How to Prepare a Company for an Acquisition

I'm Kisam Patel, and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M and A deals.

Today. I'm here with Jordan Lampos, a director in the Healthcare Investment Banking group at Duff and Phelps. Jordan has more than a decade of corporate finance experience and previously worked at several boutique practices where he worked with companies in a wide variety of industries. On today's episode, Jordan and I are going to discuss how to best prepare a company for an M and A process, the benefits of using an investment bank, and how Duff and Phelps utilizes project management software to deliver better results for their clients. How you doing today, Jordan?

I'm doing great. Thanks for having me.

Hey, thank you. So I want to kick off with just asking, what are some of the largest challenges you see a company faces while preparing for an M and A transaction, particularly those looking to sell?

Yeah, it's a great, great question. And, you know, there are a variety of challenges that companies seek, and there's probably no, you know, set list of challenges, but I would say that, you know, a couple of the largest that we face would revolve around their financial statements. So preparing those, you know, either via quality of earnings or just going through a deep dive on financials. And then also document organization in preparation for the due diligence process, which, as we all know, in an M and A transaction can be quite taxing on an organization.

Right. So a lot of this is prep work, just getting ready for the sale. If you maybe want to start with like the really, really beginning. When should a company start thinking about preparing this information? Kind of. What are the first steps? When. When someone wants to sell a company.

Earlier is better with regard to preparation, and that can involve a variety of areas. Hiring a financial advisor, such as an investment bank like Duffen Phelps, hiring great corporate counsel, that is critical because they'll really work hand in hand with your financial advisor to prepare all the documentation, both legal as well as just all of the internal documents that you're going to need to disclose when you're going through a confirmatory due diligence process who's.

Typically involved in preparing that information.

In the front end of the process, it typically is going to be the financial advisor that you hire. An attorney may be involved early, and then the internal management team who's going to need to basically respond to a request list from your financial advisor and begin to gather documentation to populate, typically an online data room and just As a quick aside, I would say the. The old adage that a company is a nexus of contracts, well, it really holds true. I mean, there are a variety of contracts, a variety of documents that need to be tracked down and organized. And that can be with suppliers, it can be with customers, it can be with employees, it can be with third parties that the company does business with, as well as all the data associated with all of those relationships. The tracking all that down and organizing it, especially with larger companies, can be a monumental task.

So big first step is being prepared to do a lot of heavy lifting for documentation. Preparation.

Yeah, absolutely.

What's the process like in selecting a bank to work with? What are the key factors in making that selection?

Yeah, these days it seems like the key factors to select an investment banker or financial advisor really comes down to industry expertise. And then I would also say it comes down to personality fit with. So you want someone who has knowledge of your industry that is going to understand the trends, the drivers, a lot of the key metrics that your business is going to deal with, and also has access and familiarity with a lot of the other companies, potentially competitors, but ultimately possibly buyers of your business and your industry.

How do you get that perception, that understanding that this bank actually has these relationships with these potential buyers?

It's a good question. I think the main factor really is going to be the advisor has completed previous transactions in and around the sector that the company is in. And that is going to be ultimately the best determining factor as to if they have those relationships. Previous processes will give them information on what are some of the strategic objectives of those buyers, especially on the strategic side. And also what are pricing and multiples looking like in the sector? I think it really comes down to just doing multiple transactions in a sector is going to give an advisor significant upper hand as opposed to someone who has them.

For somebody evaluating investment banks, would you check references? Would you maybe call some of those companies or previous clients and so forth?

Yeah, clients do that all the time when they're evaluating Duffy Phelps. And we are always happy to provide numerous references from past clients. When you're getting a reference from someone that can obviously be you're picking your best clients, et cetera. But really it comes down to the last two or three deals. We're happy for clients to call those owners and managers and just talk about what it was like to work with us. And we think that, frankly, is a significant strength of our practice that we do develop those positive relationships.

What happens after a mandate is signed? Have you found ways to improve customer experience.

Yeah, I mean, really, as we said, once a client is actually signed up, the process begins typically to draft all of the marketing materials that are going to be needed to ultimately go to market. And that really requires a significant amount of data and information from the company. And so the first thing that we typically do is provide the client with a fairly comprehensive due diligence request list that has a variety of both financial, non financial contractual items on it, and then sign up a virtual data room, begin to organize the information that we receive into that data room.

Gotcha.

Then.

What challenges do companies face during this process?

Yeah, I think one of the hardest things for managers to do is to just simply track all of the data room requests or due diligence requests that they receive from either their advisor in the upfront process of drafting materials or even later in the process during due diligence. And we have found that using Deal Room and using the due Diligence tool is really a key because it allows you to stop trading back and forth Excel documents, it allows you to efficiently run through kind of the high priority items that are being requested, and it allows you to kind of interact with the management team and with those documents via the data room, which makes it much more efficient and reduces the amount of time required to go through that. So that is really a key and a first step that we've implemented in at least the vast majority of our processes that I work on at Duff and Phelps.

