How to Choose an M&A Advisor

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. In this episode, Mark Miller and I discuss the process of executing deals without overburdening the management team. Mark is currently the Vice President of Huron Capital, a private equity firm that invests in lower middle market companies. He is familiar with the private equity process from start to finish, deal sourcing, execution and portfolio company management. Mark discusses the role of management, choosing an advisor and customizable exit plans. Here's more from Mark.

I'm a Vice President at Huron Capital. I've been with the firm for the last three years and and I am responsible on our transaction teams for all aspects of deal sourcing and execution and portfolio company management. And on the execution front, I'm involved in everything from managing the due diligence process to negotiating legal documentations to setting the ultimate capital structure for the investments that we made and lining up all the financing documentation and all the stuff that goes along with that. Prior to Huron, I was in business school for two years at Wharton. I was there from 2011 to 2013 and after graduating from college in 2005, I spent six years in the world of finance, two years with JP Morgan from 2005 to 2007 in their mid corporate investment banking group in Chicago and I spent four years with Glencoe Capital, a Chicago based private equity firm that also had some operations in Michigan as well. And that was from 2007 to and 22,000 2011. So since graduating college been in the world of finance, private equity and banking.

Sounds great. It sounds like you've seen the sale process from multiple angles.

Absolutely. Yeah. It's been good over the years I've been involved, I guess at a good time in the world of private equity and investment banking. There's just been a lot of activity in the M and A market and then there was quite an interesting time in 2008 and 2009 when the great Recession hit. You know, did weather that storm and you know it's been especially a Huron all the transaction activity that our firm has been involved in. It's been a fantastic learning experience for me seeing the private equity process really from start to finish from you know, executing deals on the buy side, being heavily involved in strategic initiatives that are portfolio companies focused on growing those businesses all the way through, you know, ultimately selling those companies and realizing the, you know, the successes of all the effort that's put in during the investment period.

So Mark, from your experience and just looking at the sale process, what's the worst thing that could happen when selling a company?

Well, I think when you look at, you know, the process of selling a company, you know, it can be a very quick process that you evolves over the course of a short period of time, but oftentimes it's a several month process. And the worst thing that can happen in that process is that you are consuming the management team, the underlying portfolio company, their time and energy, taking them ultimately away from managing the business and being sure that the operations and the financial performance is, you know, all trending in the right direction. So, you know, I think that the worst thing that can happen is you create an environment where the management team of the portfolio company can easily sort of lose focus on the business itself. Because the sale process or the transaction process can be so time consuming. And that can lead to bumps in the road in terms of operational and financial performance. And when you have performance over the course of the sale process that does not meet the expectations of the advisors or buyers who are participating in that process, that creates wrinkles that can be quite challenging to work through at the end of the day.

So how do you keep that from happening?

I think it starts with working with an advisor that you truly trust that has deep experience of managing transaction processes over a long period of time, has deep experience in the specific industry in which the portfolio company resides. And as an investment team, we want to be working closely with that advisor to really take as much as we can off of the management team's plate during the transaction process. So when you look at what the management team has to be actively involved in, they need to be involved in creating the marketing materials, they need to be involved in attending management presentations with buyers as they come and take a look at the business. And there's no way to get around the fact that that's going to be a very time consuming process for management teams. But at the same time, an effective advisor and an effective deal team. From the private equity firm's perspective, and from Huron's perspective, we're focused on really playing an active role to be sure that, that the management team isn't spending too much of its time on those transaction activities and can really do what's important to creating value at the end of the day, which is focusing on being sure that the operations of the business and the underlying financial performance continues to be strong. Because at the end of the day, those fundamentals are the building blocks and are key to a successful outcome and an investment.

That's a good point. Mark, can you take me back to when you first start planning for an exit and the steps involved?

Yeah. You know, we take the approach of planning for an exit on day one. And you know, that might sound strange, right? You know, you close an investment and then you're immediately focused on planning for an exit thereafter. But that's the reality of investing. Now, before I go into why that's the case, I want you to understand that and anybody else out there to understand that, you know, we take a very long term approach to investing, a very patient approach to investing. And that typically means that we'll hold our investments in the portfolio for five plus years. There are some investments that Huron has held for, you know, even 10 years. So that's not to say that we're taking a shorter term sort of view on the investment and looking to make a quick exit. But what you need to do is you need to start thinking about how you can enter into a strategic planning process shortly after an investment closes. That involves initiatives, strategic initiatives that are part of a long range five year plan. And each of those initiatives need to be geared toward focusing the leadership team of the portfolio company, that includes the management and the board of directors, on initiatives that are ultimately going to, you know, to maximize the value of the portfolio companies in which we invest. So that's why I say it really starts on day one, is because when you're setting those strategic initiatives and action items that you need to execute on the management teams of our portfolio companies, you know, need to execute on over the course of a several year period, those initiatives need to be items that are going to ultimately, you know, in our view, maximize the underlying value of the company in which we're invested in. And that's why it starts so early in the process.

