How to Compete in a Competitive M&A Market

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Welcome to M and A Science where leading MA practitioners share lessons learned from their experience. If you're interested in keeping up with the latest From Mascience, visit mascience.com and subscribe to our free newsletter. Every Monday we share highlights from our interviews and invitations to events as we build the greatest community of forward thinking M and A practitioners. Plus, we got 1500 pages of content and six different business lines to help you build a world class M and A function. Again, that's masc. Also, want to put a special thanks to VRC for providing the office space for me to do my podcast today. They helped me out. Those of you not familiar with vrc, they're a full service independent global valuation firm that that focuses exclusively on valuations that offer judgment beyond modeling. I'm your host, Kisan Patel, CEO and founder of M and A Science. Joining me today is Tyler Rodwald, VP M&A at EIS Holdings. EIS holdings is one of the largest providers of mission critical environmental and infrastructure services in the United States, serving a wide variety of public and private end markets. EIS is sponsored by Sun Capital.

Today we're going to talk about how.

To compete in a competitive M and A market. Tyler, how's it going?

Hey Kisan, Good. How are you man?

I'm doing well, thanks for asking. Can we kick things off with a little bit about your background?

So I started in the M and A World, a boutique private equity firm out of Atlanta called the Widow Group. We focus in two sectors, environmental services, aerospace and defense. A lot of aerospace and defense. Within that a lot of SATCOM work and had the opportunity to join a nuclear detection radiation company on the corporate Development side as a manager called Mirion Technologies. We're serving various clients between the government, education and then also military applications as well as medical applications. We have lead the M and A team doing probably between five and eight acquisitions a year with the end goal of exiting relatively soon. Started there in 2020 and successfully SPAC'd with Goldman Sachs October 2021 which we $2.6 billion SPAC and global company with about $700 million in revenue and over 2,500 employees. We leveraged deal room to go through our diligence there and all the streams we went through kind of a sell side project there. And then after this back I had the opportunity to come up with EIS holdings as a VP where out of strange coincidence there's been like three asbestos abatement roll ups that have happened since 2018 and really since ever. But at White Oak Group we were on the front side of that in 2018 and I helped lead that charge until this opportunity came around. It made a lot of sense. Decided it would be a good time to go back and service the private equity world rather than stay in the public world.

That's a pretty diverse background there, my friend. Touched a lot of different types of deal. Pretty significant volume of deals. And then you ended up doing the SPAC IPO deal, which I think is a pretty big deal. Impressive.

It's been a fun journey. We've seen quite a bit. Everywhere we've been has been kind of a high volume shop.

I want to get into it. How do you effectively compete in an auction process?

Our first strategy within the auction process is to create a strong relationship. And there's two relationships you're creating. The first one's obviously going to be with the seller. If you don't have their vote of confidence, it'll be tough from a valuation perspective wherever you stand. Obviously money talks at the end of the day, but it helps when the seller likes you. So we try to create the relationship with them quickly, but also to get access to the seller, create a relationship with the bankers as well as making sure we're staying actively engaged with them. Especially in a deal we really want actively engaged, following up every kind of two or three days blistering questions, calling them and showing them that we're really putting the work on the front side, being transparent with them on what we're looking for to get this done and what we need to come to evaluation that we're going to submit that both parties are really all three parties between us, the buyer, the seller and the Investment banker feel confident that we can close on because we've done our work on the front side and explained to them what we needed to see and achieves that.

So big emphasis on relationship building is that it just build a good relationship with the seller and call it a day.

