How to Close M&A Deals in 30 Days

Emerson Block, Cardinal Health, Broadcom Toast, Energizer Jam, Treehouse Food, Hora Main there's too many to list what do the best corporate development teams in the world have in common? They use Deal Room, Add a crappy data room, and Excel trackers. In 2021, Emerson did an $11 billion acquisition on Deal Room. Then this year, a $14 billion platform divestiture to Blackstone. Even with every big bank name involved in the deal, they all had to use Deal Room. Learn why the best in MA combine diligence and integration into one workflow so they can get both diligence and integration done faster. To execute M and A like the Best, you have to know how to use Deal Room. See for yourself@dealroom.net Again, that's dealroom.net let's get to the interview. 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.

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Scientists welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. If you're interested in learning more on how to optimize your M and A practice, or want to get involved with a community of forward thinking M and a practitioners, visit mascience.com and subscribe to our free weekly newsletter. If you want to keep up with us on the go, head over to LinkedIn and follow M and A Science. I'm your host, Kisan Patel, CEO and Founder of M and A Science. Joining me today is Jeremy Siegel, Executive Vice President, Corporate Development at Progress. Progress Software offers software for creating and deploying business applications, trading on NASDAQ under prgs. Today we're going to talk about how to close a deal in 30 days. Jeremy, how are you doing?

We're doing great. Kisan. It's great to be back with you. Looking forward to this discussion.

We're here live in person at the dealmax Conference in Las Vegas.

Very cool, right?

How's the conference been for you?

It's been really good. We had a Strategic Acquirer Forum yesterday, some really good discussion with 200 practitioners who are doing corporate development and doing M and A for a living. So it's great to share best practices and learn from others who've been doing this for a long time. Just like me.

I've been having a great time. It's my first time at dealmax and it's been awesome. Literally looking forward to hard not to.

Have fun in Las Vegas. It's been a lot of fun.

I think it's a lot better than a lot of the other corporate M and A conferences out there that tend to be a little stuffy. And this has just been a lot of good, exciting energy.

Yeah.

Can we kick things off a little bit about your background?

I've been doing corporate development for a long time, thus the lack of hair that I have right now. So I've been doing M and A for technology companies for 25 years. I started my career in M and A at Akamai Technologies and was there for 16 years. Did probably 35 to 40 transactions when I was there, then had the opportunity to go run corporate development at LogMeIn and was there for around five years. We ultimately sold the business to Francisco Partners and that's what gave me the opportunity to make the move to Progress Software, where I've been for the last four years. Been responsible for really executing on our total growth MA strategy, reporting directly to our CEO. And it's been a ton of fun watching the company transition and be really transformed through M and A over the last few years.

A lot of deals, my friend.

It's a lot of deals, but it's a lot of fun. I'm a deal junkie.

Thanks for taking a break from doing deals to chat with me. Let's start from the top. What is the top? The top is you found a company to acquire. I would assume that you're nurturing these relationships. I got a pipeline. I'm trying to make friends and get to that point of does it really make sense to do a deal? What does that seem like? Do you feel like it's people just sort of trying to fill you out to see how much you're going to offer? Or is it more of would make sense we can get to the right price. What does that look like early on?

I like to refer to it as like a dating process. It's really getting to know the company, but also giving them an opportunity to get to know Progress. Obviously, we're trying to learn more about the target company to see if it makes sense from an acquisition standpoint. We also want them to be excited about potentially being part of Progress. So we spent a lot of time in the early going in dialogue with prospective target companies, really just building that trust, building that understanding of who we are and really seeing if there are angles where we can get excited, where potentially M and A makes the most sense.

And that's where they get to the point where they're like, yeah, I could see this making sense, but we want to see an offer, show me the money.

Definitely. And they don't want to waste cycles. We don't want to waste cycles either. So one of the things that we've done is we've created this very simple one page set of questions that we can use to learn some of the key things really quickly about a company. In addition to those questions, a few core things of data requests like an anonymized census, a financial pack with some financial details. From that data, we can pretty quickly determine what we think an appropriate value is. And we can have that conversation with the company and say, hey, we think that we could be in a valuation range of around X. Does that resonate with you? And if it does, great, let's continue the dialogue. And if it doesn't, we're comfortable walking away or potentially revisiting at a later time.

Walk me through that. So let's role play it out. You could be the choir, I'm the acquiree, you're pitching me to acquire. Deal room. Great opportunity by the way. Not ready to sell yet, but. And I'm like, you know what, it makes sense. Common customers. I could see a good growth strategy and story together.

There are a few primary areas that we really want to dig in on in an initial conversation. So one, obviously we want to understand what is the product set? What are the products that you offer? How do those products potentially fit within progress? How are those products differentiated? Is there a lot of technical debt? Is it going to require me to really do a lot of work to get your technology, your products to be more at par with what current technology is? That can help inform how much work, how much investment we might have to do. Understanding the product, understanding the competitive environment, understanding how the product is differentiated is really important.

Jeremy, we're a hot, high growth SaaS company. I'm looking for 15x. Can you do that or not?

If you're looking for 15x, you're in a different category than what we're looking for. Progress is a value buyer. We are looking for companies, we like to refer to them as thoroughbreds. Companies that are good companies, that have good technology, that have very loyal customers, but for whatever reason haven't necessarily seen the growth rates or haven't been the star company within a VC portfolio. But they're still good companies and they need a bigger platform to really prosper on. We can be that bigger platform. We have over 100,000 enterprise customers. We have 4 million developers that are using Our tools, we have hundreds of sales folks, we have a global presence across Asia, Europe, South America, North America. So we can bring a lot of value to a company in that position where it really can't grow much more. It's not going to get more funding from the VCs because you know how the VCs work. They're very focused on their home runs. They're very focused on the companies that are either going to go IPO or sell for that 15x. Those are not the companies we're looking.

