How to Overcome M&A Hurdles

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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.

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Free weekly newsletter to stay up to date on our latest courses, upcoming events and expert interviews. Again, that's mascience.com I'm your host Kisam Patel, CEO and founder of M&A Science. Joining me today is Ritika Bhutani, head of Corporate Development at Toast. Toast is a restaurant point of sale.

And management system that helps restaurants improve.

Operations, increase sales and create a better guest experience. Traded on NYSE under tost. Today we're going to talk about how to overcome M and A hurdles. Ritika, how are you doing today?

I'm doing great. Thanks for having me.

Thanks for taking time from doing deals to have this conversation. Can I kick things off with a little bit about your background?

I have been at Toast for about a year, heading corporate development before Toast spent three years at Block, formerly known as Square, where I led acquisitions on the merchant side of the business title and tbd. My last deal at Block was afterpay, which was a fun one to execute. And before that I spent almost eight years at Verizon Media and Yahoo, where I led corporate development for ad tech and search business and also dabbled in strategy and some operations and partnerships. And before that a legacy banker. I am also an LP at the Operator Collective.

That's a pretty diverse background and you spend a good amount of time on the strategic side.

That's right. We spend a lot of time thinking through strategy. It's the best part of my job because you're always thinking about the future versus always thinking about the past and what didn't go right. And so it's always fun to dive a little more about what's happening and what should be happening in the future of just even restaurant tech.

So what's the secret to overcoming M and A hurdles?

There is a slogan that I often think about when I think about M and A hurdles, and that's keep calm and carry on. M and A is hard, but it's fun. It's exciting because every single deal is extremely different. You have to expect the unexpected. Things never go as planned. You have to be flexible and agile as the deal moves forward. No two deals are identical. Obviously having a playbook and looking at a formula that might have worked or strategy that worked in a prior deal is a good way to think about what might work in the next deal, but it's not often that easy. It does require a lot of thinking and improving and reassessing throughout the deal process. Just staying focused on and being willing to be agile is really helpful. It's also trying not to be too emotional. Sometimes when a deal is dragging on or it's been going on for many months and you're in heat of negotiations, it's hard not to get emotional. Taking a step back and really assessing why you're doing the deal. What are your non negotiables? Thinking a little more about the deal thesis and the outcome you want really helps. Staying calm throughout the process is really important. As you get more deals under your belt, you start learning about what's a really big issue versus what's not. So it's all about experience. But keeping calm and carrying on is the slogan we use.

That's my takeaways, the big theme, Keep calm and carry on. Be mindful that deals never go as planned. Be flexible, agile and don't get too emotional. That's where it's important to remember that slogan. Keep calm and carry on.

That's absolutely right.

Can we talk through some examples of challenges you see on deals?

It's interesting because you might think that the larger deals are the ones that are the hardest to do. And sometimes they are, but sometimes they're not. Because often in larger deals you do have more governance and processes and people with clear functional GNA roles that make it way easier. It's often the smaller deals where there's so much more complexity. You have startups who have messy corporate histories and you often uncover a lot of landmines. And so when we're thinking about challenges, it really just depends on the company and their life cycle. I often see a lot of issues on the tax side, especially when you have operations in several countries or states. There are sales tax and transfer taxes and things of that nature that often get overlooked by startups or companies that are still non public. Those issues tend to get compounded and there's often 9 out of 10 times exposure on the tax side. The other key area that we often see issues is on the HR side, especially in this current hybrid world where you have employees who might say, say that they stay in one state but actually are traveling all over the world. It does create a lot of payroll, regulation and exposure. We have also seen areas where there's not been clear employment agreements, no clear IP assignments. There might not be directly appropriate entity that has been formulated to hire those employees. So there's a lot that goes into just HR and tax. They're often two biggest areas when it comes to M and A that we try to streamline earlier on in the process so we can see if there's any potential red flags.

So we got the company size could be one dynamic of it and essentially like the maturity of the business itself, the tax, hr, what are the areas you run across?

There's always the contract issues. The company is very dependent on a Couple of key vendors understanding change of control mechanisms or any other interdependencies. But generally hr, tax accounting, often the GNA functions that are outsourced or there might not be someone that's truly dedicated within the startup end up being issues when you're doing diligence. And so we try to prioritize that on the product side, I would say we spend a lot of time doing that diligence upfront. And so when we're entering into an loi, we would do that level of diligence. And once you are comfortable, we enter into that LOI and get into formal diligence where we spend more time on these GNA functions. But usually it's within these GNA roles that we often see issues.