What we've looked at is you tend to batch a lot of this work together and you sort of lose track of the actual prioritization. And we've seen that a lot of buyers tend to throw a lot of templates into the mix. And a lot of times they're not organized in a way where it's the actual information they're looking for. It's more of here's a template we used on a previous deal, and I'm curious, sort of how do you balance that out or if that sort of runs into extra overhead for you guys?

Oftentimes you have what can be a half a dozen or more folks on the buyer's side performing due diligence. And that can be, you know, it's obviously legal due diligence. There's financial due diligence, there's tax related due diligence. There can be compliance, there can be hr, there can be insurance, there could be real estate, there could be a whole host of third parties that are providing request lists to the target company and keeping those request lists organized. And Prioritized is absolutely critical. You know what we have done as financial advisors is tried to compress the amount of time from say the amount of time allocated to that confirmatory due diligence period. So what used to take maybe 60 or 90 days, we're trying to compress into 30 days or 45 days to get to signings or closings faster. Number one, to maintain competitive dynamics between buyers. But number two, to make sure that people are moving quickly and are not wasting clients time. A lot of factors go into that, but if you're going to move at that pace, you have to prioritize your request list. You have to prioritize management's time in getting those requests fulfilled. And we haven't found a better tool to do it at this point than the tools that are available via deal room.

Makes my heart warm.

Well, it helps us out. So it's definitely a two way street.

Okay, so I want to step back a little bit, sort of take the, the 10,000 or 50,000 view and look at the sale process. Jordan. Because I want to give the audience or somebody listening this, that's thinking about selling a company what that timeline looks like. Because we talked about selection of the investment bank, signing the mandate, preparing the marketing materials. Then you go out and you go look for buyers. So you probably do your first pass of solicitation. You know, walk me through that. And then taking the I and rough time frames in between.

I would say cookie cutter process that should be run. We try to make sure that we are customizing all of our processes. With all of that being said, a basic process after you launch would be to spend anywhere from four weeks to six weeks sending out an executive summary to potential buyers, signing NDAs with those buyers and then ultimately distributing them. What we would call a confidential information memorandum or a sin. That's a fairly comprehensive document that can be anywhere from 20 or 30 pages to 100 pages that basically tells you everything you need to know about the company. Give folks again four to six weeks to digest that. At the end of that marketing period asking for indications of interest which tend to be non binding letters that will be fairly short and brief, but give oftentimes a range of value as to what a or what the buyer would potentially pay for that asset. And then at that point you typically would select a handful of groups based on various criteria. Price being only one of the criteria but could be fit, could be terms, a variety of factors to move into management presentations with your client. You go through those management presentations, allows people to meet face to face allows the buyers to ask more detailed questions of the management team. You will typically open a broader data room at that point, more comprehensive, because you're actually wanting these buyers to do fairly comprehensive business due diligence. And then at the end of that period, which probably takes another four weeks or so, four to six weeks, you would call for letters of intent which are really non binding in their, in their nature, other than a few clauses that would grant some sort of exclusivity potentially to one buyer that you would ultimately select to go through the confirmatory due diligence process and hopefully close the transaction. So you know, you've got four, I would say once you launch into the market, you've got four to six weeks of that marketing period. You've got another four to six weeks of management meetings and due diligence. And then the closing period could be anywhere from 30 to 90 days, depending upon how quickly things work.

People often underestimate the weight of selling a company and going through an M and A process. And I'd really like to hear from you what that entails for some of these management companies that leads to deal fatigue and so forth.

Yeah, I mean, there are a number of factors that are challenging and part of it has to do with just the personalities of the counterparties, both the buyer and the seller. But you know, I would say that the depth and the complexity of due diligence is always a challenge for management. You know, why do I need to provide that amendment to that, you know, to that lease that we signed three years ago? You know, I'm paying the rent, everybody's happy, what's the big issue? Little minutiae and things like that can often lead to extremely long request lists, lots of information that needs to change hands. And really it comes down to the sophistication of the seller. We deal with a lot of small middle market companies that are founder, entrepreneur owned. They are great businesses, usually growing fairly rapidly, but they are not accustomed to having all of the internal resources of say, a large publicly traded company. And so you oftentimes in these processes have people wearing multiple hats, doing double duty. A lot of the burden tends to fall on the financial team from the CFO down. And it's very important to be efficient with management's time, be efficient with your info and data requests and move through the process as quickly as possible. One of the things that we always want to focus on is trying to allow the management team to run the business, maintain performance, continue to grow, focus on clients, focus on revenue and profitability. Because if a management team gets too distracted during an M and a process that can obviously derail the business. And if the business derails, it's most likely that the transaction will be derailed. So you have to walk a very fine line between overburdening the management team, but also if they don't spend enough time and effort on the transaction, the transaction probably won't get done for those reasons as well. So it is a challenging process, especially for groups, again entrepreneur, family owned businesses that haven't transacted either on the buy side or the sell side. It can be a challenging process to move through, which is why you need a good attorney and a good financial advisor to, to get you through that type of process.

