying assets that we know are good assets for Progress and that we know we can execute on and optimize given all the strengths that we have at Progress. Global company, distributed sales force, 200,000 customers. The list goes on.

So clear criteria. You obviously know how you'd create value, like you mentioned, a platform to facilitate growth.

Yes.

When you define a big part, just being buyer-led and having clearly defined criteria, because you know right away if you can fit companies in or out.

Our top of funnel is very large, but that quickly shrinks down to a much more focused set of pipeline targets that actually fit our criteria. Where we can actually have engaged conversations with the target companies, build those relationships, get them to know Progress better, because that's going to be a key. We're not paying a crazy high value and multiple for assets that we buy. We want the companies that we buy to be excited about the value that our platform can bring to their business, that they are comfortable selling to us, knowing that we're going to take that business, leverage all the strengths that we have, and make their business better.

You want to see some synergy story there in these deals. You want to see that right growth trajectory so you know they can get the right valuation. What does that look like in terms of your pipeline? You funnel things down and you find companies that fit, but then they sit at different stages of actionability.

Absolutely.

Yeah. We like to— No will of selling to like, we're ready to sell today.

I like to refer to it as a 5-year roadmap. So some of the relationships that we're developing, are for opportunities that are more imminent. Some of the relationships that we're developing are for opportunities that we know are probably not going to come to market for 2, 3 years. But it's still important for us to understand who these companies are, to build those relationships, to build that trust, and to get them excited about who Progress is. There are a lot of people out there that don't know who Progress is today. As a 40-year-old software company, people might think of Progress with some of our legacy products. They don't realize that we've done all these acquisitions and we've really transformed this company into a leading infrastructure software player that plays across all different aspects of that infrastructure software ecosystem, from data and data analytics to infrastructure and monitoring and observability to digital experiences. So it's a much more robust platform. A lot of companies don't even realize once they start to get to know us, they get to know some of our leaders, they get to see how passionate we are about this company, they get more excited about the company. The pipeline, it's very important for us to have companies that are more near-term that we should be having much more active dialogue with, as well as companies that are further out. So maybe we're checking in every 6 months, every year, but just making sure that we stay on their radar. The key thing for me, and this is something I think I've talked about in the past, is we never want to miss a deal that we would've liked to have looked at. So we put a very, very concerted effort on making sure we understand this ecosystem, understand who the players are, and make sure not only investment banks, but the venture capital folks, the private equity folks know we're open for business, know we're well-capitalized, and know we'd be interested in buying certain assets there. They understand what our parameters are. They understand our financial criteria. They're not bringing us $5 million tokens because we're not looking at tokens., and they're not bringing us their companies that are growing 30, 40, 50%. We've built those relationships and that has enhanced the quality of the pipeline.

Any, any hacks to like drive actionability on these deals that you really like in your pipeline?

I leverage the great team we have here at Progress, to be honest. It's very easy for me to bring one of my GMs onto a call with the CEO of a company, and once they hear their story, once they hear their vision, They get a lot more excited about Progress as a potential acquirer.

Because that's who they're going to be working with. They're going to be working with GM.

My CEO, they're all assets for me in selling Progress to these potential acquisition targets. And I leverage that. Absolutely. I can tell the story, but when they hear it from the person who owns that story or owns that business unit, there's just an additional level of excitement, enthusiasm. Passion. And that works. It works great.

All right. Then my hack of the day, leverage your business unit leaders.

Yeah.

Teach me some math. Your model is to buy assets that trade at a discount to Progress's multiple on a pro forma basis after synergies. Teach me how that math works. Like, how do you build this synergy model before LOI?

Some of it is assumptions that you have to validate once you get into LOI and can do much more in-depth diligence. But you're right. So how do we create shareholder value with the deals we do? We create shareholder value by finding assets where we know there's still room for optimization, where on a high-level basis, we're paying a much higher EBITDA multiple, maybe even a multiple that's higher than where we trade. But after we've executed on the synergies, the goal is to try to acquire assets that from a multiple standpoint will be below where we trade as an EBITDA multiple. So you're creating that shareholder value, that shareholder arbitrage, or however you want to refer to it. And that is one of the reasons why investors like our M&A strategy, because we're showing that we're creating this value. We're showing that we have this playbook from an integration standpoint. We know how to execute and we know how to execute on it quickly. These aren't taking a year and a half, 2 years plus. Within the first 12 months, we're usually seeing the majority of the optimization already complete. And that's powerful. That at a high level is the formula that we use. So we could pay a higher EBITDA multiple than where we trade at the surface, but know that from an optimization standpoint, once we integrate this asset, we're operating at a different type of operating margin profile such that we're creating that value for our shareholders.