Is there a certain time frame when you're going through the deal process that you tend to see more issues arise? Is it stuff earlier in, confirmatory diligence later, or is it just a surprise across the board?

Sometimes it's a surprise across the board. Depends on what gets disclosed and at what period. We try to really prioritize our list because we have a sense of where there might be more work to be done or diligence that will take time for us to uncover. For example, on the tax side, there's a lot that goes into tax diligence. And so we often have a very detailed list that we would provide the target earlier on in the process, but it will take them several weeks to populate a data room with that materials. So even though the ask is out there, it takes them many weeks. And by the time we've had a chance to kind of look through it and come up with our potential view on any exposures, it is towards the tail end or middle of the diligence period. So some of these just diligence processes just take a long time, given they're pretty intricate. But oftentimes you try to front load as much as possible, but there's always things that come up throughout the process.

Okay, so it sounds like you're front loading it, but also it's based around the value drivers of the deal itself. So you really know where to prioritize things.

That's right. We try to front load where it matters and again, where we have less confidence in or where we've seen some of the initial diligence materials. And we figure there's going to be some potential issue, so we try to contemplate where those might be. But there's often things that come up out of the woodworks that you find out Nonetheless, I want to click down.

A level of details in these areas that you run across issues just to understand them a little better. When you look at the size component of it you mentioned just smaller companies in general, they may not have maturity in terms of the way they keep their books, things of that sort. How do you identify with those challenges? Is it just harder to get things together than what you need or is it just harder for them to put it together?

It's a subset, even just in the way they do accounting. Whether they're actually accounting for revenue correctly and whether you can actually recognize that revenue once you acquire them. Those are basic things that you would want to check for when you're doing diligence. It comes up earlier on in the process, but it does take some time to think through and get all the materials from the target in order for you to assess that. But we do something called quality of earnings check just to make sure the way the company's thinking about revenue, the way they're accounting for it, the way the cash flows, all those things are vetted before we actually complete diligence. So it is kind of a process. Does require a lot of inputs, however, from the target.

You'd probably use like a third party for that quality of earnings.

Depends on the size of the deal. If we have a accounting team that has the bandwidth and the experience, we would try to do it in house, especially for smaller acquisitions. For larger acquisitions, it does make sense to include that as a part of a outsourced third party providing that consulting experience, especially if you need to do pro forma financials post. So that's where it comes really helpful.

Small company side challenges around really looking through the numbers because they may not have it organized like a more mature company. Are there other issues with a smaller company, people wise, or anything?

On a smaller company, the people side is often it's very haphazardly done. They might not have mature HR policies in place, they might not be properly hiring an individual, they might be a contractor, but they're not really a contractor under law. And. And so we often find those type of challenges when we actually dig a little deeper to understand why folks are employed a certain way within a startup. And I think a lot of times startups don't realize that they're actually creating exposure because of the way they're actually accounted for that employment of that individual. But when we actually dig into it a little deeper, we start uncovering a lot of these things and then we start putting together ways that we can potentially mitigate this is it exposure that we expect is going to happen. Do we need to move this contractor to a full time equivalent? Because from a legal perspective, they're not really a contractor. These are all things that kind of get overlooked because from a startup's perspective, they just want the best talent and they want the best talent in fast, but they're not thinking about the proper processes and the rules when it comes to employment.

Yeah, it's interesting because the way you describe these smaller companies, it hits on the other buckets, but it's amplifying the risk you're finding in the other areas between tax and hr.

It's very nuanced because it's per state, but then the longer the exposure is, the more it compounds. Some of these can be mitigated by going to the state and asking, revealing that we've made a mistake and we need to change the employment. Other things are penalties that might be incurred. So there's definitely a lot of formulaic type of work that goes into diligence that needs to be accounted for when we actually come up with our list of exposures and what eventually gets into an indemnity.

Do you find smaller companies more fragile in general in that the employees can be a bigger flight risk because they didn't want to be part of a larger company?

Depends on the company and the culture of the company. I think there's definitely instances where there's a cultural gap and that creates an issue. We implement something called a culture survey earlier on in the deal process where we really do an assessment of the culture of the company, the target versus the acquirer. So we can just at least be mindful of where we think there might be cultural gaps. And we try to address that in the first 90 days post acquisition. But I would say culture is a big part of that as well as the founders and how much they believe in the business and the thesis of the combined business going forward. A lot of it is driven by that. It also comes down to whether they see this as a successful exit or whether they see this as the company is losing money and they needed to exit and therefore hard to retain all the individuals at that point. It just depends on kind of the overall ROI of that investment.