I think that's your big value add is enabling them to have this additional capacity to handle the process itself and allowing them to be able to stay focused on their business. I'm curious, in general, what would you say are the largest benefits of using an investment bank during an M and A transaction?

Yeah, I mean the largest benefit is that you're going to get leverage when you use an investment bank or a financial advisor. And the reason is because if you were a manager and even if you were adept at MA transactions, given your time that's divided amongst running the business and then working on a transaction, you can't field questions or work with probably more than two to four buyers at once. Even that many may be too much for a manager to manage. First thing that an investment bank gives you is it gives you leverage, gives you the opportunity to go out to five or 10 buyers or 15 buyers, or a very broad universe of financial sponsors if that's the way you want to go. And that doesn't take any more of management's time. We funnel all of those questions, all of that outreach, all of that contact through our team, which limits the amount of time that management needs to spend, at least in the upfront pieces of the transaction. So that's number one. Number two, we're going to create some sort of competitive dynamic or to the best of our ability, create some sort of competitive dynamic that is hopefully going to result in getting the highest possible price in the market that you can get and getting a small percentage increases in the overall price as a result of that more than will pay for a fee that you ultimately pay a financial advisor. And so that competitive dynamic is very important. And then all the other things, expertise in negotiating a transaction or various contract terms and all those other things are important too. But I would say up Front. It's really those two. Leveraging from a buyer standpoint, really time and the number of buyers you can contact and then creating competitive tension in a process to maximize value are really the two biggest adds that you get or value that you get from a investment bank.

Many investment banks use outdated tools like Excel and long email chains when conducting deals. How does Duff and Phelps leverage technology to deliver better results for its clients?

The most straightforward and simplest answer is that we use Deal Room, like I said, for the vast majority of the projects that I work on. And, you know, not only is the data room functionality an interface, easy and intuitive to use, which it is, but it really comes down to the due diligence tool and the ability to manage multiple work streams at one time, both with the information that's been loaded into the deal room and the data room as well as the request list. And doing that all in a digital format that everybody can see, that everybody can comment on, that everyone can upload questions, close questions, upload information, et cetera, is really an invaluable tool. And if anybody isn't doing that and is pushing around Excel spreadsheets, I mean, that's fine, you can get a deal done that way, but it's just going to be, it's just going to be a lot harder, it's going to take a lot more time, it's going to be a lot messier. And so using a tool like Deal Room to me is just a no brainer. I don't know why anybody would not use it because all of the, you know, I've used all of the other data rooms, all of them are fine. You can upload documents and create a file index, but if you can't manage a due diligence process, what's the point? That's why when we found Deal Room, we switched over the vast majority of the projects that I work on. And when I recommend a data room to clients, we're using Deal Room.

So I'm curious for the seller, how does it make things easier for them because you're getting a bunch of information, having them fill out a lot of requests.

Yeah, I mean, it makes it easier because all the requests are in one place and they're handled digitally. Instead of having to have one Excel file with, you know, maybe upwards of, you know, 6, 7, 8, 9 different work streams or more that are all different tabs, they would all be formatted differently because one's coming from the accountant, one's coming from the attorney, one's coming from, you know, HR Due Diligence, you know, the investment banker is going to have to aggregate all of those requests, scrub them, go through them, and then obviously send them to the appropriate parties at the client. Well, you can do all of that and manage all of that in the due diligence tool in Deal Room without having to push all of that digital paper around in the form of Excel or Word Docs or whatever it is. And so it's very easy to take a request that you have uploaded into Deal Room, into the request section, link it to the appropriate document in the Deal room, and then you always have that connection between the request and the document. You know, if you are just sending off or referencing different indexes on an Excel spreadsheet, that just tends to be, you know, an error prone process where you can, you can put in the wrong reference, you could, Excel can get deleted, things can, you know, things can occur and you really don't have any of those issues when you're using plm.

So your clients aren't manually updating Excel sheets anymore?