Can you gimme the rundown as if I'm the new guy on your deal team and you just explain to me what are these synergies typically on a deal and gimme the breakdown of like, what are you actually betting on?

It varies. We benefit from being a global company.

I mean, is it revenue?

Do you assume a lift in revenue or—

the revenue tends to be more upside. What we're modeling is what we know we can execute on and we know where we can execute. For instance, we're a global company. We have centers of excellence in Sofia, Bulgaria, in Bangalore, India, in Hyderabad, India. So if there are ways for us to leverage those centers of excellence to create efficiencies with a target company, who maybe has all their development in San Francisco at crazy OTE levels. Those create opportunities. We have a massive sales distribution force here with 200,000 customers. If we can add things to our sales force's bag so that they can sell more of these assets, we don't need necessarily a large number of salespeople coming from the acquired company. So again, it— there's optimization opportunities there. And then you think of the back office. In the back office, we— you don't need two CEOs, you don't need two CFOs, that obvious stuff, but you can get some really good synergies out of that really quickly. So I would say for us, it's leveraging the massive distribution force that we have. It's leveraging the centers of excellence from a development standpoint in lower-cost places and eliminating redundancy.

So there's the stuff you want to bet on, like these cost synergies. Obviously back office is Pretty straightforward. But then you look at the deal. Yeah.

Say the company is a hybrid company, but they have facilities in 4 locations. You don't need 4 locations if people aren't going into the office. You don't need those.

That's part of your plan. Hey, here's what we're going to do. We have these assumptions. We're taking a bet on that when you make your offer at LOI.

But you're right. There's limited information that you have before you get to that LOI. The LOI, post-LOI diligence period is when you validate Can I really execute on that?

What's your philosophy on that? I feel like what I'm learning when I talk to these growth equity funds—

I don't mean to rip on some of them out there, but I will right now—

they will always come in with this very optimistic view on valuation. And then when they start running through diligence, that changes pretty quickly. They come up with a list and just basically give you a good kick on this is why your company is not worth this much.

And by that time, you've already invested in quite a bit and then you're so far down the road, you're just like, okay, at this point I'm just going to finish executing on this deal. Yeah. So our model, we try to be as precise as we can be at the LOI stage. We're not looking to renegotiate on value. Now, obviously, if you get into diligence and you learn that revenue isn't really 100, but it's 50, it's very different. Or that you have major collections issues or whatever the reason might be, things that maybe you should have shared early in the discussion that you didn't, that could change the perspective. But yeah, Now we're very focused. Once you sign an LOI with us, unless we learn something that's very different from what you told us previously, we're not going to retrade. That's not in our DNA. And I understand the strategy from a growth equity standpoint. You want to try to lock in a target by selling them a higher purchase price and getting them all excited and then diligencing them and negotiating with them and getting them so far down that path that at that point they're like, we'd have to start all over. To try to get some amount of value, or we could just do this deal. But that is not our DNA.

Yeah, I was curious. Let's tell a story. Chef, that was actually a deal I got to know you right after you closed the deal. And it was a company I was really familiar with. I had the t-shirt. I went to the AWS conference. Maybe you can give me a— give us a rundown. That was a unique deal.

Yeah, that was a competitive deal. There was a lot of private equity interest in the asset.

How do you be buyer-led on a competitive deal?

So for us, Again, we had an advantage there, and the advantage that we had was we had the center of excellence in Bangalore, and a lot of the things that Chef was doing in much more expensive geographies were things that we knew we could do in lower-cost geographies, and we had that platform. Private equity folks buying this as a standalone entity didn't have that same platform, so they weren't able to get the same level of cost efficiencies as we were able to. They had very expensive salespeople and we shifted that to an inside sales motion and they had incredibly expensive engineers. We shifted that to our Bangalore center of excellence and built up a team there. Things that we were able to do because we had this center of excellence location already, and it was just leverage that, build upon that. But as a result of that, we were able to be much more competitive from a price standpoint. And win that deal from pretty reputable private equity folks that were around the hoop on it.

Was the deal on your radar before it came up in the auction?

I inherited the deal. It was my first deal at Progress. But yes, the DevOps ecosystem was certainly a space that Progress had identified as an interesting and relevant space for us to play in. Great extension from being very developer-focused to being developer and IT ops-focused. In allowing you to tell that more complete story. So yes, the space was certainly a space of interest. And then with Chef, it just worked out from a timing standpoint. The investors had been in for 10+ years. The company had grown from rocket growth to growth plateauing, and it really wasn't going to be in a position where it could go IPO. The investors were tired. They weren't going to put more capital in. It was a break-even business. Their alternative was to either optimize themselves or sell. And they opted to sell. It was a great deal for us and it's been a great asset and a great part of our story.