So early on you're developing this strategy for the exit. How does that evolve as you get closer to actually executing the exit?

Yeah, I want to just comment on one thing you said in a strategy for exit. I'd say it's. It's really a strategy for the business. It's a strategic plan that involves a business plan that has multiple action items that are geared toward maximizing the value of the company. And that's ultimately what we need to do before we exit an investment. So it's not that we're planning the nuts and bolts of what that exit process is going to look like, but it's planning the nuts and bolts of what are those strategic initiatives. That are going to take us to an exit event that we can successfully run and one that we think can maximize the value of the company. So how does it evolve over time? You have a strategic plan that's developed at the outset of an investment, and it needs to be a living and breathing plan. It needs to be a plan that we, as investors and board members and management teams, can constantly look at, tweak, and refine over time, depending on how dynamics in an industry might change, how dynamics within the company's leadership team might change. You need to be able to adjust so those strategic initiatives adjust over time. And then the closer you get to the actual exit event, ideally at that point you've been down the path of successfully executing several components of the strategic plan, then you can really begin to put the finer points on. How do I want to begin to tell this story to the marketplace and convey to the marketplace that the initiatives that the leadership team of the portfolio company, with the help of the board and investors, have embarked on, have really created a situation where the next buyer or the next owner of the business can really do another exciting strategic plan with the business and take it through its next phase of growth. It might outgrow at that point. It's key, as you get closer to the exit process, to really refine the elements of the story that tell the marketplace. Why is the underlying business that we've been invested in and been working so hard on positioned to continue to grow its revenue and cash flows?

So your thought process behind is we build a story behind what we've done to build value in this company and then have it tail out where here's opportunities for the next buyer to be able to even grow it further.

Absolutely. You need to have a story and a positioning in place. And if we've been successful in executing our strategic plan, by the time we exit an investment, we still have a number of growth opportunities, whether it's organic or through acquisition, for our portfolio company to capitalize on under new leadership and new ownership, I should say.

Then what happens next?

Well, at that point, when you feel pretty good about the elements of the strategic plan that we've executed on, you know, over the life of our investment, you know, at that point, that's when you can really say, do we feel as though the value of the company, you know, at that point is, you know, optimized to a point where we are in a position to exit and pass on the investment to new ownership? So when you feel really good about the pieces of the puzzle and how they're fitting together at that point in time. That's when we can begin the process of really, you know, engaging with advisors who can market the and ultimately run a sale process at that point.

Well, tell me a little bit about the type of advisors that you use.

We use a variety of advisors and I would say the common thread among the advisors and investment banks that we work with is that they have a core expertise in middle market and lower middle market mergers and acquisitions. As you know, Huron Capital is a private equity firm focused on businesses investing in businesses with revenues up to $200 million. And you have to have an advisor who has just first and foremost at the highest level that has an expertise and an experience base of working with companies that are in that size range. So we tend not to work with the larger bulge bracket investment banking firms of the world just because those banks, naturally, due to their size, tend to focus on deals and companies that are much larger than those in which Huron Capital invests.

Other than size, what factors do you evaluate when selecting an advisor?

So to reiterate what I just said, it's an excellent reputation in the middle market. Take it through a few points. That would be sort of number one. That's the most obvious and most general. And then I'll dig down into more specifics. And you really want to be engaging with the deal team that understands the industry in which the underlying portfolio company resides. So for example, if we are in the process of exiting an investment or a portfolio company that is in the consumer product space, we're going to want to be working with a firm and an investment banking firm and a deal team within that firm that has extensive experience working with businesses that have similar dynamics and have also been in the consumer product space. That then leads to my next point, which would be that the deal team that you'd be working with, on the deal team of the investment bank that you'd be working with would be able to be in a position to have a deep understanding of the portfolio company's business model, you know, given their experience in the industry. So we want them to be coming. We want that the investment banking advisor to be coming to us with similar experiences with companies that have similar business models and they have a deep understanding for how to position those businesses in the marketplace. Given the business dynamics and given the business models. And if there's similarities between our portfolio company and the previous companies that those investment banks have worked with, that knowledge base is invaluable. And then the final point, you know, I'll make on this Front is that we look to our sell side advisor to commit to us Huron that the senior most member of that advisor's deal team will be giving the transaction that we're talking about significant attention and that we'll know that it has, you know, our deal is high on that advisor's that senior member's priority list and he will be focused on it. So we want a river guide who's sort of passionate about working with us and personally on that. The senior deal teams member side is a personally deep experience in the industry in which our portfolio company resides.