No, absolutely not. And we get Excel requests or Excel spreadsheets requests via Excel spreadsheets. We immediately use the upload tool, can upload them into Deal Room or depending upon the length, we will put them in manually. That obviously doesn't take very long and then you're managing the process through that tool. We have also done a very good job and people have been very responsive to it on the other side. So counterparties in the transaction using Deal Room for our due diligence processes, so they have gotten used to going to the Deal Room, adding some of their own requests, commenting on requests, reopening requests that we thought we had closed. So they're actually using the tool on their side, which again makes it even more efficient. And I think we've had a variety of attorneys, a variety of accountants, these are big four accounting firms or kind of mid tier accounting firms, name brand MA attorneys have used it as a counterparty and have had no problems with it. And frankly, they probably think it's helpful as well. And so it's been really an invaluable tool. There have been clients who have insisted on using other data rooms for whatever reasons they have. And frankly, those processes are a pain because we don't have that functionality or it's not as good.

Just to clarify, for listeners, when Jordan references the Diligence tool essentially for Deal Room, what we did is took a data room and overlaid project management functionality right on top. Not these QA modules, but real project management functionality that's designed around Agile principles. So it's highly fluid, flexible and really designed so you can keep your lists in descending order of priorities.

You know, the bottom line is that being able to prioritize number, being able to just manage digitally and not push the Excel back and forth just makes it so much more efficient. There's not a version issue in managing Deal Room, right? You don't have to. Oh, is that the latest version of the request list? I don't know, I just sent it to someone else. When it's all in one place and everybody's working off of the most updated real time version, you don't have any missteps there or, or hiccups or. Oh yeah, I already sent you that type of things that come up very frequently when you're not using Deal Room. It's also very easy to assign, especially as you get into more sophisticated larger organizations as your client. They have multiple department heads, they have multiple resources, you're going to be drawing that information from a variety of sources. And so being able to assign tasks or the requests in Deal Room, being able to create various request lists and also the tracking tools that allow you to see what's open, what's closed priority, just all those simple things that you can do with the click of a button that are just a pain to do in Excel, so you're getting information out more quickly. The deal team is able to wrap their heads around, like you said, 100, 200, 300 requests out there in a more efficient manner and it just makes for a better process.

Yeah, and it sounds like you don't have people waiting around, waiting around and then get a huge avalanche of work all at once. They sort of able to trickle this out on a daily basis instead.

Absolutely, absolutely.

What role do you see technology playing in the future of investment banking?

Investment banking, for all of the technology that we have and use, is still very much a people business when it comes down to the actual transactions that are being done. So there it may be more of a challenge. But what I will say is that from a deal management standpoint and a due diligence standpoint, I think that technology is going to continue to speed up those processes, improve the time, reduce the time required from doing due diligence to closing, and really improve outcomes for both buyers and sellers because they're going to get deals done faster, which is going to mean reduced fees from advisors, especially advisors who potentially are billing hourly. And that all just saves money. So I think the technology will always work to reduce those cycle times. If you will throughout a deal process.

Let's talk about advice you'd give to company execs that are planning an exit.

Yeah, I mean, there's so much advice that you could give them. You could probably fill volumes of podcasts in a variety of different topics, valuation, competition, strategy, all those different things. But the one thing within this context that I would say is that organization is really, really key. If you're a business that has multiple locations, maybe you have multiple retail locations in a region or even across the country, you should have all of those leases and all of those lease amendments and all of those other documents related to those properties well organized in one location that you could literally click with a button and send to a due diligence provider or a financial advisor, investment banker within one click. And if you don't have that level of organization and that frankly shouldn't take a lot of work. But it just keeps taking, you know, keeps staying on top of those types of things. And that goes for your finances, it goes for insurance, it goes for, you know, we were talking about real estate, but it can go for really any of those areas, client contracts, etc. You should have all of your legal documentation organized and up to date and at a finger's touch. And it is very difficult to manage that. It requires constant updating, constant monitoring. But your department heads, your managers, really should be on top of that stuff. And I think it should be a priority to have those things. And if it requires getting a handwritten contract and scanning it in and uploading it to a data room or to your own file sharing website or whatever it might be, then you need to do that because ultimately you're going to. At some point somebody is going to transact. And if you have all that stuff, number one, I think you'll run a more efficient business because you'll be able to save time and know what's going on with all your contracts. But number two, it's going to make the due diligence process a lot simpler. So that would be my. It's a small thing and it's probably kind of a nitpicking thing, but I think a lot of companies could do a lot better with regard to that type of organization. And there are tools out there to do it. We're talking about deal room. You can do it. You just have to spend the resources in order to make it a priority.

Hey, thank you, Jordan. I appreciate you helping unravel the story for some of the problems we're trying to solve in the industry.

Absolutely.

Thanks for your time.

All right. Thank you.

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