So when you look to the deal, your synergies you drew out was a lot of the savings you could do with the current infrastructure platform.

You have the center of excellence allows you to reduce costs on support and development, selling more efficient ways and not necessarily needing high expensive salespeople for lower value deals.

You can leverage inside sales.

And so really just changing that approach allowed for all these different optimizations. And as a result, we got it to our operating margin profile really quickly.

Anything else unique on the deal that you saw that maybe others missed that allowed you to beat out all these PE firms on price?

Looking back on it, it was a great deal for progress. Chef was one of those internet technology darling type companies that had grand expectations of an IPO. That didn't play out. And when you think about a workforce that thinks they're going to go public and then all of a sudden they're getting bought by a 40-year-old software company, it has an effect. It has an effect on the target company. As our profile has changed over these last few years with all the acquisitions we've done, we've become so much more relevant, so much more interesting. And as a billion-dollar software company, we're a unique company at this point. It's a very different story that we tell now than we did when we were a $400 million business. We did that acquisition. Making sure that you think about dynamics like that when you're looking at an acquisition. This company, the employee base, very different mindset. You come to Progress and we have people who have been employed here for 20, 25, 30 years, very loyal people. And we have customers that have been here for 20, 25, 30 years, very loyal customers. And then you take this faster moving startup type oriented company, there are going to be challenges with that.

What were the big challenges when doing that deal?

One of the challenges that we encountered was attrition, and the attrition happened because of the fact that there was a certain percentage of that workforce that had expectations of an IPO, had expectations about making a lot of money working with Chef. That didn't pan out with the deal that we did. It was still a good value deal for the investors, but coming in and knowing that you were thinking you were going to make millions and millions of dollars and Here you are not making any money. That can create some tension. A lot of the people in their workforce probably preferred to work for earlier stage companies, more startup-centric companies. And Progress is a well-established public company on the NASDAQ, billion-dollar company. We're not a startup anymore.

I'm going to look at a deal. I am looking at a deal that it's a similar situation. Company raised a bunch of money and they're underwater. The value is nowhere near capital that they raised. And it's going to be the same thing. The employees got to bear the bad news that your options are worthless. It's not going to get—

it's hard. You can leverage that with retention stock and retention equity and retention bonuses, which are things that we incorporate into our deals too.

If there's people I want to keep—

for people that you want to keep, absolutely.

How would you look at that? Would you want to say, oh, we're really trying to keep everybody intact, let's come up with something broadly?

Yeah, we usually have different categories. We have key employees, then we have that subset below that, core employees that we also want to make sure we take care of. And then there's the rest of the employee base, you know, you still want to take care of at some level, but the ones that are key and core are the ones that you want to make sure get the higher allocations of that retention pool. For sure. Part of it falls on the target company in the way that they message the deal. For some reason, the people at Chef didn't necessarily understand that they weren't going to make money on the deal. They didn't understand the value of their options or their equity. It's important for the selling company leadership to be able to explain, here's where we are as a company. Yes, we were valued at this. Maybe that was in 2021 when things were irrational, but things are very different now. Look at the public markets. Look at how software public companies have declined from a value standpoint over the last year. Private companies need to have some of that perspective. They're not insulated from it. Think about the rank and file. They might just not understand. They might think that they're going to make a lot of money with 100,000 options or whatever they have. But when the deal gets done at a value that's significantly below where the last money was raised, all of a sudden that's not worth anything, but they don't understand that. So it's really important from a communication standpoint, from a messaging standpoint, and it starts with the leadership of the company that you're buying. And then it's important for us as the buying company to explain why these people are still important and what we're going to do for them.

This company I'm looking at, what should I do? Should I tell their leadership like, hey, I hope these employees aren't blindsided when we make a deal. You know, is there anything I can do to buy them?

Well, I think one of the things you want to do, maybe you incorporate key employees into the deal. And if you identify that core set of 3 to 5 people that have a decent stake in the business, you say, I can't do the deal without these people. They're going to be motivated to make sure those people get locked in and excited about doing the deal with you and being a part of a bigger platform that you guys are.

I like that. I'm going to come back to that. That's a good example.

Yeah.

This ShareFile was one. I was bugging you after you did that deal. I was like, that's a pretty cool carve-out you did.

That was a great acquisition for us.

Cloud Software Group.

Can you give me a sort of a sense of like the size of Cloud Software Group?