How do you manage that? I'm curious, just even through the deal process, how do you put the considerations around culture? I'm even looking at a deal now, and that's the biggest red button item right now is the culture doesn't seem to be a good fit. But I'm curious how you assess it and it sounds like you even run things post close where you're identifying those unique areas and bridging those gaps.

We do, like I mentioned, a cultural assessment. We do surveys with the employees post close.

What are you doing pre close prequels.

We do the cultural assessment where we have a list of questions that we would want to get answered between the target and acquirer so we can understand how they think about their employees, what matters most to them, what's really important in terms of their culture, their day to day, what events do they like to have, how does the team communicate, how does the team bond? Those type of things are really important to make sure we hone in and don't lose. But at the same time you are bringing in this target company to a new company altogether. There are a mixing of cultures and so making sure there's not a cultural gap where it's so way off and that it will be hard to find alignment is something that we try to focus on. If you don't have that, if they feel like it's totally different company than they would want to be a part of, then it's really hard to retain that team. There's often surveys that we do post flows as well, the first 30, 60, 90 days to see how people are feeling about the deal. Where are they seeing any conflict, is there any confusion? So we can help remedy any of that stuff as soon as we see it. But it's often a. It's often a delicate balance, frankly. You have to enlist the founders and the key executives who are a part of the deal to help motivate their employees because at the end of the day, they're the most trusted folks within that company for that subset and that team. And so we really need to make sure they're on board and excited about joining Toast or Yahoo or Square and use that as kind of the key way to kind of communicate and create that excitement for the rest of the team.

Has culture ever become a blocker from doing deals?

Yes, I would say sometimes you still would do the deal. If everything else nets positive understanding that culture is going to be something that's going to be a struggle. There are always challenges, especially when it's two very different companies with very different mindsets of how they want to operate, different countries, languages, etc. It does make it very difficult. You need to find that middle ground between both sides early on so you can understand each other and communicate with each other when you can find that and when you can't give the target company that level of Attention earlier on you will see them become detached and often then the company and the target won't be as successful within the company going forward.

Okay, yeah. I was curious because I felt like with smaller companies that would be a big element that would make those deals particularly sensitive where the culture component and they manage that with the especially a larger organization where the culture is going to be very dominant as opposed to the smaller startup.

Yeah, and I think it's different in tech versus not in tech. A lot of tech companies still operate like startups in some ways. They have a very tech centric culture. A lot of perks, a lot of transparency. That makes it exciting for a lot of startups because they have that within their own business. Today when you join a non tech company, that's when it becomes a lot more difficult because there is more processes from the very top, there's a lot more layers, less transparency. It just makes it way more difficult to digest for a startup to come in that becomes very challenging.

Accounting and tax issues, what challenges do you typically see there? I can foresee the startup that hasn't paid taxes in all the states they do business in. What other types of challenges do you see? And I guess what do you see with the larger deals?

As you mentioned on a tax side is often not paying taxes or you might not be profitable today. And so your stance is I don't need to apply for any taxes. But you actually still do. You do have to pay payroll taxes and at least disclose to those states what your tax situation is. Oftentimes things do not actually get disclosed and that's when there's exposure. One of the biggest challenges that I've seen is that startups just don't take taxes as serious until they are profitable. And not hiring the right folks to manage your taxes I think is a big deal. Especially when they don't have the resources necessarily to outsource third parties. On the accounting side, most companies, especially small startups, are not audited. Always becomes more difficult because you need to kind of vet through the numbers to make sure it's legit. That takes a lot of time and diligence for us, especially when it might be a different business model, might be a different type of SaaS or hardware business or licensing business or whatever it might be. You need to really absorb that and see where and how revenue should be accounted and whether it's accounted for appropriately as well as a cost basis, what's included in cost, what's not, is it appropriate, is it being in the right categories within the P and L. So there's a lot of work that kind of goes into that for a startup, they're not really focused on those nuances. It matters, especially for a public company as we get audited and we need to consolidate our financials so it becomes more of an issue for us. And then obviously being a public company, you have to be SOX compliant. So there's a lot of other compliance related aspects to accounting that goes into doing a deal that creates a lot more scrutiny than a typical startup might be used to.

Yeah, it's interesting. I like the pendulum swings when you talk about from a smaller company, larger companies, just a different set of challenges where you're dealing with several different jurisdictions, even internationally, that you have to make sure you're putting things together correctly.

Yeah, totally. There's always a challenge regardless of the size. I think it's just the level of challenge just changes.