At in that case. Jeremy, we own a data room product called Firm Room, which I think would be a really good fit for your strategy.

As we think about software and technology, we are definitely starting to be more thoughtful and think about different tools that we can use to make our process more efficient from the early stages of sourcing and managing our deal flow. And we have a massive pipeline. We have over 800 companies that we monitor within infrastructure software. So it's huge and untenable to manage on an Excel spreadsheet. We need good software for that. Similarly, when we're running a diligence process, there's probably software that can help us be more efficient there. And certainly on the integration side, as we're tracking so many of the different things that need to get done to make an integration seamless and successful, having tools, having software to really provide more structure, more organization, is incredibly valuable.

Going back to the role play here, let's say you're interested and say, hey, the data room company owns sounds great. It's not as like crazy, I'm not expectation there. I don't know if I would be ambitious enough to even come out and say, hey, my expectation is this. Or do you feel that out early before doing an NDA preliminary? Warm me up like the pitch was good. Jeremy, I get it, I could see this. But what are you talking about?

Valuation wise, we do sign NDAs early in the process so that we can be more transparent and so that the seller can be more transparent and give us some of the information that can really help us to evaluate where we could potentially be from a purchase price standpoint. It's important to not jump too fast into we want to buy you and this is what we'll pay you. Like I talked about before, it's really about building that relationship, building that trust, getting the excitement level on both sides. That's really important. And maybe through that process, a company, a potential acquisition target, can say, hey, progress is a great platform for me and they can get a deal done. Quickly. Maybe I'm better off going down that path with progress. Maybe I could get more money if I went and did a market check or hired an investment banker. But let's go down this path with progress because they're a great home, they're an acquirer of choice, they've had successful acquisitions, they have a team that's dedicated to doing M and A and has built an M and A readiness machine. And maybe that's the better path.

You'll essentially create a stage gate that you'll not introduce a price. You want to do a preliminary diligence where you have that list that we talked about and go through that so that you can actually put in the consideration, have a model to reference and then have a formal LOI to present.

Ideally, we'd like to be able to submit an LOI and get what's referred to as exclusivity so that we can be the only party that's negotiating. The last thing I want to do, because we all know that it's a big time commitment to diligence a company. If we're diligencing a company and there are five other companies also bidding on that target, and we're expending all this work and all this external resources and money and time only to lose a deal, it can be hard on you as the acquirer, it can be hard on your team, and you're trying to put yourself in the best position for success where you can control the process. So what we've done is we've developed this sort of one page set of questions and a core set of requests. And the requests are very simple. It's an anonymized census. It's a financial pack with some financial data and maybe it's a SIEM that gives you a little bit more detail on the company, the products and so on and so forth from that data. We have a one pager valuation model that we can plug a bunch of assumptions in and really get a feel for where we can be on value. And we can do that quickly. And if we can get alignment on value with the target company, what we can say to them is let's enter into an LOI, let's get exclusivity on the table. In 30 days we will complete all of our diligence and we will negotiate a definitive agreement and that speed and certainty to close. We have over a billion dollars on the balance sheet that we can use for M and A. That's not an issue for us. Speed and certainty to close and a compelling Valuation. That combination can really be compelling to sellers and then we're not wasting each other's time. And ultimately at the end of that 30 days, we have a deal.

Having a little bit of formality probably gives that sense of confidence.

We have a great track record of if we enter into an loi, unless we learn something very concerning from a diligence standpoint that would cause us to walk away from a deal, we're going to do that deal. Having that kind of reputation and that kind of track record is really important. And you can go to the progress.com website. We have a section around corporate development and M and A that talks about us as an acquirer of choice. And you can see we take good care of the customers, we take care of the people. We are focused on speed and certainty to close. We've built Playbooks. So we have all these things that make that experience of doing a deal that much more appealing to a seller.

I have a copy of your preliminary data request.

Great.

I was told not to publish this.

I talked about what the requests are. There's nothing that's really surprising there. I mean we can certainly talk about some of those different requests, but again, they're things that are gonna help to inform us as we think about where can we potentially identify synergies if they have real estate or leases in a bunch of expensive cities. We're in a much more hybrid oriented world these days. Maybe we can get out of those. That's immediate savings. Where is their IT spent? Are there opportunities for efficiency leveraging our bigger platform? There are a bunch of very straightforward questions that allow us to quickly determine where we think a company could be from a value standpoint within Progress.

This is like a pretty valuable asset tool. Right here, your preliminary data list. You've refined this over 25 plus years of experience and you've got it down. Technically it's three pages because you have a few different sections. You have it broken down by front office questions, right?

The go to market stuff. So product in sales and go to market and then the back office. So really trying to dig in on the people side. And they're very simple questions to ask on the people side. What kind of attrition have you experienced? Have you done any rifts? What kind of morale does the company currently have? How do you compensate your employees? Are we going to need to calibrate the entire team? Because they're paid at the 25th compa and we pay at the 50th compa.

I want to go through this, okay? Since I can't publish this.

Then let's talk about it.