No, the relationships definitely won. And as we trickle down from there, the other part we like to talk to people about, typically on some of the deals we're seeing, they'll be bouncing between hey, we're going to be a platform company or are we going to be an add on acquisition? The relationship with the sellers and the bankers, we get a little bit more lead way being able to talk to sellers and some other bankers as well and try to communicate hey, here's our strategy and here's what we think. Coming on as an add on makes a lot of sense. There's advantages to it. I think a couple things being there is the portfolio diversification that some of these owners are looking for, especially in the founder owned businesses. They're trying to diversify their investments is the best way to put this. This is typically their 401k IRA, whatever you call it, their life savings. And so they're trying to get liquidity out of it. From a PE perspective you do get liquidity. However, you are still the 20, 30, 40, $50 million business you are today. The difference coming into an add on here is you, you might be $50 million of revenue, but you're 50 million out of 2, 3, $400 million of revenue. So it's a little bit smaller chunk of the pie and a little bit more diversification to where, hey, if your numbers slip a little bit, the group can pull you up. That's one thing. Another portion as we talk about add on versus platform is the management of the business. As you come on as a platform, there's additional responsibilities from reporting to your board and making sure the investment team is happy, really achieving their objectives. Whereas the add on again you're achieving the objectives of the broader company. However, we have a corporate team in place today. Right. And so you can absorb it into the corporate team leads to the integrations. The corporate team can help lead the acquisitions and work with you in tandem. We search back to our founder owned businesses and really try to leverage the relationships to source additional add on acquisitions. However, we have guys here who can do the work and the legwork to get the deal done. It's another thing off the operator's plate that we can handle where throw at the private equity group or as a platform they have to handle themselves. And that's another thing that they got to drive besides just driving value within their organic business as it is today.

I'm hearing a couple themes. There's relationship, strategy, vision that you're developing and pitching and then this landscape of who you're competing with, the add ons versus platform. We're going to talk a lot about relationship. I can already tell in terms of the other players that you're competing against in a competitive process. We have platform plays. PE is buying a company as a platform with the strategy to grow it. Then you have add ons where in your situation, PE backed platform that you are looking to add on businesses to continue growing. And then you got strategics, just large company, likely public, you're competing with them. Can we break that down in terms of the strategy vision part and what they tend to sell? Because this sort of becomes ultimately the seller's decision and obviously price is a big factor. I'm curious, when we think about distinguishing or competing around the strategy vision part, what are the themes that you see amongst those different types of buyers coming in?

I can tell you about our strategy. We really try to provide that on the front side of it.

Okay, I'll play the devil's advocate. Let's pretend we're pitching for the same deal here.

Absolutely. And so our approach on strategy and vision is, is really one of just being open. And so we're going to tell you we're going to integrate these companies. We're going to do an extensive integration. No, we call it kind of integration light. However, there's going to be some change from a competitive process. It might eliminate us from some people who just don't want to integrate, which is fine. That's not going to fit our strategy and what we're trying to do here in creating value for our shareholders and what we believe is the way to do that within our company. And so we take that on our front side as well as we try to define roles and responsibilities on the front side as well. Hey, here's how we see you playing within this. How does it work with you? And discuss that. Discuss compensation on our front side. Discuss how do you feel like your company fits within eis? The typical questions there. Then also understanding, hey, what really makes you happy? What kind of management style would you like to see from us post closing and try to pick their brain to get the information that we can use to make sure that our investment thesis is going to be realized and we can also do the things that we need to do post Closing without anybody getting upset on the backside of stuff. A very transparent process up front and here's how it's going to be. But also making sure they're on the board timeframe wise.

When you're doing this as an add on, as a PE add on versus a large public company, you have different structures because for them they're going to have to get this deal approved probably through a board. It just seems there's so much checks and balances trying to get a sense of the players here. In a competitive process, are there things that you have as an advantage towards those companies where you can move faster? Are there any things there where it's quicker for you to get approval, or is it still a similar type of process?

From a strategic perspective, we're about $150 million in revenue. We're still at this spot where we can move quickly and nimbly. We have direct access to our CEO, CFO as well as our deal team at Sun Capital. And so from a timing perspective, we can move real fast. We've put out Lois within a week. Typically we'll try to preempt some of it as we think about a competitive process. Basically, once work comes in, it's going to get processed, it's going to get processed quickly. Then on the back side of it, decisions are going to be made quickly. There's just a couple of phone calls to be made and everybody dials in and gets it done. So from a timing and checks and balances too, like I think a difference here is that maybe not so much with another strategic from this next perspective, but at least from a private equity company. What differentiate, what we can differentiate is the timing. From the perspective of us rolling in a 20 or $30 million deal to a platform of $150 million in revenue, we're not taking as much risk. It's a much smaller piece of the pie. It's the $20 million goes to 10, we can have some other portion of our business pick that up ideally, or we're not going to lose as much value within a company as maybe a PE sponsor platform would. If their $20 million business goes to 10, it's cut in half. Truly where our business is still going to continue to grow. From a diligence perspective, we will diligence what matters, what we need to get done. However, we can move a little bit quicker without having to get into every single weed and turn over every single stone. Just from a risk tolerance perspective, you.