I mean, Cloud Software Group is huge and Cloud Software Group sells million-dollar enterprise software deals. And here you have this asset ShareFile that the average deal size was $3,000. They had 86,000 customers. Now we at Progress, we have hundreds of thousands of customers too. We know how to nurture, we know how to work with small customers who are paying a couple thousand dollars, $10,000. It was not really in the Cloud Software Group DNA. You know, one of the things, and going back to relationship building and trust, we had developed a great relationship with the CEO of Cloud Software Group and his head of corporate development when they were still at Broadcom. When they moved to Cloud Software Group, we continued that dialogue, making sure that we stayed in front and making sure that they knew that for certain things in their portfolio that maybe aren't core to them could be core to Progress. When they were making those decisions, one of the first assets they decided to divest was ShareFile. We got the call to take a look at that asset.

They reached out to you?

Yes. I mean, through the bankers, they hired the bankers, but they knew. And the nice thing is, is we knew a lot about the business because we had already had dialogue with them. So we were familiar with the business, which, as we've talked about in the past, speed, certainty to close are key differentiators. If I have a good familiarity with a business, I can move faster.

So this business was in your pipeline.

So we were familiar with the business, we were familiar with the asset, and it was non-core to Cloud Software Group, but at $250 million in revenue, it was a very sizable part of progress. So it gets a lot of attention at Progress. It gets a lot of love and the employee base really appreciated that. And it was something that I think really differentiated us and made us such a good buyer for this asset. It's been fantastic. It's been a great—

like a real carve-out. Yeah, it was more like a divestiture.

Yeah, it was carved out of Cloud Software Group. They had certain dependencies from a back-office standpoint. So we had a TSA in place which we were able to get off very quickly. The majority of the customers were unique to ShareFile, so that made it simpler. There wasn't an untangling a lot of customers that were Cloud Software Group and ShareFile customers. So that made things easier.

How do you think through synergies in this deal?

You know, it's the same. It's looking at the different ways that we could optimize the business better and not fully optimize the business. So there was still room to do optimization there. And we took advantage of that like we always do in acquisitions that we do.

Isn't the carve-out scenario just so different? It tends to be a lot more murky. You're really building this pro forma. There's like even more unknowns.

Well, it's an asset deal. It obviously requires you to really understand the business, understand what all the assets are that you want to buy, and making sure you identify everything. So there's certainly more pressure on you to conduct that diligence and be as thorough as possible so you don't miss anything, as opposed to a stock merger where you're buying the company as a whole. That definitely requires more work, but we at Progress have such a great M&A playbook when it comes to diligence. We have a lot of conviction. We have a lot of confidence that the work that we're doing to diligence the company is going to identify everything that we need.

What are the key things you want to look for if you're doing a carve-out? Like I said, it's still like an odd type of deal.

You're trying to understand like how intertwined is the technology? Is the technology coming all to you or is there parts— are there parts of the technology that the parent company is going to still be dependent on? In this case, there was none of that. So that made that part clean. There's the untangling of customers and then there's the figuring out from a back office standpoint, what do we need to do to be able to support this? How can we do it more efficiently than the parent company had done? And those are the things that we think about. So it's really making sure how clean or messy is this untangling going to be. And if it's going to be messy, it's probably going to make it more difficult to get through the process here at Progress. So we want to see a clean divestiture, as clean as possible. We've talked about this. We looked at a divestiture several years ago and we were very explicit from the beginning that we needed to own the IP. Towards the end of the process, when we were told they needed the IP too, and they would license it to us, that became a deal breaker. That came up too late in the process, and then you lose trust. And this goes back to the whole concept of trust and the importance of trust and relationship building. If you have issues, or if they're going to be things that are going to make the deal challenging, let us know upfront. And we can figure out if we can address them. But when we find out late in the process, it just changes the dynamics.

They get pissed off and then they don't want to— they're harder to make deals with.

Like, what else is there? What else haven't you told me?

I know, I know.

Your spiny senses get raised.

I agree. You get one lie, there's probably a million more behind this one. Yeah. It's an interesting one. The Carvel, I was thinking, were your biggest deals too.

That was our biggest deal.

Yeah.

Certainly from a top line standpoint, from a purchase price standpoint. Yeah.— it took us to almost $1 billion in the top line. Helped us achieve our first goal, getting to $1 billion.

Buyers lose competitive deals to private equity because they're modeling the same numbers. Jeremy won by building a model around what he could execute that they couldn't. He knew his platform well enough to see value nobody else could price. That's the whole game. Most corp dev teams haven't built the discipline to play it. The Buyer-Led M&A Certification teaches you how to build that kind of model before you price a deal. Build from over 400 of these interviews, 10 to 12 hours. Go to mascience.com and look for the Buyer-Led M&A Certification.