But for the record, we collaborated. I think you were part of it. We collaborated with Kevin Barnes and actually put a really good preliminary diligence list template that I think is like awesome because it's only 12 things and it is a great starting place. Cause you can't just take somebody's cause like Jeremy's refined it and it's like very specific for tech deals. On this one. Let's run through it the first section and product and let's use that same data room as example. Just hey, role playing it out. You're looking to acquire data room product. I see the questions here. How's the product differentiated? What's your plan to introduce new products? Asking about how the tech has developed. I want to understand the thinking. Cause I feel like that's the conundrum people run into is they get this shared from somebody. Yeah, they send it, but that's not what you should be doing. Walk me through what you're really trying to do in this early stage, especially on the product related item.

Really what we're trying to do is so when we're typically looking at a potential acquisition target, we know that there are multiple companies that are in the similar space. Hypothetically just say we're looking at doing an acquisition of a company in the application performance monitoring space. And again, this is a hypothetical and there are 10 to 15 companies that are in that space. When we're having conversations with a couple of the companies that could be potential acquisition targets, we want to understand why is your product the best? How are you differentiated? How easy is it to replace your product or how sticky is your product? Because those kinds of things inform our thinking as we're building out our valuation model. If we know that the product's not sticky and they can easily go to another product, we're going to have to take that into account when we're thinking about valuation modeling. Similarly, if the product is old and has a lot of technical debt for specifically requires a lot of work to get the technology to be more current, to be more aligned with the market leaders, what kind of investment is that going to take and how is that going to affect my model? So asking these kinds of questions helps inform how I'm thinking about my financial model. When you look at the kinds of questions that we're asking, they're all trying to really inform that they're trying to inform how can this influence my valuation model and how can this influence my desire to want to proceed with A deal or not. If the company has a lot of technical debt and you're seeing a lot of customer churn, those are big red flags. Maybe that's not the right company for us to look at. By asking some of these questions in the early stage, you can quickly make a determination. Is this an asset that I want to potentially explore or is this an asset that I don't? We're trying to do these things quickly so that we're not wasting people's cycles, so that we can be respectful to the target company. Because the last thing we want to do is string the target company along too, by having lots of meetings and having them spend a lot of time with us. If we can make these decisions quickly, they appreciate that. My M and A team certainly appreciates it because they're not spending cycles on something that isn't really going to make sense for us. So that's really the intent with this set of questions that we ask.

Is the product sticky? Is there technical debt? Understanding the technical debt. It sounds pretty straightforward.

It is. None of this stuff is rocket science, really. It's just these are the kinds of questions that allow us to be more informed and to be informed quickly.

Do you email this list and expect them to respond to everything or is some of this stuff over a phone call?

We refer to this as the master list when we're looking at an acquisition target. Specifically, we'll customize some of the questions based on our understanding of that specific company. These are more generic type questions, but we might have some more specific questions for the specific company. We will send this in advance because we want to give the company an opportunity to think about it. We want to give the company an opportunity to be able to potentially present some materials based on this. Ideally, and in some situations they do this, they can send us responses in advance. And it allows that initial conversation when you do that call to be much more interactive and to be much more focused as opposed to high level, which is more of a waste of time.

So they'll typically take a pass at answering it, but then set up a call to really follow on any additional.

Clarification, to dig in and to really do the follow up questions and to really hone in making sure we ask the hard questions and making sure we ask questions that aren't going to just get you a yes, no answer, but are going to force the seller to provide a lot more detail and a lot more context to really help you understand that company. Because if you ask a question, they simply can just say, yeah, we do that. That provides no value. But if you ask the question in such a way that they have to say, here's how we approach this, here's how we differentiate here in a lot more detail, you can learn a lot more about the company.

Some of this stuff I feel like if you really want to click into, you need access to that functional lead. And I'm just curious who's actually involved this early. Is it just the C suite or do you actually get some of those people involved?

That's a great question. Yeah, it's typically a very limited subset of the C suite. It could potentially be the CEO and the cfo depending on how well the CEO understands the business. If the CEO is also a founder and more technical, they could probably go pretty deep on the product side. If not, they'll probably want to bring their chief product officer. Same thing on the go to market side. Depending on if the CEO is very go to market oriented, they can answer a lot of that as well. If not, bringing in the chief revenue officer to really help elaborate is important. And then the CFO can really provide a lot of color and context, particularly from a financial perspective.

The next section is sales and go to market. What are we looking for?

So there are a bunch of things here. I'll share the why that we're asking these questions. We're asking questions like who is the buyer of the product? Who is your ideal customer? And these things are informing us because if the buyer of their product is someone that's completely different than who our buyer is, we're probably not going to be able to get the same level of efficiency. So it's helpful for us to know that if the ideal customer profile is heavily enterprise and our expertise is in mid market or more in lower mid market, then we're probably not going to get the same level of efficiency. So we're trying to see is there alignment and can we get efficiencies from a go to market standpoint because there's a lot of similarity there. And similarly, is it a long sales cycle for progress? If our sales cycle is short or our average deal price is small and their average deal size is a million dollars or half a million dollars and it takes them 9 to 12 months to close a deal. Again, it's a very different go to market motion. And so maybe we're not going to get the right kind of efficiency by asking these questions. We're able to get smarter and really be able to inform that financial model. And I keep going back to that financial model because it's really important for us as a value buyer. It's important for us to identify areas where we can get efficiency so we can create more shareholder value with the acquisitions that we do. And so by understanding some of these different things, what kind of channel ecosystem are they? Pure direct sales motion or do they leverage channels? Are the channels that they have similar to the channels that we have? Can we get efficiencies there or are we going to have to create an entirely new channel ecosystem? Again, all these questions sort of help to inform that. And that's really what we're intending to do by asking these questions.