Get a little bit of a best of both worlds. You sort of are bidding on synergies, which allows you to be pretty aggressive there. But then that PE structure allows you to still move and market focus. Some of these deals are smaller deals that the big companies may not pay as much attention to. Different view around risk allocation. What about your PE sponsor? Do they help with any of this stuff at all?

If we need it, we obviously have an approval process. If we get a little bit bogged down and whatnot, just from deal flow perspective, they're happy to help in. They've been fantastic from that perspective. But even questions that we have within the industry, they're obviously really well connected. This is their second or third environmental deal. I know they have two in the fund right now and I think they've done one before. If not, they've been evaluating the industry for a while. Anytime we need industry experts that quickly on the line, they can typically call people up and help us out a little bit from that perspective and also provide guidance and other stuff they're seeing. They've been fantastic from that perspective. Again, drives towards our ability to get stuff done quickly. They know what they're looking for, we know what we're looking for. And it's between those two parties. There's not a lot of ambiguity into what needs to get done to get a deal closed.

Cool. You got some market intel and some connections when you need it.

Absolutely.

All right, we're going to play the you competing on add on versus the PE firm doing this as a platform play. I'm curious because my pitch, our listeners are the ones that are the sellers here in the South. As a PE firm buying a platform, my pitch is around especially when I can do the growth play. Hey, whether we buy minority or majority, but there's an opportunity for a second exit and that's what I'm competing in. Going to bid it competitively on this. But to hear that that's what our goal is as a PE platform play is that we are very founder focused. We want to help you grow. We want to align with your vision so you can build a successful business. And we know you still got the legs to keep running with it for a period longer. Hey, we want to map that together so that four or five years you have an opportunity to take the upside of the value that we create. There's like a pretty good pitch, right? I've gotten this pitch before. So how do you compete against that? You're looking for the full acquisition and actually do the integration.

Yeah. So I think there's a couple of things that's Beneficial for us being private rather than public. The first one is kind of the second exit and second bite at the apple. Most of our deals are going to have rollover equity. Obviously there's exceptions to everything, so we try to keep the founders invested into it. But also we are going to have to exit from sun at some point. And so when that happens, your rollover equity they have is going to be realized and go from there. And we'll typically also try to put in as a seller, you're still going to get the rollover equity if you want it. And then also we do try to work out some sort of additional incentive plan. Whether it's bonus pools, options, sometimes we'll structure it as rollover equity inside that whatever it is, we still have the opportunity to sell that second bite at the app.

Okay.

The main thing that we're going to focus on is let's say a $50 million deal, you roll over 20% of it. That $10 million of equity as a platform has no diversification of it. As of today, as a platform, your $10 million equity is at $10 million equity. That's all that's there. Your business goes to zero. That $10 million goes to zero. Within our platform here at EIS, as an add on, your $50 million of revenue might go to zero. However, as I said before, EIS can still grow until your $10 million still has value of it. So it's a little bit less risky investment as a founder owner, which is typically, it turns into another portion of the retirement plan from the $40 million they just took home. That's a big sell we're going to play. And then also really focus on, you still get to run your business. The background of where we come from is more the environmental services industry. We have a lot of blue collar guys, we have some white collar guys, but still they're engineers and scientists. And so a lot of them, they don't want to deal with guys out of New York on a day to day basis. And their requests and they don't understand the request. They have their stigma, hey, I'm a blue collar guy. Show up with a lunchbox to work. What we can do and offer to them is, hey, you don't have to deal with those guys. That's for us to be concerned about and stay up at night. You show up, you run your business, we'll integrate it for you, we'll run your strategy for you. All you got to do is sell and have that flow down to the bottom line. And we Will help you do that as well.

Nice move. I like it. I was thinking back on the platform play that if I am a sick headed CEO like most of us are, I'd be the one that wants to lead building the platform and saying yeah, that's what we're going to do. We're going to go do some add on acquisitions and generate all this value and I get to be the hotshot and captain the ship. I like how you painted that picture of you can go do that, then you're going to have to own up to the Wall street folks.