There's a link in the show notes. I'm thinking about like sourcing these kinds of carve-out opportunities. Was that deal competitive, by the way?

Oh yeah. Yeah.

You gotta go.

Yeah.

That was a competitive one too. So the way that it works at Pargas as a value buyer, We build the relationships, we're proactive on the front end, building the relationships, getting to know these target companies. But it's rare that a target company is necessarily going to just be like, "All right, I'm going to sell to Progress," without checking the market and seeing what kind of value can they really get. So the key for us is making sure that we're an ideal potential buyer, making sure we're as knowledgeable as possible, making sure that they understand the value proposition that we bring to the table as much as possible. Those are all things that we focus on early in that process because you're right, we're not going to necessarily be preempting deals. So they're going to be competitive. And this one was competitive too.

I think it's because the industry, most of these are PE owners, investors involved, and that's their playbook is to get a bank, run a process to maximize value.

Yeah. I don't blame anyone to go do a market check and see if you can get—

You're not buying like a founder.

We're very comfortable as a patient buyer to say, hey, go test the market. If you can get 5 times, 7 times, 10 times revenue multiple, all the power to you, and I'll be happy for you. But if you can't, we're still a great alternative. We're a great platform. We're an execution machine when it comes to our M&A playbooks from diligencing all the way through integration. So bankers know that we're going to be laser focused. We're not going to be asking for everything under the sun in diligence. Sellers know us from a certainty to close standpoint. Once we're committed to a deal in LOI stage, unless we learn something that's a surprise, we're going to get a deal done. We're well capitalized. We have an incredible economic model. We're 40% operating margins, 30% free cash flow margins. It's a powerful model. It puts me in a good position to be able to go do deals and continue to grow this business through M&A.

Profitability, a thing you look for, or at least a path to profitability?

We're comfortable looking at things that are sort of— I like to refer to it on the cusp of profitability to say 20-25% profitable. If you're bleeding lots and lots of money, it makes it a lot harder for us to get that to the kind of operating margin levels that we need to get to. If you're already at 50-60% operating margin, you're already fully optimized. There's not much room for us to create value. We're looking for companies that are— they can be losing a little bit of money to making 15, 20% from an operating margin standpoint where there's still room for optimization.

Strong businesses.

Yeah, absolutely. Even though the businesses that we look at aren't necessarily fast growers, we look at things like net retention and gross retention, and those have to be really strong because those are good indicators of customer loyalty. Maybe you're not growing 15, 20%, but the customers that use you, love you, love your technology, are loyal. And that is the Progress model. We're not going out there and chasing a lot of net new business. We are nurturing our install base. We're upselling and cross-selling to our install base, and we're continuing to innovate so that we can remain relevant and an awesome solution provider for our 200,000+ customers.

MarkLogic, that's one of your favorite deals you ever did.

MarkLogic. Yeah, it was an interesting one.

Was it competitive?

It was competitive as well. Yeah. Most of these deals that we're looking at that we get done are competitive.

If you had to sell, would you get a banker involved?

Well, we've talked about that. I'm a big believer in a banker brings some maturity to a process. And particularly if you're an earlier stage company and you're a new entrepreneur who's never done this before, the process can be really hard. So in those kinds of situations, absolutely hire a banker.

You can avoid the situation I described earlier.