Have you ever heard of synergies?

Very familiar with synergies, yes.

So when it comes to this, this would be considered a revenue synergies.

No, it actually can be considered an OPEX synergy too.

If you're combin sales team and looking at some of those.

Yeah, if you don't need their sales team because our sales team can sell their product easily and just add it to the bag, that's great. But yeah, from a revenue synergy standpoint, if you think that there are opportunities for cross sell because hey, it's a similar buyer, they're buying this now if we get that customer, we can also go in and sell them something from our bag.

That's what I was curious about. How optimistic are you on betting on revenue synergies because they feel like they're the most unpredictable.

We are very focused on operational efficiencies much more than revenue synergies. If there are revenue synergies or cross sell that results from a deal, we refer to that as upside. We're not going to typically model that. We're not going to use that as the justification for value. We are going to determine can we make this deal work from a valuation standpoint with operational efficiencies and operational synergies. And if the answer is yes, great. And if we then do the deal and revenue synergies result. Take for instance our last acquisition, MarkLogic. They had access to a very robust government public sector ecosystem of customers. We didn't really have a lot of expertise there. We have leveraged that and now can find ways to use the cross sell through this progress federal solutions group to create opportunities for new revenue. We didn't model this when we initially did the deal. It's a nice surprise result of the acquisition. But you're right, operational efficiencies are much more manageable and you can control them a lot better. Revenue synergies are a lot harder and unpredictable. Like you said and if you're depending on them for evaluation and then you don't achieve them, then it makes the acquisition a lot tougher.

Revenue synergies equals icing on cake.

It's upside, it's a bonus and we love it. And we've certainly gotten cross sell opportunities and it's great. We're just not going to model it.

You got to make the business case a little sweeter. Add the icing in the model.

Sometimes we end up losing deals because if another acquirer is willing to value based on potential revenue synergies and thus can be more aggressive from a value standpoint, all the power to them. And that happens as a disciplined acquirer that we are, we're okay with that. We're okay if someone else beats us on price because they are doing things to be more aggressive than we think are realistic or defensible, and that's okay. Being a disciplined buyer means that we're comfortable walking away from an acquisition.

When you're going through this, the sales and go to market, how much consideration do you put into the post close what it's going to look like in terms of how you're going to market the product portfolio? What's the customer journey look like?

We start really thinking about that after loi. And while we're negotiating a definitive agreement and we're doing some of the preliminary integration planning, we'll start to think about that. We're not getting a lot of interaction with the target company or certainly with the folks that are really responsible for the sales and go to market until you've signed a definitive agreement and you actually have access to a broader set of people. So it takes a little bit more time before you can really map that out. But we've done so many deals and my head of integration is a rock star. She knows the things to be thinking about. And so we can do a lot from a preliminary integration planning standpoint with our team. Then we want to post Loi Free signing.

I was wondering if there's a big gotcha thing that you may miss when you're going through the early thing. That's what I was curious about.

There's always going to be a gotcha. And this is something that we discuss a lot internally at Progress. No matter how much diligence you do and no matter how thorough you are, there's always going to be surprises. There are always going to be things that you learn on the other side. It's one of the reasons why we've put such a concerted effort on as we think about what we need from a diligence standpoint, focusing on what we refer to as the must haves, not the nice to haves. Because it's great to get all kinds of information, all the nice to haves, and to understand every little thing about a business. But at the end of the day, you can do all that and you're still going to learn something after you've owned the company that you didn't find out in diligence. What's important in diligence is to really focus in on the key things that could potentially influence your decision to do or not do a deal. Is there a standing litigation that could cost you a lot of money? Has the company been experiencing significant attrition? Why is that? Is the company experiencing lots of customer churn? So things like that that are going to make you smarter and make you bigger picture, think, do I want to proceed or do I not want to proceed?

Let's get a little theoretical here. Let's say you cannot get 100% of the information at this early stage where you're just getting a proper bid. In what percentage of information? I guess you're really just targeting the big risk items. So that's probably not really much. But I'm just curious, like, what percentage of it? Cause obviously you get a lot more after loi and you still don't get a hundred against the accuracy. Are we sort of getting to like this 5 to 10% range of precision that we're bidding on?

It's something that we debate a lot internally because we like to refer to it as it's important to be comfortable being uncomfortable. Yes, it'd be great to be able to have 100% precision. But are you ever going to have 100% precision? No. For instance, when you're thinking about who are the employees that you want to keep in a transaction, who are the employees that you don't want to keep? You can make educated thoughts and educated thinking around that, but at the end of the day, you're probably going to make some mistakes. Maybe you're going to say, we don't need this person. Then learn after the fact that person could have been valuable for X, Y and Z. That's going to happen. It's never going to be perfect. But I think the whole point of M and A is getting to a point where there's enough conviction in wanting to proceed. There's enough conviction that the value of the deal is worth it. And you understand that you're going to learn some things afterwards that I would have loved to have known that during the diligence process, but it just is not realistic.

What's the confidence? Do you come up with that where you're like, hey, we're confident that we're in this 10% band of where we should be in pricing this asset?