It's so relevant because we just lost a deal on this premise about two months ago that we wanted back. We pushed up the price, went after it, did the whole. Everything we're talking about here explained it to them. I think when you're doing the M and A culture is such a big part of this too. We're really focused on that and trying to create a partnership and everybody's aligned on the same page. And so if somebody wants to do that, we're never going to wish them bad will. Best of luck to you. And that's just the route they want to go. And so you just lose the process. It is what it is. You put the time and resources into it. It sucks, but it's also part of the job. If that is what makes that guy happy, more power to them. Best of luck to you man. And hopefully down the road we can work together in a joint venture as a prime and a sub on a contract or project and maybe in three to four years we link the companies up at that time and double our size. It's just, it's one of those things that's really tough to compete against as a strategic and you tell them pros and cons and go on with the day.

It sounds like you got these variables for the seller to make a decision around around vision, speed and certainty. Sort of the factors and play. I'm curious about your approach in building that. Even though we have these auction processes and ideas make them competitive and objective, but we know they're not unbiased. This is like going to war. It's just like anything goes here. We know that and I'm curious about. I want to learn these strategies. I guess rule one is don't get in the competitive process and go source your own deals. But hey, if you've got the shiny thing that you're really after and I have to do it, it sounds like the number one thing or like the whole takeaway is build a Relationship with the seller as best you can. In fact have a good relationship with a banker so he can help you build that relationship with the seller. Is that pretty much it?

They tell us, no, I want it to suck. And that's just a very blunt way of putting it. But that's all I really can say to it is, hey, I gotta go tell Tyler and Joe and Joe's our chief strategy officer and say, hey, appreciate all the time, everything you've done, but we're going with the other group. It still hurts always.

Will you dig in there and ask them why?

Absolutely, in a variety of reasons. But typically as you say, I want to go be a platform or this other person just offered us a little bit more money. If we don't want you, if we're on the fence about doing not on offense about it, but like just basically tapped out and somebody else offered more money and that's what they want to go after, then okay, fine, that's again, know what we can win. Our goal is to never lose a deal based on relationship because they like somebody else more. It's one of the other intangibles of money or the platform really are the only two I can think of that we might blown out on that.

People do that. They'll take the vision over price. This vision and relationship over price.

A marginal, very marginal degree. Yes. A couple hundred thousand dollars on 50 million something. But if we're. You start getting millions of dollars away, it's again, it's a human being. I don't know many humans who wouldn't.

What about the relationship? What's your strategy to build those strong relationships that get you in that position to compete well in an auction process.

I can say this because Joe would say it too. We're two different individuals within our team. Joe, our chief strategy officer is a former operator and I mentioned the blue collar workers earlier. He'll get on a phone call and tell you, hey, my name's Joe. I'm just a redneck from Arkansas. Which is true. Yeah, he's a redneck, he's from Arkansas. But he also has been educated at Harvard and various classes along the way. So he kind of underplays it a little bit. But his operator kind of redneck mentality with a lot of the guys we're working with does provide a good lead in for some individuals and then also have more of the investment experience on the backside of it. A little bit more bike collared. I was raised in Nashville in the south my whole life, so I can get a Little bit of an accent going if I need to. I usually don't break those out on too many calls. I'll take more of the investment approach, a little bit more serious here to protect your capital perspective. I'm the numbers guy. That's what I do in the evaluation. And so between the two of us, we're such kind of on the opposite side of things. One of us will hit it off with the owner and be able to drive that relationship home. It just depends on who it is. Whoever it is, we both get out of each other's way. And hey, you got the relationship on this one. You drive this and you need the help, let me know. And so that's kind of how we him and egg it if we want to use a term around it on the relationship. And then just from there, after that initial connection being highly responsive in working, a lot of people will ask why do you do so much work on the front side of these opportunities? And it's well, yeah, am I guaranteed to get it? No. However, do I have a lot better chance if we're doing the work on the front side? Yes. And the other part leads into a little bit of it is certainty to close.

What does that mean doing a lot of work on the front side?