We talked about the smaller companies with the HR side. They might not have the typical structure and policies in place. What are HR issues with the larger deals?

I think with larger deals it really comes down to making sure there is a clear transition. You might have a product team and a tech team and all the DNA functions and they all are used to reporting straight up into their same org structure. That's not necessarily how it will work once you acquire the business. And so understanding why things will kind of be, you know, having to spread apart and report into their different functions is something people have to get used to. Oftentimes in M and A we might keep the team together for a period of time, but over time we would want them to report into their functionality areas. That's often a hard conversation to have is thinking about org structure and how all of that will work together. The other is just compensation and ensuring people understand retention. Retaining talent is hard to do for any M and A deal. And so making sure you have the right mechanisms in place so you're keeping the most relevant, most crucial, most key folks in the company retained for a period of time is super, super important for us. So we would negotiate terms that would make sure we get those key employees. If you can get key employees, then you can usually get the rest or at least a subset of the rest to join as well. Any other HR issues besides just employment related specific things we have not for the most part. That's where the challenges are on just employment and then classification and then lastly just culture. That's where we spent the bulk of our time. Since COVID we've been also dealing with kind of just hybrid Versus not hybrid and coming into work or the culture of working at home that's come up more and dealing with that and figuring out what makes the most sense for that startup is something that we've been assessing, but before that, never really too much of a challenge.

Beyond those issues, how about with the contract side? What are the typical issues related to contract? I know you mentioned the vendor part of it and then change of control.

Yeah. So we do a legal review of key contracts as a part of the deal process to see if there's any that would need to get remediated or signed over prior to the deal closing. A lot of times a company cannot function unless those key vendors or contracts are in place. And so you never want to be in a position where you're not sure whether that contract is something that could be handed over to the acquirer post deal. So we do spend a lot of time trying to understand that and getting comfortable with the risk really honing in on change of control provisions or assignments. That type of stuff gets done earlier on in the deal process so we can figure out which ones to address between which period. Sometimes you might have a period between sign and close in order to address that. But on contracts, usually those are the key issues. Sometimes there's also provisions and terms that might have been agreed upon that as a public company we would never have agreed to. So it is sometimes unwinding some of those contracts, which becomes tricky because those are lengthy and take time. And especially when you're coming in and trying to renegotiate something with a third party, it doesn't necessarily run on deal time. It kind of runs on their schedule. And so that can sometimes prolong a deal from closing where they have to.

Go back to one of their customers and saying, hey, we need to update our agreement here.

I had an incident like this many years back. I was working on a deal where the company, a small startup, again, did not spend money on their legal resources, which is a lesson for most startups. So always invest in your legal resources. They signed a customer contract with a very large commerce company. It was great. They signed it because they felt like this was a proof point for their business and their platform. Because they had this really big commerce company as a customer. They didn't realize that the contract essentially said that any work they did for this commerce company essentially was the commerce company's IP and not their IP going forward. And so essentially all the work they had done for the last year and a half was no longer their IP and they had not realized that that was what they had signed. They understood it as something different, but they did not read the language close enough to understand. They actually were assigning over their IP and their business, obviously in diligence. We discovered that pretty early on. And then we had to formulate a way to renegotiate that contract on behalf of this target anonymously to ensure that we can reassign it and change some of the provisions so that we get comfortable doing the deal. Very tricky. It ended up taking two months to renegotiate that contract. And so the whole deal ended up being longer than we would have expected. But we had a favorable outcome at the end of it because we were able to renegotiate that and then get the deal complete.

Wow. Can you go back and walk me through change of control and assignments so I can relearn it?

So for most contracts that companies sign, especially the larger contracts, there might be a provision for change of control, which is essentially, if the company was acquired or changed owners, what would happen to this contract? Would it supersede? Would it continue? Would there need to be authorization to continue to contract? Would there have to strike a new contract, whatever it might be, or whether it could just be assigned? Can we just assign it without any type of change of control, so immediately it goes to the acquirer? So those are the types of things we look for. Because if there is a change of control mechanism, A might also mean that we might not have that key contract if we need to renegotiate it. And B, we might not get the same terms either. Especially when a third party vendor might see a larger company is acquiring a smaller company. I can ask for more money. And that often becomes problematic because at the end of the day, no one wants to pay more for the same service. But oftentimes we have to get into a process of renegotiating those relationships and that becomes really time consuming and painful as part of the deal process.

So assignments are a type of change of control. You can have a provision specific to assignments and then broadly speaking, around the change of control as definition of any event that would change control.