Now do you have a beauty contest for the bankers or do you just have a firm you just know to go to right away?

No, we do evaluate multiple options. There's so many strong lower middle market and middle market investment banks out there and not only just in the market generally, but when you get down into different industry sectors, you know, niche manufacturing, business services, consumer products and services, there are so many strong, strong banks within each of those verticals that are capable of managing an effective transaction process. So what we try to do is, you know, through the, through even the life of our investment, sometimes very early in our investment period. We're meeting with a variety of advisors who have experience in the industries in which our portfol companies are in. So we'll be speaking to them early. And then when you get down to actually selecting an advisor for a specific sale process, we would at that point interview anywhere from say 2 on the low end, if you have a very focused approach on who might run the process to four to five banks on the high end and then ultimately make a selection from that process.

Okay, and then what really impresses you when you see presentation from bankers?

You know, it goes back to the factors that we evaluate when selecting an advisor and it's again, it's going to be a deep list of relevant transaction experience in the particular industry that we're looking to engage a sell side advisor in. You know, we don't necessarily look to bring an advisor to the table that doesn't have specific transaction experience in the industry that we're talking. I mean that's sort of critical first and foremost. So if an advisor can come to us and say, look, you know, I have go back to the consumer products example I was talking about earlier. You know, our firm and me personally, I'm speaking from their perspective now, have a history over the past three years of, you know, 20 successful M& A transactions in this space. You know, that's something that is quite impressive because at that point they can bring to bear in our process all of the nuances that they went through in each of those individual transactions to really be sure that we're optimizing value and making the right decisions and speaking to the right people in our transaction process. So I'd say that that's the first thing that impresses us the most. And then the second thing would just be, you know, conveying in the materials that they present to us when you're in that sort of beauty contest, as you called it. And they've done their homework. You know, they've done their homework. They understand the industry dynamics. They come to the table with a very thoughtful approach for, you know, based on what I know. Again, I'm speaking from the banker's perspective. Based on what I know, this is how I would position the business. Here are different buyers in the marketplace that I would specifically pursue in this transaction. Here's why I think they're interested. Here are people that I know and I speak directly with at each of these buyers, and I know I can get their attention if I'm speaking with them about your business and if they can come to the table with a deep transaction experience and then also a very thoughtful approach for how they would market, you know, a Huron Capital portfolio company in the marketplace. Put those two pieces together and you have a pretty solid plan. And, you know, not. Not all bankers come to the table with both of those dynamics. And that's sometimes how, when you're speaking with three or four or five different firms, you know, one can really differentiate themselves from another.

That makes a lot of sense. One question that comes to mind is when you're getting these different pitches from bankers, and I know a lot of times they may project a value that they can fetch from the market, what's your experience in terms of the variance that you've seen and I guess your interpretation of it, because, hey, would you sense that this person's on point or this guy just blowing it out just to get the business?

Yeah, that's a really good question, and that's one that we think about a lot, because you do frequently see variations in the valuation ranges presented among multiple parties. And you have to vet whether the outlier on the high side is realistic or if the outlier on the low side is overly pessimistic or is a real signal that they're not confident that they themselves can get the deal done at a valuation that might be as attractive as what someone else is putting out there. So the way I'm speaking a bit for Myself and I know, my colleagues and the extensive discussions we have around this topic, think about it similarly in many ways, is that you have to pair the communication on what the value expectations are with that advisor's experience in the specific industry that we are talking about and with transactions in that industry that have similar dynamics to the transaction that we're at the table discussing. And obviously the dynamics that are being experienced in the broader marketplace, all of that comes to bear. But if they can really support their valuation range with some sound facts from what's going on in the broader industry, here's what I've experienced in similar transactions in this specific industry. Those are the sort of the solid building blocks of my valuation. And by the way, they also sort of conform with valuations and trends in the broader marketplace. Right now that is impacting the broader MA market. The story has to all hold together. And if you have valuation range that's presented and the support for it is flimsy and doesn't have all those solid building blocks in place, that's how you can sort of ferret out one advisor's valuation range that might be a bit more rock solid than another advisor's.