Yeah, we have good conviction, we have good confidence, and we also have what we refer to as a contingency line. And that contingency line allows for things that you may potentially miss, and you can dip into that contingency. As long as you stay within that contingency that you've modeled, then the model's still going to be a success, even by missing a few things. If you don't have that contingency and the model requires you to be 100% precise and then you learn things after the fact, then it can be a little bit more challenging. That's why we always have a contingency line, because we always know that they're going to be surprises. And as long as those surprises are within the bucket of that contingency, it's okay. Model will still work.

You have to have your own deal philosophy and your risk tolerance, for sure. Customer success is there some key things. I think this goes back to retention and customer satisfaction.

We're thinking about a couple things. We're thinking about how much touch points are required to keep a customer happy. You need to throw a lot of bodies at it. How hard is it to get a customer up and running on your product? Is it very intensive from a professional services standpoint? So those kinds of things are really important. And remember, progress isn't necessarily saying, all right, we're going to model this deal and we're going to go out and chase a whole lot of net new. Our focus is really around what we refer to as maintain and retain. So the customer success piece is really important. How good is the company at retaining the customers? How happy are those customers? Our focus is really, if we can build out a model where we can have a lot of conviction that we will maintain the core set of the customers that are driving the majority of the revenue, that's great. We want to understand who it is that's critical to helping us to do that. And that's why asking the questions around customer success and professional services is important.

You get through those key areas and then it's gna questions, starting with finance, which I think is pretty straightforward. It's probably the thing that we're all most familiar with is you're asking for some of the financials for the past. I don't know, how many years do you go back?

We'd like to look back two, three years. We're trying to understand trends. We're trying to understand what's going on with annual recurring revenue. Is it growing, is it shrinking? We're trying to understand, are you seeing a lot of expansion with your install base? We're trying to understand, is growth highly dependent on lots of net new, or is it highly dependent on the install base that you have? Those are some of the key things that we want to really understand and they're going to inform our model because, remember, we're focused very much on operational efficiency. If we have to go chase a lot of net new to keep revenue flat or to keep it growing a little bit, that's going to be a lot more expensive than being able to maintain and retain and grow an install base.

What is a right retention rate? What's your key metrics you're looking for?

Because customer loyalty is so important. We're looking for net retention rates that are north of 90%. We're looking for gross retention rates north of 80%. That's roughly where we are. If you look at Progress as a whole today, we historically around 100% net retention. We're trying to look for companies that are in that range or where we have conviction that we can improve those net retention rates a little bit, given our more robust platform of customers, of distribution and things like that.

That makes sense.

People, People. Very important. The people piece is super, super important. At Progress, we talk a lot about how we care about our customers and we care about our people. And one of the things that I think is fantastic about our M and A strategy is the opportunity that people have to be able to come within progress and to be able to grow their careers. And if you go to our website, you'll see different profiles of people who have come to us through acquisitions that have been able to take on more responsibility, bigger roles on a bigger platform, and that's what we're looking for. We put a lot of emphasis into taking care of the people. We know that we're not going to be able to keep all the people. The important thing for us is that we're transparent around that and for the people that we aren't able to keep that we still take good care of them and we're incredibly respectful. And I think that's something that we've gotten a lot of credit for because we care about that. And it's hard. It's hard to find out that you don't have a role within the bigger company, but sometimes that's just reality. You don't need two CFOs, you don't need two Chief People Officers. They're obviously going to be roles that are redundant.

And that's what you're figuring out. You're figuring out, hey, where's more of these capex reductions?

OPEX reductions? Yeah. So think about, like, where there are OPEX reductions, but we're also trying to understand what are the trends? What are the trends that the company is experiencing. If the company has done a bunch of rifts already, how has that affected morale? If the company is seeing a lot of attrition, why is that? Why do people not have conviction or excitement around staying at the company? Really trying to dig in on those pieces? It's important. And then even from a culture standpoint, we do care about understanding the target company's culture. We're not one of those acquirers that just says, we're going to do it our way, take it or leave it. We're very respectful of understanding what does another company do? What are the important things from a cultural standpoint? How can we incorporate that into the way we are at progress? And we're not necessarily going to be able to incorporate everything, but we try to understand what's important from a cultural standpoint. And when we're doing our integration planning, we're going to bake that into the thinking.

Do you ever come across some real red flags in people that you are like, can't do this deal?

Absolutely. From a cultural standpoint, their culture is just completely different than ours. It's incredibly entrepreneurial. And Opocus has been around for 40 years. So that's something that you have to take into account. If you learn things that give you discomfort from a standpoint of ethics and ethical things, absolutely, we'll walk away.

You've had that happen.

I haven't had that happen specifically, but those are the kinds of things that would certainly rise to the level of, all right, we don't want to proceed with this deal because there's just too much risk here.

Then you got it. So it says things about incidents, breaches things, attacks and stuff. So you're looking to see if they had some issues.

We want to understand what kind of security initiatives have they put in place. Is there the potential for risk and exposure from a vulnerability standpoint? In today's world of cybersecurity and cyber threats, I think that this is an area that you just have to pay a lot more attention to than Maybe you did five, 10 years ago when it wasn't as much of a concern. Now, it's something that you absolutely need to understand because the last thing you want to do is go acquire a company and then a couple months after you've acquired the company, they have a vulnerability or some sort of ransomware.

In this preliminary stage, you're looking at their historical to see what that track record looks like.

Yes. But we're also asking, like, what kind of security initiatives do you have in place? Do you have a strong security protocol or not? And if you don't, it's okay. We just need to make sure that we're proactive in thinking about what do we need to implement to get them to a security level that's at par with a public company like Progress.

And I guess I was trying to delineate between pre and conformatory diligence. You got to put a line in terms of what you can really get into.