That's right. It's a really key aspect to contracts. Even other vendor agreements, it might be, even employment agreements. There's specific contracts that really matter when it comes to change of control. And you want to make sure you account for all of those things. There might be things in employment agreements as well that in a change of control you might get accelerated vesting. And it's painful if that's the case, because sometimes that means that key executives might get accelerated vesting and no longer be incentivized to continue to work. You really need to look and understand contracts on both the people front or any of the more critical contracts that the company has in terms of how they operate their business to make sure you can continue the business as is going forward.

Let's talk about how to mitigate these issues.

It's interesting. There's a lot of different ways to think about mitigating it. For a startup, the best thing they can do is just hire good lawyers. Having good advisors and lawyers are really, really important. Have someone managing your taxes and if possible, your hr. Oftentimes the CEO of the company or the founder wears many different hats, but they're not an expert of HR or taxes or payroll or accounting. They're kind of wearing all these different hats to just make mine. Often that's when there's errors that occur. So for a startup, the best thing they can do is just hire good lawyers and advisors for the acquirer. It's focusing on these key areas earlier on on the deal process so you can make sure you have a flag earlier on so you can deal with them and so you have time to deal with them and understand them and come up with a solution. It also helps that if you understand these flags earlier on in the deal process, then you can start planning for that in the integration process as well. The other thing that really helps me has been to make sure you understand your non negotiables. Having a set of principles you agree to at the beginning of the deal and refer to them when you need them helps with negotiations. It helps you also understand whether something is a deal breaker or whether it's perceived as a deal breaker because you're in the middle of a process. Or it might be a deal breaker for one cross functional team, but it might not be a deal breaker for the deal sponsor who wants to find a solution that the thesis still holds for the company and the target and for the deal. There's a flag for which we need to navigate and figure out a solution or we might be willing to take on the risk for. So those are some tactics that I've seen have been helpful to try to mitigate these. There is always a solution. It's just a matter of who bears the risk. So you can always increase indemnity, you can increase timeline for indemnity, you can haircut the purchase price. There's always a solution. It's just who's willing to bear the risk and who's Willing to get the deal done with those new terms.

Get a good lawyer, plan your integration and list your non negotiables. What's a good approach for a startup to find a good lawyer? They feel like you go on Google and it doesn't necessarily take you to the great lawyers.

Referrals. There's a lot of referrals you can get. I would always work for a referral for a really good lawyer or an advisor. Oftentimes a startup might have board members who they should discuss with and figure out who would they recommend. I would go with recommendations rather than just a blanket a Google search. Okay, you do want someone that has experience working with startups that have seen these type of contracts or have dealt with cap tables and things of that nature. So someone that has experience with more startup formation. Extremely important.

What's the one or two questions you'd ask to make sure you got the right lawyer?

I would always want a deal flow to understand your deal sheet and who have they worked with and the outcomes of those deals. Just to see companies they've represented and whether those companies have gotten into any issues or whether they've been successful, exits, et cetera. I would also look at just their caliber of their talent, which law firms they come from. There's a lot of more independent advisors and law firms that have come from larger law companies and have then created their own separate business. Those are often good advisors who are probably more cost effective than some of the larger law firms that are out there. And then also to kind of just understand their current customer set. Who are they advising? Are they a lawyer for a similar company in your space? It just gives you a little more comfort that they understand your space. They understand how legal terms are being negotiated within your space. And so it gives you a little more guidance in terms of what you should be looking for, especially when you're negotiating cap tables or terms for your deal or fundraising. Someone that has experience within your key segment is extremely important.

And then on integration, what's the approach there? You mentioned you want to plan integration early, but how do you actually do that?

I think integration is probably one of the most underrated functions within Corp Dev. It sometimes gets overlooked because it's the hard part. Frankly. It takes a lot of effort to integrate a business, but it's a very crucial part of M and A at Toast, at Square, at Yahoo. Integration sat within our Corp dev team and it played a pretty integral part of our deal process very early on. So we would bring integration from the very beginning, even before we Signed a term sheet. We would inform integration about deal, what aspects of the deal are important to us, why are we doing this deal? And then have them start joining us and shadowing us as we get into the deal process. And then once we actually do start diligence, we would have integration join all of our cross functional diligence sessions so they can hear and understand where we might have potential issues in terms of integration or areas where we will have to figure out a integration plan. But I think it's very important to have this person or this team dedicated to post close integration rather than just having someone doing at the side of their desk. But having dedicated individuals doing this can either make or break the deal.