Now, would you ever pull your own comps through different data sources?

For sure, yeah. You know, we're, we need, in any of our investments, if we're going to be successful as investors, we have to know what's going on in the industry and we pay very close attention to M and A transactions that are impacting the industries in which we're invested. What multiples are those MA transactions? What valuation multiples are being ascribed to the targets in those M and A transactions? We keep close track of that constantly. If we're invested in an industry, you know, a niche manufacturing business, for example, and there are, we invest in the middle market where companies don't tend to be publicly traded, but there tend to be companies out there that, you know, are publicly traded that are, that are similar in many ways. You know, we're also taking a look at public comps on a regular basis as well. So we'll always have a good sense for what an appropriate valuation multiple could be for the businesses in which we're invested. And that can be a, you know, pretty good sanity check on, you know, what the bankers are delivering. But again, you know, so we'll test it ourselves. But the support that the bankers from their specific, you know, the sell side advisor from the specific experience that they have in the marketplace that they can bring to the table to support their valuation metric, you know, that just makes us feel all the better if the support that they have is sound and it aligns with our view as well.

Gotcha. So you're considering valuation before you even engage with the banker as part of that process?

We do. We always have to have an understanding of what the valuation trends are in the industries and spaces in which we're invested.

So when you sign this engagement with the banker, what's your expectations from your advisor from that point on?

So I'll walk through three points. First, our expectation is that the deal that we're talking about will be a priority for all members of the advisors deal team. You know, and especially as I mentioned previously from the, you know, the managing director or the senior most team member who's leading the engagement, that's critical. So we expect that our deal will be a priority for the entire team, especially the senior most member of it. We also expect that the deep transaction experience that the advisor has will allow them to really customize the exit process for our specific deal. And what I mean by customize is that once we sign up the engagement, they're going to run a smart process that really takes advantage of what they see as the unique opportunities to create value in the process. For example, if the advisor might say in this situation it is appropriate to run a broad marketing process versus another situation where it might be appropriate to run a very targeted marketing process where you're only going to a select group of, say, five to 10 buyers. Those two paths can lead to much different dynamics in the transaction process because in the broad outreach you might have 100 plus parties to the table. In the targeted outreach, you might only have five to 10 parties to the table. So it can create a lot more, a lot less to manage in the process. But we expect that our advisor is going to be bringing their own transaction expertise to the table to really figure out how are we going to customize and run this the right way for this specific outreach. You know, it's not a one size fits all approach and we expect that thoughtful customization to come to us. And then the next, the last thing that, you know, that we would expect is rapid, thoughtful responses to questions and requests that we as the private equity firm and deal team have for our advisors as we're preparing to launch the exit process. And then ultimately, and the management team for that matter, the management team is going to have, have questions and going to want to be educated as the process begins. And then also that same sort of rapid and thoughtful responsiveness and decision making when buyers who are ultimately involved in the process, make requests for information.

So really making sure they're responsive to your needs and the buyers as well?

Absolutely, yeah.

Have you ever retained a banker that was just shitty to work with? You don't have to name names.

Yeah, I mean there's always just like anything in life and over the course of my own short 10 year career here, since graduating school, there's going to be parties that are worse or better than others. And I would say where I've seen where parties tend to differentiate themselves is on that level of thoughtfulness, I guess I would say with regards to, you know, running a, an appropriately customized process, you know, figuring out if that broad outreach, for example, versus the targeted outreach is going to be appropriate and are they reaching out to the right buyers and the right constituents at the right time? You know, that sort of thing you don't want. It's not good when an advisor selects a strategy or takes an approach that ultimately doesn't work out as expected. So that's one thing that can sort of disappoint you in a process and then I think just the responsiveness to questions and calls that come from either us, the private equity firm or the buyers as well. I have worked with some advisors that are less responsive than others, but by and large I've been very pleased with everybody I've worked with on the sell side front.

I think that's a big thing generally across the board. If you're working with anybody, any kind of consultant, advisor, and they're not responsive, that's a huge red flag. No, no.

Yeah. At the end of the day, these are important engagements and you're going to get a response. But it's that how rapid, how thoughtful are the responses? That can be a differentiator.