Dig in. Evaluation work will be completed prior to sending an LOI 95% of the time. There's obviously those exceptions, but I want to see the monthly financials back for a period of time. Typically, like everybody, we go back to the great, Great Financial Crisis 2006, 2007, look at the trend and every business has changed since then. Get that explanation, go through that, try to get monthly financials for the past five years, see the cyclicality trends there and then also just the financial profile of the business. Other items we're really focused on is safety. So in our industry, safety is a really big thing. If you're safety record isn't relatively clean, you won't win jobs and you won't work. But that's a big thing for us and it also affects our pro forma financials. There's a score that the workers comp company gives you that will affect your premium. And so if you have a higher score, your premium goes up. I'm trying to understand that anything that could be related to valuation, I want to do that on the front side before we even send it to loi rather than putting in a range or something else. So the bankers and the sellers, whoever it is we're dealing with, know they've done a significant amount of work. They really understand the business. When they look us in the eyes and tell us they're going to pay $50 million for this, they're going to pay $50 million. And obviously, again, the worst conversation we can have is going back and saying, hey, listen, we missed this on the front side. So therefore we're going to reduce this price. It's just not a fun conversation to have. It happens. Not necessarily missing stuff anymore. It's more so it just wasn't disclosed. But we really try to avoid that. We really try to avoid that conversation on the backside of it and just do the work in the front when not under exclusivity. But we're still spending resources to get stuff done and understand the business and show that we're engaged.

This part of the presentation is showing that you've really done the work, that you've done your homework, you're working hard for the deal.

I want to talk to those individuals, if it's an investment banker, at least two to three times a week leading up to stuff or leading up to different bid dates between IOI and loi, I say IOI once a week. I try to talk to them. The loi, it's two to three times a week. Really pushing hard, making sure they're engaged, too.

You gave an example of building rapport with that seller. Is. Is there ways to leverage that banking relationship so that you can get more opportunities? Build rapport with the seller?

Oh, 100%.

That's like a clear thing. You don't know the banker really well, so they sort of. You kind of are there in the, like, third tier of the process versus the person really well. You've gone had dinner, drinks and whatnot. And then they give you a little leverage to get you that first in line type of privilege.

We have relationships with different bankers now where we're first in line. I actually have a call with one of my buddies this afternoon who's an investment banker, and he will bring us a deal and say, hey, you guys have first crack at it. I think this fits. He knows our strategy, been in the industry for several years, was at Montrose beforehand, and sold his business to Montrose Environmental. And every deal he comes through, hey, here it is. Here's. Here's where I need to get to from a valuation perspective. Here's why it fits your business. He's starting to pitch to us now and says, I would not take this to a competitive process if you can get here, as long as it meets what we're thinking. All right, perfect. Thanks, man. With those guys, we close deals in 60 days. We know what the spa looks like. They know what to expect from us from a diligence perspective. And so it's that relationship where we now have a quote, buy side engagement with this investment bank. However, the seller's paying the fees and so we're getting to processes like that where we've created the relationship and rapport. But also, I think is what you're alluding to where we don't have that. Creating a relationship with the bankers does allow us, obviously in every NDA and whatnot that they send over. It's, hey, you're not supposed to talk with the sellers. And they try to keep them guarded a little bit. But when they see the work that we do, done and completed and been pushing them so hard and know that we're interested, they've definitely opened the doors up a lot. And not all of them. Some of them have a lot more generously, hey, yes, you can talk to management. Another call. That's fine. Get your stuff.

You need a lot of work. We got to build relationships all around with the seller, with the banker. But the banker seems key because you got a good relationship there, give you guidance on the valuation. Essentially you could skip the whole process and work with them on the deal if it's early. How are you building relationships with the bankers? You taking them out? Who's paying? Are you paying? They paying? That's how the bankers pick up the tab.

It depends really. Just kind of phone calls and working with them. Once they go through a deal process with us and see how we can get stuff done, they want to work with us and that's the thing we want to do. We're extremely fair, quick, nimble. But then, as I said in the beginning of the call, another theme is transparent. We'll tell you what our problems are, and that's because I think sometimes people like to hide problems and avoid them and then use them as a aha moment at the end. That's not what we want to do when we're legitimately trying to get deals done and create value, knowing that too many dollars of equity value means a lot more to us than zero. So here's our problems, here's how we get this done. You solve these problems together, we'll move on. And so from a relationship perspective, that's just kind of how we handled it. Being transparent and honest with the investment bankers and what we're looking for and trying to do. I guess we'll go out to lunch and keep in contact with them and send them emails, ask them how they're doing. But there's not really much wine and dining. It's more so just our action in how we treat the deal process.