A lot of people talk about this in integration and I'm trying to get a sense of how do you know when you're hitting the right level of detail? Because I feel like you can start a deal process and say okay, here's how we're going to integrate our companies. We're going to move your sales team here and the product's going to go here. But then when you really look at all these things, there's so many things that could be assumptions that are totally wrong. How do you really know the level of detail for integration planning to know? That's actual integration planning versus just hypothesizing.

A lot of integration planning is done in collaboration with the cross functional teams. We do something called blueprinting where we have a view of the current state and we lay it out. What's the current state of target for each one of these functions? What would be the 30 day post, 30 day close status? Where do we want to be? Where do we need to be? How do we know what needs to get done by day one? Readiness. And then what's the long term plan? Eventually? Do we want to migrate ERP systems? Do we want to migrate them into workday? Do we want to move our salesforce instance together? All those things cannot be done on day one. But we'll have a viewpoint on where the company is today, what is feasible in the 30 days post close and what needs to get done day one. And then where we want to have the end state. We work pretty closely with those cross functional teams post close to hold them accountable for at least the first 30 day plan. And then post 30 days we start planning out when we can complete the rest of integration. It is a moving process. It doesn't all get done day one. Because as you acquire the business you uncover new things and priorities change, viewpoints change. We might be doing something within the company that might no longer make sense from that integration process. You have to kind of be willing to change things as they come up. But I would say at least the current state and the first 30 days, you can have a pretty good viewpoint with the cross functional teams prior to close. It's really the 1690 and then the 180 day plan that takes some time and usually gets moved around quite a bit.

The fact you refer to it as blueprinting gives me a good sense of the details to get into and how you referred to this before and after state. And it sounds like it's a pretty broad initiative that goes far beyond just corporate development in terms of who's involved to do all that planning.

Yes, absolutely. We're lucky enough when we're at a bigger company where you can have cross functional teams who are experienced to come in and help out with diligence, but they are very much involved throughout the deal process as well as post integration. They're the ones that make the integration happen. It's not just the corp dev team. That's when all the hard work happens, to be honest, for a lot of teams and it requires a lot of thinking and there's a lot of different approaches to get there and make sure the deal is successfully integrated. But it's very much collaborative and it continues for many different quarters post acquisition as well. So it's not something that just happens first 30 days and it's over. We track acquisitions for many quarters post close and we're accountable until the deal is integrated.

What if you're a smaller 2, 300 person company? Maybe you have a half a corp dev person there. There is no real dedicated integration resource. How would you approach it then? Would you simply bring in functional leads and give them that similar exercise for integration planning?

So usually when we do acquisitions, we would have the acquirer side take the lead in terms of integration and we would find a party within each cross functional role. So there might be someone that's wearing a hat for accounting and tax. That person will be the liaison with our accounting and tax individuals. Same thing on the HR side. Whoever is holding that hat today, they might be involved going forward as we get into 30, 60, 90 day planning. So we usually find that individual that's spending the time at the company to help us make that decision. Sometimes you might not have anyone frankly, and so they're fully reliant on you to figure out what do you think the best plan is at that point. We usually work with the founder to Determine what's the best approach, but we would take more of the heavy hand in terms of determining what's the best end state.

Okay, so pretty dynamic in the approach based on the situation and company sizes, the structures. But ultimately you want to get to the details and have a good plan in place.

You have to get into the details. Really good integration leader is someone that can get into details, has seen these integrations happen before and where they failed, but also help keep the teams motivated and accountable. We say we will do something post close and then if we get busy and we don't prioritize it, that integration doesn't happen. And oftentimes that can hinder the business and the deal thesis. So we spend a lot of time making sure we are meeting on the regular with our cross functional leads and then also doing things like scorecards where we measure the success of the deal. We have clear KPIs that we're tracking and report that upwards. So when there is something that's fall into the cracks, we quickly address it and make sure we try to keep things on the same track going forward.

How early do you define those key KPIs?

Oh, before deal close. So you have a set of KPIs for which you will be accountable for the deal pre close and by the time you close the deal, we start tracking that.

You have some principles on doing deals. Can we talk through them?