I've seen that with that whole size fit example and what we've experienced in working with transactions where you could just tell a bank's working with a transaction that's a lot smaller than their typical scope and it's just becoming this very neglected deal and you can just tell there's not a lot of responses going on. I think that part of it as well. Here's a bank you hired and they're going through a sale process. They pick a strategy, whether they're doing a broad auction or targeted to specific buyers and they get narrowed down further and further. And I guess as they start presenting buyers to you, what are some of the factors that you look at to narrow it down? I'm sure you've been in situations where it's Very close to pick between buyers. And I guess maybe if you have some experience around that in terms of those close situations and what are the key things that you end up deciding on?

Yeah, okay. So the elephant in the room is valuation. And that becomes a very cut and dry way to separate buyers you'd like to pursue and move forward in a process from those you wouldn't. And, you know, at the end of the day, you have to use that as a screening tool. There's no way around it. Valuation is one component, but the next component that is critically important is certainty to close. And certainty to close is something that we spend a lot of time thinking about with regards to the buyers that are in the mix in a transaction process. And there are oftentimes, you know, in the sell side processes I've been a part of, where a buyer can be in the mix and doesn't have the highest valuation, but for a variety of reasons might have the highest certainty to closing. And the weight put on the certainty to closing in terms of importance is huge. In Huron's evaluation of buyers that would be selected to either enter into exclusive due diligence and negotiations to close a transaction or just moving forward in the transaction process. So certainty to closing, we evaluate that by looking at, similar in many ways, I guess, to how we evaluate which advisor we're ultimately going to select, but looking at buyers who understand the industry that the portfolio company resides in, have transaction experience in the space, have been really actively involved with reviewing the marketing materials that are out there in the marketplace, calling the advisor that we've engaged with, not only questions, but smart questions on the business. Buyers that have looked to engage with and develop a relationship with the management team of our portfolio company, they've spent a lot of time, if this is relevant, in the data room, looking at the various materials that have been posted in the data room and engaging in further questions with the management team and advisor on those materials. And if you have evaluation that is low, but you have a high level of activity in all those areas I just discussed in terms of review of materials, study of materials, study of the industry, and you come to the table with a very smart approach and a thoughtfulness to your valuation, that can still be a very, very compelling offer, because the highest offer might be from a buyer that doesn't necessarily have strong support for the valuation or hasn't spent quite a bit of time with the marketing materials, due diligence materials, or developing relationships with the management team. And what you frequently see in processes is that when you select the buyer solely on the basis of the highest number. You know, a couple weeks transpire and there still might not be that much activity, or when there is activity, you know, they're turning over rocks and exposing issues they didn't know existed, but should have known existed and didn't appropriately diligence. And they're not able to ultimately stand behind the valuation that they put forth. And in that case, a number is just a number, and if there's not solid support for that number, it doesn't carry any value at all. The deal can't be closed. So that's why, you know, valuation, you can't get around it. It's a critical component of the decision process. But it's absolutely necessary to pair valuation with certainty to closing when ultimately making the selection right.

And sounds like you do have quite a few factors in determining that certainty to close.

Yeah. From the day we launch a marketing process and we're receiving updates from our advisor on activity among the buyers and their level of engagement with the buyers, that that's what we're assessing. You know, whenever we look for an update from our advisor, we want to get a sense for which of the parties out there that are not only putting a valuation proposal in front of us or signaling an intent to close the deal, but which are the buyers that actually can close this deal and which buyers, based on the level of activity, is our advisor most confident on that they can get to a closing at the valuation and proposal that they put forth?

I guess a question just looking from the tech perspective, because it's always interesting when we look from the buyer's perspective, they don't want their activity track. They normally go in the data room, do a bulk download, and they're out of there. And I'm curious to know, aside from file activity, looking at, maybe the diligence activity is a consideration in terms of what type of diligence request are you getting from potential buyers?