Well, yeah, avoid the where you get the surprises later, or you can kind of that situation where the seller decides at the last minute that they're worth twice what you agreed to in the LOI. That's always a bad discussion. So you want to try to avoid that. So bringing in that banker, bringing in that maturity and that experience helps. MarkLogic was another great acquisition for us. From MarkLogic, we've been able to create our Progress Data Platform, which is this great platform that does more than just aggregate data, but does data analytics and data intelligence. And we've incorporated Agentic Search into this platform, and it's a great differentiator for Progress today. That came from the MarkLogic acquisition. Were there challenges to that acquisition? There are challenges with every deal we do. That one was a little more unique because there were things that happened that were surprising to us. One of which was maybe we took for granted too much that when you're between that announcing a deal and closing a deal, you're going to have access to the team of the acquired company, start to have dialogue with them, figure out who are the keepers, who are the ones that we're not going to need, who are the ones that are redundant. We didn't have that access during that period. And that was a surprise. We've always had access to that. How have we addressed that? In our LOIs, we make it very explicit that we'll need that access. And if you're not going to give us that access, tell us that now. But in this case, it was unique because it was the target company's last month of the fiscal year. And there was a lot of pressure to hit some of the numbers that we had talked about during the diligence process. And they didn't really want to have distractions. On the flip side, not everyone in the company is selling deals. There was a lot of people that we could have seen. The private equity firm claimed that was their model, that they don't give access to people in that period, but we've never really seen that in all our years of doing deals. So it was a surprise to us. And so we created this thing called orange flags that we flag during the diligence process, things that rise to the level of let's go talk to our CEO and CFO. And discuss, do we want to continue going here based on these orange flags? What's an orange flag? We've been asking for this basic information for the last 2, 3 weeks and they haven't given it to us. Why haven't they given it to us? What are they hiding? When that happens, it raises that flag, starts as an orange flag. We then discuss it with our CEO and CFO. Do we want to continue and continue trying to get this information or do we just want to walk away? Again, because we're a disciplined buyer, we're comfortable walking away. And when you say, "Hey, if I can't get this information, I'm not going to be able to do this deal," it usually lights a fire on the bankers, on the sellers. And I understand it's part of the strategy. Bankers are going to hold off on giving certain information while they let other people get in and do their work so that there isn't one company that's way ahead of this other company. So I understand there's all that kind of stuff happening in the background, but Getting access to certain key information is key. And if we don't get it, we're going to walk away.

Are there other flags? Is orange flag like— I'm familiar with red flags, green flags, and yellow flags.

Oh no, there are plenty of red flags.

I mean, red flags are like the deal breakers.

Yeah. Red flags are deal breakers. Orange flags are if you have enough orange flags, that could become a red flag and then that's a deal breaker. Or this warrants me having a conversation earlier in this diligence process with my CEO and CFO to see if it's even worth continuing with this process.

You know, in this example, like, this is like basic diligence access we're talking about, and you put it as an orange flag. Like, is there an escalation process that you do? Is it just making that point to the banker? Like, either we get this information or we're going to—

That's the escalation point. You say, hey, I had a conversation with my CEO and CFO, and they're like, if we don't have access to this information, we can't proceed with the deal. You can decide, do you want to share it with us?

What's that conversation look like when you go back to your team to decide if, and have you done that where you just like, we're going to walk?

Oh yeah, we, we've had those conversations internally. And again, because we're a disciplined buyer, we're comfortable saying, all right, the best thing for us to do is to walk.

You don't fall in love with deals.

That's key about our corp dev team and something that I've learned in this type of environment for 25+ years. You can't fall in love with a deal because you never know what's going to happen. So you always have to have sort of that balanced perspective.

There is like not falling in love with the deal, but then also having a motivated seller. That's the thing I'm learning more recently because I chase things.

And when you find out the seller is really not motivated, and that's an orange flag. And we learned that on a deal because we had a deal that had two owners. They were pretty much owned the entire business. It was bootstrap company. When one was on board, wanted to sell, and one was not on board, and you could tell they were never on board, but they capitulated with the process. We should have raised that as an orange flag earlier in the process. Instead, what happened was we expended all the resources, we did all our diligence, we negotiated a definitive agreement, we basically got to the finish line, and then one of the, the seller who had always shown a little bit of reticence basically came back and said, I hired an independent valuation company. They think my value is significantly greater than what you're going to pay, so I can't sell for that. I'll sell for this, which was a discount to what the valuation company said, but a significant premium to what we had agreed to. And that's walk away. So you walk away from that deal. So it's painful, but you learn your lesson. As an orange flag, if you don't see the seller being fully bought in to doing a deal, that's a flag.

There's no recourse if you threw money for QV and all this stuff at that point. There's no way to get that money back.

You get none of that money back.

That all becomes OpEx on the seller.

Painful.

Ouch. Yeah. I would not be happy about that.

Yeah.

We talked about you guys don't retrade, which is good.

Remember, we are not going to retrade unless we learn something significant.

Yeah. It's like, I see a misrepresentation. Sorry.

That's completely different than what had been told to us previously.

It's just like if QOV comes back and says, hey, You sort of represented these numbers for this fiscal year when it should have been this fiscal year or something like that. Or some of these add-backs you put in aren't really justifiable or things like that.

Material. Yeah. If it's material enough, that's different than just coming up with a laundry list and saying, hey, well now I've got you.

GRR is 85% instead of 90%. So we're going to deduct a couple turns for that.

Yeah. And again, things like that. And we're going to do our own ARR analysis and our own and determine what we think GRR and NRR really are. Someone tells us their calculation is 87% and we come up with 88% based on the work that— or 86% based on the work that our independent advisors do, we're not going to change the price for something like that. But if it comes back and we're at 75% and you were telling me it was 85%, 90%, that's a big delta.