There's different principles we use. There's key areas where if some one of these principles no longer is true, we will reconsider the deal. One's the deal thesis. The deal thesis and why you're doing the acquisition. If doing diligence, something changes and that deal thesis no longer holds true, then we reassess whether it makes sense to continue the deal. The other is a financial profile of the business or the health of the business. If we uncover that the business is not as healthy as we had expected, they're losing customers or churn is higher than we expected, or we don't think we can cross sell or there might not be synergies. Then we reassess whether it makes sense to do the deal. Or maybe it makes sense to do the deal but at a lower valuation. And then the team, without the team, you cannot do this deal. At the end of the day you need continuity post close at least for a period of time. If you acquire a business and majority of the team leaves, you're going to have a really unsuccessful deal. Ensuring the founders are on board or the CEO and then a good portion of the team is willing to sign offer letters and join the company. Post close is really important and so getting ahead of that is something that we like to ensure as well. If for whatever reason we cannot get the team on board, we probably wouldn't proceed with the deal because it will basically mean that we're going to have to inherit a company, the infrastructure and rehire and retrain folks to start working and inheriting that business. And P and L, which is often hard and impossible to do.

These are three good pillars that make a lot of sense. You got to have your deal thesis concrete, can't compromise on that. The financial health of the business, that Q of E comes back with some surprises. That's not going to be a good thing. And the team, you don't want some key folks that aren't going to be around to drive close close success. We skipped over listing the non negotiable. Can we talk through your approach? Does it fit into this with the deal thesis and some of these other elements? I guess like how do you go about? What are examples of listing your non negotiables and sticking to it?

The deal thesis financial profile, the team we have, those are kind of our non negotiables or our principles that we end up using for the deal thesis. So things that for sure we don't want to bend on writing it down earlier on in the process is really helpful and healthy because oftentimes if the deal prolongs, you forget about the non negotiables. You're just trying to get the deal done at some point and willing to kind of knock down an issue and then move things forward. But when you actually look back at kind of the things that we said we would not negotiate, yet we're at the table negotiating that you need to kind of reassess whether we should be doing that or not. So having it written down and having clarity with the deal sponsor, what is really important and what we can't bend on really helps bring a little light into the negotiations and helps you figure out a path forward. Sometimes there's no path forward and you just decide this deal is not worth doing. Sometimes you're willing to bend even though it's a non negotiable because at the end of the day you still think the business is a great business to acquire and we might have to find a different way to just remediate the risk, but it helps us at least alleviate some of the concerns and also enables us to be a little accountable when we're thinking about acquisitions.

What are Examples of non negotiables you would list out one.

Negotiable is like whether it would harm the current business. If we inherit this business, would it put us in harm's way from a regulatory aspect? Would it ruin the way we think about our accounting structure? Or would it impact the way that the rest of the company operates? Things that kind of have to be really detailed and something that could be really impactful to our current business is something that we would consider non negotiable. It's often probably the larger deals where you might have things that can be really impactful to your current business. Or maybe it's like a principle, right? Something where the company did something and we think it's fraudulent and we don't want to associate ourselves with a company that's done fraud and we don't want to obviously associate with companies that have done anything that's been fraudulent or neglected or things of that nature. And so those are things that are non negotiables. On the legal side, from the people side, if we feel like someone is just ethically not behaving the way we would have expected them to behave as an employee, that's a non negotiable for us too. Whether they lied about something in the diligence process and we uncovered it, that's something that I would say is a non negotiable. That we would likely cancel the deal or at least address it with the founder or the CEO. And then if we're not able to reach resolution, then we would actually not do the deal. But things that are really impactful and can really hinder the company post close.

How do you incorporate that into your process? Is it something you do as a team activity? We list this out and discuss what are non negotiables are or is it just something that is generally known? Deal to deal?

I would say it's something we do. Deal to deal depends on the size of the deal, right? If it's a small deal and it's more straightforward, it's a lot easier to think about your non negotiables. If it's something where it's a larger deal for which we got comfortable, then we would align with it with the deal sponsor and make sure we're in agreement. Because it enables us to then be in a position where we can negotiate where it matters. If we know we're willing to bend on xyz, it enables us to then when we go into the negotiating table to have something to trade versus other areas that we know are non negotiable. That we're not willing to trade on.

I wanted to talk through real life examples. I'm hoping to learn how do you overcome the hurdles and work with the target company specifically. And I'm sure you got some fun surprise stories because we didn't talk so much about the surprises that come up.

It's honestly more of an art than a science on how you deal with these issues. You have to remember at the end of the day, the founder, the CEO, they have been building this company from many, many different years. This is their life's work. If you find issues and you need to address it, you need to be empathetic. You can't just go in and list out a bunch of issues and then leave them. Think about it for days on end. You need to really be tactical and go in and be direct and often rip the band aid at the very beginning, but be transparent about it. Like, we found an issue, we think the exposure is xyz. We need to think about a solution here, but we have a couple of options and go with more of that collaborative approach versus just laying down all the issues and then letting the CEO or the founder just dwell on it is often the recipe for disaster. Oftentimes Also, we want to make sure we're fully bulletproof when we actually present an issue to the target company. Sometimes it might be our understanding, sometimes it might just be a mistake and kind of how we comprehended something. When we do discuss issues with the company, we want to make sure we really have bulletproof evidence that was the case and then present it in a way that we can make sure that they understand there are options. It just means that we're going to have to think about the risk a little more and potentially think about ways to kind of mitigate that, whether it be an indemnity, whether it be a purchase price reduction, or whether it be something else altogether.