Yeah, I don't put much weight in activity in the data room, like you said, because of you can just download the entire data room and then you can do so much work behind the scenes that nobody's aware of, because all of the information sort of on your own shared drive. That said, data rooms are repeatedly updated throughout the transaction process. And you do want to see that when new files are uploaded, that the buyers are in fact downloading the latest version of the data room so that they're aware of what has been posted to the data room. So you can monitor activity to a certain extent using technology, but I don't put much weight on it at this point. Where the rubber meets the road is the level of engagement that the buyers are showing with the advisors and their interest in speaking with advisors and requesting, more importantly, the management team's time to review the questions that they have as they review the materials that are in the data room. So while you can't monitor exactly what they're reviewing and how frequently and how heavily they're reviewing it, you know that they are reviewing it thoughtfully. If they're coming to the table with smart questions that are going to help them, number one, solidify their valuation, number two, develop an investment thesis and a plan to continue the growth of the business and ensure that it succeeds. And number three, you know, acting in a way that they're engaging with the management team, you know, engaging with the management team not only to ask them questions, but also develop a relationship with them and signal to that management team that, hey, we're getting smart on your business. We have questions we need to address, but you know, this is a story we're really excited about. We're really excited about working with you to execute it. And if you have those three elements in place, you know, engagement with the materials, questions to advisors, management team, and then, you know, an intent to develop a relationship with the management team, you feel pretty good about their level of engagement with the materials and you don't need to rely on technical analysis of the activity to get you there.

That's interesting. It sounds like the sophistication of their diligence is a pretty big factor. Critical what happens post transaction once you get the deal closed? What needs to be done from your side?

There are contractual obligations per the purchase agreement. So you're going to have, you know, we don't have to go through the details of those, but there are various financial and tax items that need to be delivered that, you know, the buyer needs to deliver to the seller. For example, on the, you know, the final working capital amount in the purchase agreement, that's something that needs to be delivered post closing. There are other purchase price allocation details, financial details that need to be worked out. Those have tax implications. So there's a, from a pure sort of nuts and bolts transaction standpoint and in terms of buyer negotiating with or buyer interacting with seller post closing, all of those post closing items are sort of legal in nature and are spelled out contractually in the purchase agreement. And then from our perspective, outside of the legal documentation and the legal follow up items that are required once a deal closes, there's not Much more to do. From Huron Capital's perspective, the obligations are fairly light once a transaction closes.

Good. And then same for the advisor once they collect their check is pretty much off the hook.

Yeah. There's not much that needs to be done with the advisor once the deal closes either.

Now, going through that whole process, what would you say are your biggest challenges?

Something I said at the outset was managing the process in such a way where the management team is not so consumed with the process that they take their mind off of operating the company and ensuring that the company continues on a path of strong financial performance. And I'll repeat that here because the reality of any sell side process, it's very time consuming. It's time consuming for the private equity firm, it's extremely time consuming for the sell side advisor and it's extremely time consuming for the management team of the portfolio company as well. It's a very unique time for the management team of the portfolio company because the responses and the day to day management of customers and vendors don't change. Right. The transaction process itself is confidential. It's not known to many of those customers and vendors, if any of them. So they're expecting the same exact level of responsiveness and uninterrupted business activity from the management team of the portfolio company. And then behind the scenes, the management team of the portfolio company has to deal with very frequent requests for information as buyers conduct due diligence, as sell side advisors conduct due diligence and prepare marketing materials, as they hold meetings to as they hold management presentations and meet with buyers separately to discuss their questions on the business. You know, really from start to finish. It's an incredibly time consuming process that requires the sophisticated management team to figure out how to prioritize and juggle and appropriately delegate during that process. So the biggest challenge is managing the transaction activity and the sell side process with the all important elements of operating a business and ensuring continuity and operations and ensuring excellent customer service and maintenance of strong relationships with suppliers. And the fundamentals of the business need to stay in place in order to continue to grow and maintain cash flows and profitability and revenue. So the biggest challenge is balancing those two and the business continuing to perform strongly in a way that keeps buyers eager and excited to own the company.

It sounds like your biggest priority is to minimize the, the distraction for the management team throughout the transaction.

I wouldn't say it's a priority to minimize the distraction just because you can't avoid the distraction. I mean the distractions are reality of it. But if we as investors are being an effective partner to our management teams, we are selecting very strong advisors and we're also playing an active role in the sale process itself. As our portfolio company, for example, is responding to due diligence questions that are coming in from buyers, as one example. And our goal is to be actively involved so that the management team is not shouldering the entire burden. We want to take as much on our plates as possible so that the management team feels like we're a value added resource as they are responding to all, you know, the myriad requests that come in during a transaction process, which are time consuming. So we just need to be there 24, 7 and available to support the advisor and the leadership team of our portfolio companies in any way we can to ensure that the transaction process is smooth and ensure that they can, you know, continue to operate the business and aren't so consumed with the transaction process that they take their eye off the ball there.

That's interesting. So you actually take a pass at a lot of these diligence requests before it goes to the management team.