Can you teach me how to do deals with market cyclications?

Is that a word?

Market cyclications?

Yeah, it's interesting. Market cycles.

Because you've probably seen some of this happen a lot. And like, we rode a big wave and it was great, good times.

And, you know, it's interesting and you're seeing it play out right now. What's happening with software. AI can claim that software is dead, but AI also realizes that they're highly dependent on software to inform their LLMs and to basically make the AI have some semblance of value. So software is not dead. That said, the markets have responded to some of these quotes about AI can replace this, AI can displace that. And you've seen this massive drop in market value in software companies. Now that's on the public side. You're not seeing that on the private side. The challenge is when you as Progress are a billion-dollar company growing 10 to 15% top line, including inorganic. With 40% operating margins and 30% free cash flow, and you're looking at this private company that's $50 million and maybe has 5-10% operating margin and wants to sell for 5-10 times, like the math doesn't add up. And so you need the private markets to catch up to where the public markets are. And I don't think that's happened yet. Now there's going to be more pressure. There's going to be more pressure because private equity needs to show liquidity. Venture capital is going to be focused on investing in AI and is going to want to find liquidity for some of its porcos that are in the software ecosystem, and it could create great buying opportunities for Progress. But we're not going to relinquish that financial discipline that we've had all along unless they're willing to capitulate and recognize that this is the new world order from a value standpoint. They're going to be in a challenged position.

So we're saying there's no immediate direct correlation between public company valuation and private.

Right. If that was the case, then we'd be able to buy all these private companies for 2, 2.5 times like we're trading at, and we're not.

And it seems like there is the value still up there because of private equity ecosystem still hasn't— I sense that too. Yeah, it might be like a little bit dialed down, but not capitulated.

And particularly with private equity companies that are profitable. Where they can wait and see how this software—

is that what it is?

Or SaaS optimism?

Where they're like, oh, we're still optimistic that valuations will rebound at some point in our 5-year term that we're going to—

that's got to be part of it. You know, if they don't have that DPI pressure, then they can hold on to it longer. For the private equity firms that have DPI pressure, this isn't as bad as our 2021 bets that we made. It's interesting, like when we look at PitchBook and see what the 2020, 2021 valuations are, we completely disregard that. Because we know those were irrational times and companies aren't going to get that kind of value.

Have we found a rationalization of why it was so irrational back in 2021? Was it just, we believe the world was going to end and this is our last chance to buy a deal?

Like, I don't know.

I just didn't— that thing surprised me so much because the values— you look at it down and then all of a sudden everyone, he went deal crazy value.

Well, the values were crazy. Money was free. Interest rate was at zero. Private equity could just go do deals. And that's when it was a little more challenging for us too, because they could be a lot more aggressive from a value standpoint because the debt that they needed to do these deals was so cheap. Now that debt is more expensive, so they can't be as competitive from a value standpoint. So it puts us in a better position. But when money is free, it's easier to pay higher valuations.

Is there like a coin term for the 2021 era? The software rush?

I don't know.

So, okay, you had that period and you obviously seen a lot. Even now we had a correction with the public. And there's still— I think a big part of it's just so much dry powder out there.

There's a lot of dry powder out there, so that needs to get deployed without a doubt.

What I'm trying to do is get a good outlook of running my own business. I got between Dealroom and M&A Science, and I look at Dealroom and I'm like, is this the new normal? Which is— it used to be like 8 to 10x in a good healthy business with all positive rule of 40 and et cetera, et cetera. Now it's probably at 6 to 8. And again, is that the new normal? Do you settle for 6 or do you think more optimistically that things will change? I'm just wondering, like when you do deals, How do you think through that part of this? Because if the valuations fluctuate in terms of what's considered normal and what's market, then what do you base it on? And obviously your view is, because you're public, that it's on the current view. And it seems like there's a sentiment with the private sector that they're thinking it's not— we don't have a gauge.

We have lots of data on how the public market trades. We know that if you're a rule of a rule of 10 or a rule of 20 company, you're probably trading more in this range. If you're a rule of 40 to 50 company, you're trading in this range, and so on and so forth. We know that, but again, it goes back to the private companies and they're not necessarily willing to accept those kinds of trading multiples that public companies are. We look at a lot of companies that are rule of 10, rule of 15, rule of 20 that are going to hold out for a 5x multiple. I don't know where or when they'll ever get that, And if they're profitable, maybe they can hold out and continue to execute and maybe grow into that value. But it's going to take time. It's going to take time. As more and more pressure comes into the system, lenders taking over deals because they're so overleveraged, good assets starting to trade at much more favorable valuations, others will realize that it's time to capitulate. I can understand right now no one's ready to be that first company that says they sold at this super low level. As opposed to waiting. So, but we're not going to get back to irrational days.