Anything we're missing that we haven't covered before? We on to another topic here. We talked a lot about rapport demonstrating. You've done your homework. What are your preliminary diligence questions?

We'll go over the financials as we talked about earlier. Any legal matters, potential legal matters so we can set our escrows appropriately, make sure we're not stepping into a bad situation there. The safety matters, understanding union exposure that might be there. These are all kind of industry specific I guess the union safety a lot more industry specific. We'll try to understand their revenue splits, what's it by geography, end markets, who are the major customers. So we can kind of see an overlay. The big strategy inside our business is being a services business and where we stand today we get much more excited about commercial synergies than cost synergies. And so we do a lot of founder owned businesses. Within those founder owned businesses, the salary that's getting paid to an individual, that $60,000 is taken away from the owner. Every salary he brings on that's that is a true salary off his P and L personal P and L. We when you think about it from that perspective, all these companies run leads so there's really not much room for cost synergy. Right. An example of it is hey, we can take out an AR collection, A R collections, individual or better yet the senior accountant who does some AR collections, who does some senior accounting, does some reporting. But on paper you might think of it as a senior accountant and we don't understand everything else behind that wall. We don't factor those in first by any means and then we'll talk to the owners and if there is any duplicative stuff we can pick up, we will. But our real thing is just understanding the commercial synergies and that's what we're kind of digging to customers and whatnot. What's the processing potentials there and new markets we can move into between EIS and the target we're going after and try to quantify those in the front side.

How big of a list is those initial diligence questions like 20. Okay, not too crazy.

A lot of it's valuation driven. All those are going to drive valuation.

What's your typical timeframe to get to loi in an auction process?

Auction process is kind of weird, right? Because that's always typically Set by the bankers. We'll try to preempt stuff where we can. Obviously we're going to have relationships a lot easier to do that. When you read a sim, you basically know if you're going to do the deal or not. I think everybody kind of bounces around and does their stuff. If you're going to get something done, barring any major red flags by reading the sim and so we can move. I've gotten a data request and had a LOI together in 48 hours before typically though maybe a week and more so driven by the other guys, like we have the time to take. They said we can't preempt it and so, all right, we'll just hold our stuff in and wait for the backside and wait on the backside of it and try to pull out as much information as we can to get to make the most competitive offer that we can.

When we touched on the approval process because is there a certain deal size that's got to go back up to the PE firm? What does the approval process look like?

No, all of them go back to the PE firm. Just a collaborative approach of it. Those are our shareholders, our investors. And we've seen a lot of stuff. But as a group we've seen even more stuff when you take the group knowledge approach. And so we send everything up and go through that way. But I put together a quick model. We've got it down to a template now, right? Spits out our returns, pretty simple and telling the strategic rationale and why we know we want it. And when I think about the agenda on this, drives into the next phase of it or one of the questions I think that were asked, we understand our investment thesis and we have a strategy, right. We know what we're trying to do when executing on these. This worked really well. When I was at Marion, our strategy was, or let me say this Marion to give a quick high level background on it. Historically, Marion had a lot of exposure to nuclear power plants, did a lot of work inside of those. Which kind of that industrials market or the market for the nuclear power plants can be up and down. So the volatility and cyclicality that can tie to it wasn't the most attractive to investors, Wall street and whatnot. And we came up with a strategy of hey, we want to diversify and get at least a third of our revenue inside the medical radiation space or medical space, which kind of boils down to radiation therapy and nuclear medicine. And so we took a laser focused approach, said these are the deals we're going to do this is what we want to buy. These are the companies we're going after and executed on it. Does that say we didn't do anything inside the industrial space within Marion? No. There was a great target that came along. There was value for at an attractive multiple. Absolutely. We went after it, remain focused, was staying hyper focused on what we're trying to do in our investment thesis. That's what we have here. We're an asbestos abatement company. Today people see that as a melting iceberg as there's only a finite amount of asbestos out there. Which kind of true, kind of not. There's a lot more I think from a operator perspective. I'm not an operator but I haven't studied this industry for a while. There's a lot more tail than some people think. Maybe a little bit bias there. That being said, when we take stuff to the investment committee we know what we're looking for, know what we're trying to do. It's an easy decision of like hey yeah, of course this is the investment thesis. Go get it done. Or if it's a little bit outside the box we will get questioned on it. But it's taken care of within a 30 minute phone call, maybe an hour.