They'll go simultaneously to the management team and us. And we'll often need to work with the management team to develop responses. But we will get involved with crafting those responses in partnership with the management team and being sure that we can, you know, anything that Huron Capital can put on its plate to alleviate the time burden for the management team, we will take on those types of responsibilities.

It seems like that might be an area that could possibly get improved in terms of streamlining the process to be able to deal with a lot of those inbound requests.

That's a challenge that you face all the time, right? I mean, I don't think there's any silver bullet that is going to streamline a transaction process perfectly to the point where you just don't have much of a time burden on the management team because again, there's no way to avoid it. But like I said, if you have a good team built between the advisor and the deal team at the private equity firm, deal team at Huron, and the management team at the portfolio company, if all three of those constituents are working in unison, you're going to have a smoother process and hopefully a better outcome.

What would you say are some of the most important lessons that you've learned.

From your experience going back to the process of selecting a sell side advisor? Being wary, as we discussed earlier about the valuation multiple ranges that are presented if an advisor is presenting a high range to win the deal. But as we discussed earlier, if that valuation range does not have strong or has only flimsy support. You have to discredit it. And if a lower valuation range has really strong support from an advisor, that can get the deal done. And it's based on a great track record of experience. One lesson learned would be that selecting the advisor that put forth a lower valuation multiple range does not necessarily mean that that's going to result in a lower valuation multiple in the transaction process than the advisor that put forth the higher valuation range. In fact, ironically, it can be the opposite. That's one thing in the selection process. And back to moving forward now, selecting advisors, to selecting an ultimate buyer for the business. It's the level or it's the weight that is put on the importance of having a buyer that has a strong certainty to closing. And it's very easy to get focused on valuations, just sort of human nature, right? You see the high number or you see the highest number within a group of bidders, and your bias as an investor is to find ways to make that higher number work out. But you can't magically close the deal at the high number, right? So if the high number is not paired with the strong certainty to closing, the same concept applies in that, you know, a lower valuation with a higher certainty to close could very well result in the best outcome for the process. So again, when focusing on which buyer to select, you have to balance certainty to close with valuation very carefully.

Good point. I was just curious, and I'm almost done with questions here, just sharing a little bit of experience in terms of deals that maybe we didn't pick the right buyer. I'm curious to know what are some things that came up that just. All right, we're off on this one. Or this is a reason why this deal broke up.

Goes back to the certainty to close and valuation balance. That's something you see frequently. And once you select a buyer and you sign a letter of intent and that buyer has the exclusive opportunity to close that transaction, at that point they're going to start digging in and they're going to start spending money and they're going to do real work to get the deal closed and move forward. And one thing that can blow up the deal is if they start doing their work and start digging in and they're discovering issues that in fact should have been discovered or vetted earlier in the process, and that ultimately these new issues change their view on valuation. So their valuation goes from x to x minus 10, 15, 20% of x. That move in valuation leaves sort of A bad taste in everybody's mouth. And that can very easily pollute a deal because it frustrates the seller. It frustrates the private equity firm who's selling the portfolio company. It frustrates the management team who's invested so much time and energy into getting to that period of exclusivity with the buyer. So that's an obvious situation that can create a hiccup if you select the wrong party. So that's why you have to focus so much on that certainty to close part of the equation that we've been discussing. And then the second, you know, the second thing that can disrupt something, and this is second among, you know, many others, would just be relationship with the management team. We've seen parties come to the table that haven't developed strong relationships with the management team, and then they start doing their due diligence. And. And that chemistry isn't there between the CEO, CFO and the new buyer or investor group if it's another private equity firm. And that can also sour the deal, because nobody wants to enter into a partnership that starts off with a sour relationship from the start. So that chemistry has to be there too.

Those are some good examples. So you have a scenario. Let's say buyer just did okay, diligence and discovered some things they weren't happy with and want to change. Evaluation. That disrupts a lot of the terms. Or you just have a clash of culture and suppose it just were stuff that couldn't resolve and buyer bailed, or you decide not to move forward with the buyer, what happens then?