Are you seeing new deals in this current market that you didn't previously see?

That's a great question. And the answer to that is yes. So we're seeing a better cal— well, a couple of things. We're seeing some companies that are significantly worse that are willing to trade at anything that we don't want to touch. Companies that are declining, companies that have net retention rates in the 70s, gross margins in the 50s. A lot of those kinds of data points stand out as companies that we need to stay away from.

Crash and burn.

And then we're seeing higher quality assets for sure. The challenge for us is the kind of multiples that we paid 2, 3 years ago when we were trading at 11, 12 times EBITDA, it's harder for us to pay those same kind of multiples now. You run into that kind of challenge. But yes, the caliber of some of these assets that we're seeing are good quality assets. That gets me excited because if you're able to buy good quality assets at the kind of multiples that you were paying over the last few years for companies that maybe weren't as good in quality, even though they all still were solid companies, there's an opportunity to get some really new technology and potentially even accelerate that growth on the top line as well.

And different types of deals coming out.

Okay.

I want to wrap things up. You obviously know I'm trying to break my way into getting the first deals going. What do you think is advice just first-time acquisition, thinking through— we talked a lot about sort of synergies and getting the deal model structure right. What can I do to not screw that up besides call you and panic?

Yeah, the key thing is to continue to have conviction, to continue to validate what your original strategic thesis was through the process. When we're doing our diligence, we're constantly asking the same 3 or 4 key questions, and I try to get all of my deal team, diligence team folks to be— when they're doing diligence, be thinking about how does what they're learning inform those questions? Does it give us more conviction or does it give us less conviction? And if it gives us less conviction, why? And can we address that? Or is it something that escalates to the level of walkaway? For me, that's always key. And then building the relationships, building the trust in getting to know the CEO of the company and having more casual interaction and not just, I need your employee census and your financial projections for the next 3 years, but just getting to know them and getting to know what made their company tick. What would they like to see with their company in the hands of a bigger company? And really like show that you care about that. If you show that you care about that, that will go a long way. So constantly validate your assumptions through the deal process and make sure you still have that same conviction.

Build that relationship.

Yes. And build those relationships and really be thinking about like, how is this company going to operate within my company? What am I going to do to make it better? I'll let M&A.

Jeremy, what's the craziest thing you've seen in M&A?

There's so much crazy stuff out there.

I keep getting new stories.

Having a founder of a company literally the day before you're going to sign a definitive agreement, try to retrade on price is pretty crazy.

The day before.

Is pretty crazy. Didn't tell me it was the day before. It happened to me when I was at LogMeIn too.

Twice.

We weren't quite at the finish line there, but we were close. And 6 months later, he was like, we still have that deal. Like, no, it's 6 months ago. Like, no, no, that ship sailed.

There's a saying I heard. Is this true? If you get a good price, you should probably sell.

Well, it's like buying a house. That first offer is probably going to be the best offer.

That's true. This has been great. Thanks for taking time.

Always fun. Always fun to hang out with you, Kison.

I appreciate it, Jeremy. Fellow M&A scientists, thank you so much. If you stuck through this far of the podcast, You are an M&A scientist. Reach out to me on LinkedIn, connect with me, and I'll commend you. Just make sure you mention podcast. I get so much spam on LinkedIn, but mention that you actually listen to the podcast. Love to hear from you. Welcome the feedback. You got topics I haven't covered yet? Love to get those suggestions. Criticism. You think there's better ways to format this or do— I can do my job better. I'll take that criticism. Want to keep learning and improving. Till next time, here's to the deal.

Jeremy walked into competitive situations against private equity and won, not by bidding higher, but by building a better model. Plenty of corp dev teams don't lose their deals because they lack resources. They lose because they're pricing a company the same way private equity is pricing it on the numbers in the sim without asking what they could specifically execute that nobody else can. By the time they figure that out, the deal is already gone. That's the whole discipline behind buyer-led M&A. You build the model first, you understand what you can actually deliver, and the price follows from that. The buyer-led M&A certification gives you the framework to do it so you're not learning it deal by deal. Go to mascience.com and look for it. Link in the show notes. Thank you for taking the time to explore the world of M&A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M&A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kison, K-I-S-O-N, at mascience.com, or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com. Here's to the deal. Views and opinions expressed on M&A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.