To be pretty collaborative in working with the target to overcome the hurdles, we.

Obviously spend time internally before we kind of talk to Target about it. We'll talk about it with our sponsors, we'll talk about it with our executives to make sure we're all on the same page. We often do find a solution. It's really about kind of risk balancing who bears the risk, how much are you paying for this company? Are you paying top dollar? And if you're paying top dollar and a really high premium, then your expectation is that you want a very clean company. And if the company ends up being very messy and there's a lot of exposure Then you're not willing to pay that same price. You have to have those type of conversations, but be collaborative about it, explain why, get them over the hump to understand it, and then help them figure out a solution. Interesting enough. Usually when you're through the deal process, a company is usually pretty invested in the deal at that point and are willing to work with you to figure it out.

What are examples of surprises you come across?

I found a bunch of issues like in relation to IP assignments where the IP is not owned by the company. Understanding that and then working with the company to help untangle that was something that I dealt with in a deal a couple of years back. In one acquisition I was working on, the company had publicly stated something about their platform, which was very key to their platform on their website. And it was kind of the way they marketed their platform all across. And after we did diligence, we realized that it was absolutely false and what they were claiming was actually not true at all. And when we approached the CEO about it, they actually turned what we said into their favor. They just twisted the language and turned it into their favor and tried to pull it under the rug. And that became very clear to us that it wasn't just comprehension or a difference of opinion. It was really the ethics of the company and kind of how they try to find ways to kind of navigate a messy segment that they were part of. At that instance, we actually decided to walk away from the deal due to many reasons, but one of them was just the ethics of the company. They just weren't very straight shooters and we were looking at paying a really top premium for the acquisition. There's other deals that I worked on where we found so much tax exposure, it was about 50% of the purchase price, which is never great when you have so much exposure. So negotiating indemnity, where 50% of the purchase price is in the form of a tax exposure, is pretty wild. That's just when you see taxes just go really wrong. I've also worked on a deal where the company had their top three vendors, which were very important to how they continued their business. When we actually dug into it, we realized that they actually didn't have any signed contracts. They had everything was done through handshakes, which is pretty scary because once you acquire the business, those handshakes no longer work. And so we actually needed to go and renegotiate all of their key contracts prior to the deal closing. And so that was a beast to do. We ended up doing it on a deal, but it was Also very messy and very interesting to see. Again, it was a new business segment, one that we weren't as comfortable with before and so new players that we haven't dealt with. It was an interesting way to navigate, but that often happens when you have a company that's been growing really fast. They might have signed up vendors and contracts and it's just very messy paperwork. Unfortunately, that messy paperwork gets inherited for the choir. And so you really need to do a good part of trying to remedy some of that post close or even pre close.

Wow, those are some great stories, but it's fun.

Honestly, those are what keep me in M and A. I've been in M and A for almost two decades now and that's what keeps it interesting.

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

Diligence really, really matters. And I think there's a lot of scary stories out there, even more recently, about companies who didn't do their diligence and they ended up investing or acquiring a business that ended up being just a sham. Luckily, I've never been in that position, but I have done diligence on companies where what they claim to be presenting publicly was totally false. And so for me, that's always been a red flag. That to me is like a Ponzi scheme. It's just a house of cards ready to kind of collapse. Sometimes happens, sometimes doesn't happen. But when I do see that, and I'm often running the other way because you know that there's going to be issues and it's just another kind of story to be heard in the next tech crunch. So I try to stay away from those. But that's probably the craziest story that I've seen is when a company just blatantly is lying about what they've built and then publicly stating that they've built it and then not being truthful even when it comes across that they haven't built it.

It's interesting that you don't cite one example. You've seen it more than once.

I've seen it more than once. Can't say where you see it a lot. That's why diligence is really important. You want to try to do as much diligence as possible, make sure you have the right experts to help you think through and look at diligence throughout the process. There's no shortcut to good diligence.

Jika, thank you so much for your time today. This has been a great conversation. You're helping me become a better M and A scientist.

You're welcome. I enjoyed myself. Thanks for having me.

Till next time. Here's to the deal.

Foreign.

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