It's pretty easy to ask a simple question of have you had any vulnerabilities? Have you had any security breaches? What are those entailed? What did you do to respond to that? It's pretty easy to just ask what kind of security measures do you have in place? What kind of tools and technology do you use from a security standpoint? If the answer is we don't do anything around security, that's probably a red flag.

I got you.

Or at least it's an opportunity for our IT and CISO team to be able to say, here's what we need to make sure we model into this deal model to make sure that we put the right protections in place once we own this asset.

Lawsuits.

Yeah. What other legal issues you're digging in on? Customer contracts. Are there clauses that would be concerning, like most favored nation type clauses? Are there restrictions on being able to transfer a customer contract on a change of control?

Change of control.

So things like that. So we're digging in on. But the litigation is big to understand too, because we need to make sure are there going to be certain special escrows that we need to put in place to protect us for potentially litigation that's going to continue for some time. Progress is a different profile as a public company. A person that's litigating with a small private company might be looking for X. Now that company is part of Progress. That person might think that they can get more because they're now part of a big public company. So you need to be thinking about what is the risk, what is the.

Exposure let's use that change of control as an example. In customer agreements, say by default you don't have it. But so often these customer contracts get negotiated. How do you approach that? Is it. How many customer agreements have this clause or this early? I assume you can't ask for the copies of this stuff.

Yeah. So this is where AI and we talked about this at the Strategic Viral form yesterday. AI technology can come into play here because you can use AI technology to go and review contracts and say, here are the key things I want you looking for. Are there restrictions around change of control? Are there MFNs? And then you can identify, of the target companies, 500 customers, three have MFNs. Then you can go and dig in and get a better understanding of those.

Are you getting that information right now?

Preliminary, that would not be in preliminary, that would be in. When you're doing confirmatory diligence, post loi, when you're in exclusivity, I guess it.

Raises a thing where I looked at a deal and all of a sudden you find out every contract has a change of control provision.

If there's risk that the customers are not going to come on board, that's a potential red flag. Yeah, for sure.

Then all of a sudden you got to put some contingency. You have to figure out a counter move for that.

You need to either walk away or come back to the target and say the valuation was X, because we didn't know that there'd be this potential exposure. But now that there's this potential exposure and it accounts for X percent of your revenue, the valuation might be something different. And we give them an opportunity, they can either say, all right, we still want to proceed with a deal, or that's not going to work for us and we're going to walk away. And we're all grownups and we as disciplined buyers, are comfortable walking away if there is an issue that rises to a level that doesn't support us continuing with an acquisition.

Marketing.

Marketing is pretty easy marketing. We're trying to understand where are they investing, how are they generating awareness, how are they creating a differentiation? What does the competitive landscape look like and things like that. Is the money being spent efficiently? Is the money being spent poorly? Where can we get greater efficiencies? We have a great marketing team with a great platform where we can do a lot from an efficiency standpoint. And so it's really helpful for us to understand where is the spend going? Are they spending on conferences? But they're getting no value out of those conferences? Things like that that we'll in on. And again, it's all informing our model. Can we get efficiencies or do we need to spend in marketing just to be able to maintain some low level of revenue growth? And if it requires a lot of spend to do that, maybe that is something that would get us to say maybe we shouldn't be looking at this deal. And again, that's the kind of question that we're asking early pre loi. So we have that understanding.

Okay, so the marketing thing is still sounds like more opex. Map things out.

That's the theme. It's all very heavily focused on the OPEX side, but it does inform where things are going from a top line standpoint and how different marketing initiatives are driving your ability to grow that top line.

This third section you have is data request by function and the first one is general corporate and you ask for a management presentation that is a sim. Where would that be for a company if they aren't going through an auction? Would they just have like a general overview on the company? Is that what you're looking for or.

It's a great point. Sometimes they're not going to have that and that's okay, I guess. And this is the ideal wish list. We're practical. We know that we might not get all these things. And you're right. If they're not going through a process or if they don't have a banker or if they've never sold their company before, some of this stuff might feel a little bit more overwhelming. But these are the kinds of things that ideally will help us to come to a quick conclusion on what kind of valuation we could potentially put on the table for a deal.

These are the media information you're asking for a cap table you're asking for the different. This is obviously a SaaS. You're looking for the arrs.

Again we're looking for on the ARR waterfall. We're looking to understand trends, we're looking to understand how they're doing from a standpoint of upsell expansion, net new dependencies, things like that. And you get a lot of visibility into that with that ARR waterfall.

Breakdown by product, quarterly breakdown by cogs, expense segmented and again we're trying to.

Just understand the cost structure as detailed as possible. And it's interesting for a company that's focused so much on operational efficiency, like progress is understanding what's going on in cogs and what kind of gross margins you have is very important. If we're trying to get an acquisition Target's operating margins to be in line with progresses, which are around 40%. But say the target company's gross margins are say 60, 65%. That doesn't leave you a lot of room for being able to preserve a lot of the people because you have to cut more. From an OPEX standpoint, if gross margins are higher north of 80%, it gives you a lot more leeway in your ability where you can find those operational efficiencies. That's why it's really important for us to understand what's making up the COGS piece and gross margin as well as what are the pieces of opex. Most of the companies that we look at, the biggest percentage of OPEX is headcount. Is your headcount in high cost centers? Is there an opportunity for us to leverage some of our lower cost centers of excellence to get greater efficiencies while not losing a beat? From a product and development standpoint, these are the kinds of things that we're trying to dig in on.