It's a tricky situation, but it's a tough situation. It needs to be dealt with, and you got to make a decision, and you got to make a decision quickly. The decision that needs to be made is, do we move forward with this buyer and continue under a less than ideal set of circumstances. If the valuation has been changed or we're not sensing a chemistry between the buyer and the management team, for example, it's a risk to move a transaction forward under those circumstances because you're on a path where you have to have an inflection point to improve, or else things can continue to get worse. And then you're really just kicking the can down the road for being forced into a decision to move into another direction several weeks later, and then you lose all that time. So that's why I say quick decision making is critical. If anybody on our deal team at Huron is uneasy about how a transaction process is unfolding with a certain buyer, we collectively discuss it and we make a decision quickly as to whether we need to move in another direction. If we decide to move in another direction, then in that situation we're heavily engaged in discussions with our advisor. They'll be with us every step of the way and recommending what direction we move as well, we lean on them to recommend whether we move in another direction or should stay the course and we lean on their expertise to make that ultimate decision. But when we do, then you're back to the table in terms of who is the next party we are going to reach out to. Is it somebody who was actively involved earlier in the transaction process or was it somebody who had submitted, you know, is it the second place person or are we going to go out to a broader group and remarket the business to see what type of outcome we can generate? There's a number of different paths that that can take and that's where the sell side advisors where we work with, they really earn their fee in those types of situations and really can establish quite a bit of credibility if they have to adjust and change course and are successful in finding the right path forward. In that case, that results in getting a deal done because that's a tricky set of circumstances to figure out how to how to adjust. If you're dead set on doing a deal with one party that has exclusivity and then you move in another direction.

Now the banker would be incentivized to find another buyer and get the deal done as soon as possible. But would you ever take a consideration that maybe we need to just pull this off for 6 to 12 months and then reintroduce it with a little better timing approach?

Yep, I should have said that. It's a good point. And that of course my previous answer was operating under the assumption that there was a clear reason to continue to pursue a transaction process despite moving in another direction. And I've been in that situation before where you reach out to one party and that party for whatever reason doesn't work out. And you know, I've actually gone to another party after that and that party doesn't work out and then you go to the third party and then that third party does work out. You know, it creates a protracted transaction process. But in that situation there was a compelling reason for Huron as an investor, us as an investor, to get a deal done in that timeframe. So, you know, that's the path you take. Now the other path is if you are not satisfied with how the transaction process is unfolding and there are still significant opportunities to grow the business and create value with the management team under Huron's ownership, you absolutely have to consider all options. Is this a sell versus hold scenario is sort of what we would call it. And if you have a path to creating value in that hold scenario, that needs to be considered very seriously. Because the smartest decision might not be tabling a process for six months. You know, the smartest decision might be. There's actually, you know, a couple different initiatives that we can pursue right now with our leadership team. We're confident in our ability to execute on them. We might delay this for 12, 18, or 24 months. You know, you just have to see how all that unfolds. You can't dictate a specific time frame.

That sounds like a tough decision at that point.

Yeah, that's never easy. That's a lot of time and energy and discussions among the deal team and Huron's investment committee on what the right decision is.

Looking into the future, what things might you guys be considering to improve your process for exits?

I'm just going to speak from my own experience at this point because we haven't collectively come together as a group and prescribed, you know, here are the three things we're going to do to improve the process. We're always talking about what can we do to improve our processes as a firm and be sure that we're moving in the right direction. And, you know, one of the things I wouldn't say is necessarily to improve the process, but, you know, one thing that we're sure to do is just to be sure that when we're selecting an advisor or we're selecting a buyer that you're really getting, you know, the opinions and recommendations from each member of the board of directors and the key members of the management team. You want all constituents, all key constituents at that point to be on the same page and on the same team with regards to the decisions that are made. You know, these key process decisions are not ones that come, you know, unilaterally from here on or one constituent over the other. You know, the collective team needs to be comfortable and confident in the decision and how the process is going to be run.

Thanks for tuning in to M and A Science. I'm Kisan Patel and you just listened to Mark Miller with Huron Capital. We hope this episode provided valuable insight into MA transactions on how to execute deals without burdening management. If you have interesting M and A stories or suggestions to share, feel free to reach out to me. You can find my email in the show notes for more resources including links or tools mentioned during the show. Visit dealroom.net podcast Join us next week when we uncover more secrets to successful MA transactions. This podcast was brought to you by Dealroom. Dealroom is a technology company that helps corporations on both the buy and sell side minimize risk and maximize value on MA transactions. We take the mass of data rooms, spreadsheets and emails and replace it with one easy to use process management tool. This results in big improvements in collaboration, security, and risk tracking. Learn why deal teams are switching to deal room@dealroom.net all views or opinions expressed by any individual in any form of communication on this podcast, written, oral or otherwise, are personal and do not represent the companies, firms, institutions, organizations or otherwise that they are associated with.