Are you able to move faster on those deals that are closer to the strategy as opposed to further from the strategy?

Yeah, there's a little bit less questions, there's less to answer. Better, tighter business case the ones within our investment thesis. We know the industry, we've already studied the industry, we've done our market research on the front side of it. We know exactly what we're looking for. We know how to speak to the industry. It's the ones that are a little bit outside of it to where we need to do a little bit more market research on the front. We'll have our calls with the different banks and different consulting firms together. The industry from there. So it adds like a week or two to the process of how fast we can move on it.

There's this thing called deal fever when we look at some of these non directly in the strategy deals. How do you keep from deal fever from happening or is that just part of it?

It all happens, we all get our hands slapped a little bit. I told Joe I can put an investment thesis just around anything. So as I said, the group knowledge obviously I've seen a good amount of deals. Joe has seen a decent amount of deals and also significant operator experience. CEO and cfo, same boat. And then also once you bring it up to sun we, they've seen, he's been there for 20 years and the VP 5 or 6 and whatever. So they've seen a bunch of details. And so when you take the group knowledge and put it together, say, hey, this doesn't really make sense. Everybody brings a deal to the table that's a little bit ambitious for whatever reason. That's how we avoid deal fever is once everybody gets along to the table, puts the ego aside, that's a big thing that we talk about when we get into those meetings. Egos aside, be honest with each other and let's talk to each other as professionals. Do what's right for EIS and our shareholders. That's going to help you avoid it.

It's like you basically got to frame everything very objective and try to keep as black and white. And it is that it's like, can we get to the root of this and make sure there's no biases here on doing the deal that there's some emotional driver behind this of whatever, getting another one on the belt type of thing and just being that way. Then it seems like because you have others involved that they're going to be like that anyways. As no, you didn't want a bad deal. I think everybody knows in hindsight nobody wants to add that on the record.

Oh, 100%. To do M and A, you got to be very be honest with yourself. And we're all type A, maybe Type A and 0.5 at the least. Individuals. A lot of us graduated top of the class, smart, always been outperformers. As you say, we don't want to be able to fail and aren't our plate. And so it's a lot better to have one get turned down. That doesn't necessarily fit your strategic vision and strategic value of what you're trying to do than it is to have something fail. That lesson would hurt a lot more.

My biggest lesson from all this is just to avoid the auction process altogether.

Yeah, pretty much. We again at Marion and here at eis we have a very strong push on leveraging internal relationships. Our operators here cold calling too if we need to. It's trying to avoid the bankers, but they will bring you good deals every now and then and when they do, we pounce on them and give them our best pitch and put the best foot forward and kind of suck it up for the time being.

Yeah, this sounds like the right way to do it. It sounds like you got a mixed approach. You've got the right opportunities to participate in auction and then you put the effort in the proprietary steel flow as well. Any balance or anything you've learned over the years that hey, we should be spending X percentage of our efforts and building out the network. And obviously you can get some of these sort of semi proprietary deals through an advisor. When you have that strong enough relationship and they may be working directly with a PE firm, they got something they're thinking to take to market. But is there a certain sort of split that you put between it?

I guess in a broader sense maybe 15 to 20% of the time focus on sourcing, just adds and flows a little bit. You always get stuff in the pipeline, get real busy and then you're sitting there about halfway done through the deal and it's oh shoot, I need another one after this, I don't want to get bored. And So I guess 15 to 20% of the time is used to sourcing. There's talking to investment bankers and get their mind cold calling. And then also we take a lot of time going through the businesses and talking with our different founder owners there on, hey, who are good targets to go after, who do you know and whatnot. Another team that we all like to use a lot too is our sales team. I'm super close with the VP of sales at EIS and having him pitch different targets to us and what he sees in the market.

What's the split between proactively developing the relationships to the third parties versus like proactively putting effort to source your own deals with or without your in house resources too?

Probably 70, 30 in house for example.

So 70% on your own in house and then 30% external.