How do you get confidence in the numbers? Because I feel like especially you're dealing with smaller organizations, a lot of crazy things and it's just you start looking at one view and another and like this stuff doesn't add up.

We hire a third party, we hire a transaction services team that helps us do what we refer to as a quality of revenue, quality of earnings analysis, and really dig in. And this early pre loi, not pre loi, but once we have that ally in place, we will and we'll validate. And again, it goes back to that same point. If what they told us is not really what is the business, it's easy for us to be able to, with a straight face, say we need to walk away because you told us revenue is X. But when we went and did the analysis, revenue is really Y. And that revenue Y is a lot lower than the revenue you told us. And that's happened.

You have to take the information representative for what it is and if there are probably some immediate questions, you can raise it.

And in the loi, we'll say based on the information provided to date, we believe that a value of X is defensible. And when we dig in from a post LOI standpoint with more detailed diligence and the information provided does not corroborate that, it's easy to go back and.

Point to that you got people you want. The census and benefits template.

We've put such an emphasis on M and A readiness and such an emphasis in our M and A playbook. We've built out our own anonymized census benefits template that allows us to get visibility into the things that are important for us to understand. As we're thinking about where are there potential synergies? Where are there potential dissynergies? For instance, like I talked about before, if a company is paying at an incredibly low compa rate, we might need to calibrate salaries to be more competitive and to be more appropriate. That's obviously a dis synergy. The company might have significantly worse benefits. Maybe they don't have a 401 match. That's an additional cost. So we're trying to ask the different things in this template. It's really easy for the company to provide that, but that allows us to do that analysis and allows us to be a lot more efficient.

What are other hidden dis synergies? The people.

Oh, there are all kinds. There are all kinds. Bonuses and how they account for bonuses. That can end up being a dis synergy. The benefits piece. Maybe they're not as robust as ours. So there are a whole bunch of things.

Your census template, can you share that with me? I'm going to package it up with this diligence template and sell it for $10,000. Anybody listening?

We'll take that offline and then I'll split it up.

Ok, we got another idea.

We'll take that offline.

Yeah, it. You're asking for an overview of their IT budget, the key technologies they're using, and then the Capex OPEX items for the past three years.

What systems is the company on and where can we leverage our systems? Where are we going to have greater complexity transitioning to our systems? It really helps to inform where are their cost savings and it also helps to inform the integration planning. This is an interesting one. This is one that maybe you would push on confirmatory diligence as opposed to free loi. We have it on here. It's a nice thing to be able to get.

You're trying to buy my data room company. We don't have it broken down by Capex opex. It's getting there. You start with a sandwich shop looking P and L. And now we got.

And remember we're doing scale acquisitions. So we're not doing tuck ins, we're not doing aqua hires. So the companies that we're looking at tend to have a pretty decent level of revenue revenues north of 30, 40 million. So they tend to have more robust processes, more robust data, more robust information. So it's a lot easier to Get. But yeah, you're right. There are certainly companies where they're just like, we don't have this.

Gotta deal with what you got. So then you got fielders of facilities and marketing. Some pretty general requests here.

Yeah. And again, on the facility side, where are there opportunities where they're spending lots of money on a facility where no one's showing up in the office? That's an easy synergy. So it's just trying to understand that better. Do they have facilities in the same city where you have facilities? That's an easy synergy. So it's really understanding some of these things. And so you can see from this list, both from the set of questions and the data request, that it's all really going back to informing valuation and where we think we can be. One, we're trying to see are we still excited about this company as a potential acquisition target. And then two, what kind of valuation do we think we can pay that we think is defensible?

How do you adjust this thing based on the deal you're pursuing and the deal rationale? Because it varies. You're buying a company could be an acqui hire just for some high level engineering talent.

We would never do that.

It could be for market share and one of your existing products that you're just looking to expand. It could be for the customer base where you're planning to buy the customers and eliminate the product. Like it varies a bit, doesn't it?

Yeah. We're looking at a lot of companies and acquisition targets that tend to be interesting adjacencies to the products and the different solutions that we have on our platform today. And what it does is enhances our value proposition. It further differentiates us as a key player in the areas that we play in.

How much would you adjust this? Because it sounds like the whole theme of this podcast is you're really frontloading this stuff to get to an LOI that sets the tone so that we can move quickly. Exactly, yeah.

From our perspective, it's very straightforward. They're simple questions. If the company understands their business, there's no gotchas in there. And the requests from a data standpoint are very straightforward and usually ideally are off the shelf, minus the benefits and compensations and the census, which obviously they have to take their data and incorporate it into our template. But pretty straightforward to do that too. We haven't had much pushback from targets on that request.

And then after you gather this information, who's processing it on your end, you.

Pull in, typically a small team at that Stage, it's a small team. We'll have the executive champion from the business unit that wants to do the deal, be a couple of folks from Corp Dev, maybe a couple people from the business unit, thought leaders, leadership members from that team, and then obviously our finance person who's helping to build the model. That person built a simple one page template where you can just plug a bunch of numbers in and it helps spit out where we think we could be from a valuation standpoint. Because remember, we are very focused on making sure that we provide ample shareholder return. We're very focused on certain parameters for how we determine value. You said before we're never going to pay 15x for a company from a revenue multiple standpoint because we trade it four and a half times. We're never going to pay 30 times EBITDA multiple because we traded 11 times multiple. One of the things that we do is we spend a lot of time thinking about from a pro forma standpoint, once we've executed our synergies and the operational efficiencies, how much value can we create for our shareholders? And if there's sufficient value that we can create, then we can get a lot of conviction around proceeding with that deal. And if we can't, we'll walk away. And we're comfortable doing that because we're Disney.