Yeah. Just because the bankers like we know the ones we know, we really make a good impression once we do start working with them. We're going to take phone calls, take them out to lunch sometimes a little bit, send us how much money and dine in. But at the end of the day, two things. Sun has great relationships with those. They're a two and a half billion dollar fund, been around for whatever, however many years. The other part of this too is we have what the investment bankers want, we have money to buy their company and so they're going to reach out to us regardless. Obviously it's better if we're being favorably so we can appreciate preempt deals and get additional information. However, tons of people are reaching out to sellers and between cold calls and different in house relationships that they have, you have to be a little bit more proactive in getting those inroads and creating those inroads because in the environmental services space, every single person I talk to has somebody else calling them and not just one other person, it's several. It's a hot industry, a hot space and so highly competitive. I spend a lot more time kind of making sure that those guys see us in the instance they do decide to sell. They think of Tyler and Joe and EIS as a great stomping ground to go to.

I like that 70, 30 split seems really on point. Lands well with me. Any other. I guess we're ready to wrap things up over here. But any other advice in competing in an auction process that you want to share?

That's what my dad taught me. Three things of living life is doing business or whatever, honest, ethical and hard work. And if you get those three things, you're going to be able to put a really good foot forward and have your company on a pretty good pedestal within the auction process.

Pretty ironic. It sounds the exact same advice my dad gave me. It takes a while to learn. It took me a good 10 years to finally learn what he actually meant. It is true. There's pillars you can't get away from.

No. If you do that in any part of business, you're going to be successful. But I think an M and A, it's just such a competitive market and you're dealing with a lot of dollars and people are trusting you with their money and their dollars and their livelihood. And so it's even, it's even more heightened to do the right thing.

Tyler, what's the craziest thing you've seen in M and A?

This is when I was at Marion and by far the best investment I've ever been a part of. And we obviously been in the private equity world numbers. We always look at what everybody's getting paid and how people run their businesses. There's a quote, there's not a perfect way to run a business, but inside the industry there's a quote, perfect way to run a business. Rails that everybody follows along goes after. So we're looking at this company at Marion and it's a founder owned business. And over the past like six years they grew the business from $15 million of revenue to 100. You ask them, hey, how'd you do it? The first thing is hey, yeah, we just. How do you forecast for reference here they had auxiliary pieces for linear accelerators, which linear accelerators provide radiation therapy for cancer patients. They're the big old machines and they had add ons for those. So he goes like, well I just looked at the Market said, There's 100 linear accelerators out there in the world, which there's more than that, but just for rounding purposes. And I want to be in 10% of those next year. Next year I want to be in 15%. Next year I want to be in 20. Okay. Interesting way to forecast, see what you're doing. Makes sense. And then the other thing is, I gave my salespeople fat bonuses. And so he's paying his sales guys like 1 to 2 million dollars per year on these bonuses for hitting them. This is on top of commission. So these sales guys were getting two and a half, three million bucks a year because they kept hitting the numbers and it just grew like a weave. And they had these throughout the business. So there's a guy that they came in and had this software that they're running on these, on these linear accelerators, and they said, hey, you need to develop this and take this on prem solution and move this to a SaaS solution right in the cloud. And if you do it successfully within two years, $4 million bonus. We found this out during the transaction because it was in the middle of it, we're buying a company, we're on a hook for the 4 million bucks. At first, everybody said, what is this? This is ridiculous. Why is he paying all this money? We started talking to him, and he goes, I don't want to give away my equity. So I just said, I'll just pay people whatever I need to hold my equity and compensate them heavily for value creation like the sales guys. And so is it a completely crazy, knock your socks off story? No, but. But it's one of those stories that kind of give me a different perspective when evaluating businesses in compensation for individuals. Of they say if you pay people, they'll do work and good things will come. And it was one of those just a completely different way of running a business that everybody's staring at for a second knowing we need to do the acquisition a little bit and take on this risk. But it turned out six months after closing TTM, EBITDA had already grown by 20%, and it just kept ticking up, and it completely blew it out of the water. Best acquisition we've done. And just on a business model that all these deal guys at Marion were looking at first, this is crazy. And then realizing back, this is a very interesting way to run a business that made a bunch of money.

Take care of your people. I like it. You compensating on the value they create.

Yeah. And it's, hey, what's a $4 million bonus when you just created $10 million of equity value.

For me, this has been a great conversation. Thank you for taking the time. You taught me some new things.

Thank you Kon. Appreciate your time today and reaching out. Happy to do this for any time.

Until next time. Here's to the deal. Foreign.

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