Yeah, I don't think the right fit for this deal, Jeremy. I don't know. Just kidding. We really didn't talk about any of the. Really. How do you get through the 30 days?

Once we get an executed LOI with exclusivity, we have a very disciplined approach. We have a very focused diligence request list. We can lean on that. We refer to it as the P1. The highest priority items that we can get during that diligence period. At the same time that we're doing that diligence, we can start negotiating a definitive agreement. The goal is to really be able to do it all concurrently so that at the end of that 30 days you can be pencils down on diligence and you can have a negotiated definitive agreement. And if all that comes into play, that's what's appealing to a seller, not having this process linger for 3, 6, 10, 9, 12 months. But to know that in 30 days we can have a deal in place, but you have to give us the exclusivity.

30 days is a sexy target. I feel like it's part of me like, yes, let's do it. I'm on board. I want to get things done fast. But then it's just something pops up, they need some license transferred or some entity means created. Like something's going to delay that 30 days. You sort of just go with this high level of optimism.

Yeah, you're always going to say 30 days for exclusivity with automatic extensions. As long as you're continuing to negotiate in good faith because you're right. Take for instance the company isn't prepared to have the data room go live on day one post loi. That's going to delay the diligence process or the negotiation is taking a little bit longer than you expect. That's going to delay the process. We all like to set that aggressive target of 30 days and it's certainly realistic and achievable if all the stars are aligned, if the data room is in place and ready to go right from the get go, if both sides are practical and reasonable from a negotiation standpoint, if the sellers aren't being reasonable in just trying to fight every single deal term could take longer. Taking time to build out the disclosure schedules, it could take longer. So it really requires everyone being bought in and there being alignment and everyone being prepared and ready for that process. And if they're not, yeah, the 30 days can be very aggressive and unrealistic.

It's a lot of details we can even talk to. But I feel like our previous conversations, those of you first time hearing Jeremy, we've done multiple interviews, I think like three of them. This might be your fourth time on Mascience where we've actually dove in a lot deeper details about executing, diligence, a lot of fun nuances. We did talk about board approval on these deals. I highly recommend checking those out. We're running short on time because Jeremy's so popular and booked up his whole schedule here at DealMax. But that's what happens when you come out of DealMax. You get a lot of networking.

It's a fantastic form. Over 3,000 people here, private equity professionals, investment bankers, strategic acquirers that you can share best practices with. It's a great event and kudos to acg.

I'm hoping next year to collaborate a little more. I'd love to see a live podcast at acg so maybe we can do it on stage next year.

Would love it and always love spending time with you. Kisan and the M and A science team is great, great materials if you're a deal practitioner so highly recommend utilizing them. And that's not just a self plug. I've used the tools, I've read the books. It's great material and it just helps to inform and improve your processes. And I've been doing this for 25 years, and I'll be the first to say that every single deal I do, I learn something new and we enhance our playbook. And using tools like M and A Science, we'll just continue to do that.

Jeremy, I try not to make this a commercial for Deal Room, but that is a whole thing that's continually evolving and shaping. But with contributors like you, I think it's great, the thought leadership and being able to learn and build some cool things around it.

Absolutely.

I got to ask you, though, before we wrap things up, what's the craziest thing you've seen in M and A?

I'll go back to it. The craziest thing for me, and we talked about this at one of the roundtables yesterday at the Strategic Buyer Forum, where you can get all excited about an acquisition. You get the seller on board, you execute an loi. There's alignment on valuation. You're negotiating the definitive get to the point where you're ready to sign a definitive agreement and the seller gets cold feet. They go and hire an independent valuation expert who says you can sell for 3x what they're paying you. They get all spun up and the deal ends up getting blown up. It's crazy to me because nine times out of 10, they'll never get the kind of valuation that these independent valuation experts will say they'll never get a deal as good as the deal that you have on the table now. And you hear that all the time. At the end of the day, again, we're disciplined. And if they want to show that kind of naivete from a standpoint of a deal process, we're happy to walk away and we're happy to let them continue to execute. And when they come back to us and they're looking to see if maybe we'll buy them, then the answer is typically no. Or evaluation is typically something different.

That's your craziest thing, is just high valuation expectations.

The crazy aspect of it is the fact that you've done all this work, you've done all the diligence, you've negotiated the deal and you're at the finish line and they're willing to walk away.

After all that, where they've increased their.

Expectations or they get cold feet. There's all kinds of crazy stuff in M and A. We could probably do an entire session on that, but that's for a later time.

You got to do that as a whole group therapy. We do.

We do do them and I've been doing this long enough. I've got thick skin at this point. I was going to say nothing surprises me, but I've certainly had surprises over the years and I'm like, oh my gosh, that's a first. But that's what's great about doing M and A is every deal is unique, every deal is different, and you learn something new every time you do a deal.

I agree. Thank you for taking the time, Jeremy. Every one of these interviews helps me become a better M and A scientist. I appreciate I know you got ahead to this next meeting. Those of you joining us, thank you. You're also fellow M and A scientist for sticking through this far in the interview. Love hearing feedback, so if it does contribute add value. I love hearing about it. Opens up conversations for other interesting things.

Thanks Kisan.

Until next time, here's to the deal. Thank you for taking the time to explore the world of M and 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 and 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 Kisan K I S o n a science.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 and 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.