How to Source Deals and Build Your Pipeline

Hello M and A Friends. This podcast is brought to you by Deal Room, an M and A Science company. The integration phase in M and A determines if your deal will be a success or failure. Poor planning puts value realization at risk. You need a platform that allows you to do integration planning in parallel to diligence. This allows your functional leads to do both diligence and integration planning at the same time. Also, your integration teams won't waste time rediligencing the deal so they can focus on value creating activities. See why the best in the industry use Deal room? Go to dealroom.net to learn more. Again, that's dealroom.net I'm Kisan 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. Before we kick things off, I'd like to send a big thank you to you all, the listeners of the M and A Science podcast. I was just reading some of our recent Apple podcast reviews and feedback emails. I'm truly flattered and grateful we have listeners that are getting real value out of our podcast. Also wanted to point out that between mascience.com and dealroom.net, we now have over 1500 pages of content online. It's the largest publicly available collection of M and A content on the Internet. Anyways, thank you. Now onto the interview. Welcome to M and A Science where leading M and A practitioners share lessons learned from their experience. If you're interested in keeping up with the latest from M and a science, 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. Again, that's mascience.com I'm your host, Kisam Patel, CEO and founder of M and A Science. Joining me today is Jeremy Siegel, Executive Vice President, Corporate Development at Progress. Progress provides software for creating and deploying business applications. They're traded on NASDAQ under prgs. Today we're talking about how to source deals and build your own pipeline. How's it going Jeremy?

It's going great Kisan. Good to see you again.

I'm glad to get the returning guest. That makes things a lot easier.

I love these conversations. They're great. You ask thought provoking questions. So this is fantastic.

We'll see. We can provoke today. Can we kick things off just a little bit on your M and A background?

I've Been doing this for a long time. Kisana. I've been doing corporate development for around 22 years in the Boston tech market. So first 16 years at Akamai Technologies, that's where I really got my feet Wet. Followed by five years leading corporate development at LogMeIn. For the last two years I've been leading corporate development efforts at Progress Software. So it's been a great run, a lot of fun. I guess you could say that I'm a deal junkie. Been doing this for a long time.

I know we have this topic about sourcing, but before we jump into it, can we talk about strategy? I want to get a sense of how do you think through M and A strategy? What does that look like? How does that get socialized around your organization?

It's actually really easy at Progress. So Progress, as you mentioned, we're a company that's been around for quite a while. 40 years as a software company, 30 years on the NASDAQ. So we've been around for quite some time. Got a great roster of customers, 600 million revenue size company. But from an organic growth standpoint, the growth rates just aren't that high. So the big drivers for growth for Progress is inorganic is M and A. So we are executing a total growth M and A strategy that will get us to be a billion dollar revenue company within the next four to five years. That is the strategy at the simplest level and that is what me and my team are executing towards.

You have a strategy of the company and that gets shaped into an M and A strategy or at its core we're objectively looking to hit revenues and utilize M and A as a tool to achieve that.

Well, the great thing about our strategy is not only does the company as a whole understand what the strategy is and understand that M and A is a core component of it, but even externally, the shareholders, Wall street, everyone understands what our strategy is because we talk about it. We talk about it at every one of our earnings calls. This is a key component of the Progress mission. It is to execute on a total growth M and A plan. You can sort of think of us as a PE type firm operating as a public company. So we are executing a very similar model to what PE firms are doing.

Then how does that expand? Is it typical? We have some established business lines and we're doing add ons like a PE firm, we're setting up new platforms.

So the nice thing about where Progress sits in the infrastructure software ecosystem and we have a whole suite of different solutions that play across that entire software development lifecycle. So it allows me to actually look pretty broadly with regards to what it is that I can evaluate from an M and A standard. As my boss Yogesh Gupta, our CEO says, if it's infrastructure software and it fits within the financial parameters that we need it to fit within, we'll look at it. So that allows me to look at a lot. It's not as if I am just establishing a theme and say I want to go buy something in the DevOps space and I'm only going to look at assets and DevOps. I am looking across that entire infrastructure software ecosystem, everything from the early stages of building and developing your applications through deploying those applications, all the way through to managing and operating those applications. So it allows me to cast a very wide net which allows us to keep a very large funnel of deals in the top of our funnel.

How does this strategy get socialized? Is it just within the corp dev? Do you, do you try to get it across through leadership?

It is socialized internally and it is socialized externally. The investment banks that we talk to understand what our strategy is. The venture capital firms that we talk to understand what our strategy, our investors understand what our strategy is because we've been talking about it for the last three to four years. We've been executing on it for the last three to four years. The interesting thing is you do one deal and investors say, oh, that's nice, they did a deal, you did two deals. You start to show a little bit of a pattern of being able to execute on the strategy. You do three deals and you start to get more conviction and support from the outside community in your ability to be able to execute on this total growth strategy. And so over the course of the last three years, we've executed on three deals of scale that have added over $200 million in top line to the business as a result, led to our ability to be able to, from an inorganic standpoint, maintain some really nice top line growth rates.

How do you get that alignment on strategy? How are you communicating it?

It starts at the top, starts with your CEO saying that this is the strategy I want to execute on. Then you go out and you find someone like myself to help them go execute on that strategy. And then it's just a matter of socializing and talking to the venture capital firms. We basically did an outreach program where we reached out to the 75 top venture firms that invest in infrastructure software. And it starts with educating them on who is progress and then educating them on what our strategy is and what we're executing against Progress is an interesting company and we're trading at 4 times revenue multiple, 10 times EBITDA multiple. We're not out there looking for the high flying companies that are growing 20, 30, 50% so we can't afford them. The fact that Wall street understands what it is that we're looking for, the fact that the venture community understands what we're looking for, the fact that investment bankers know what it is we're looking for and can bring us those kinds of assets that fit within our parameters, makes our job easier. So I would say our strategy is very well known and very well understood both internally and external.

Who's in charge of sourcing deals?

So sourcing deals starts with me leading the corporate development team here. But I have a great director on my team who also supports me and does a lot of outreach and a lot of identification of deals. And then we work with a third party called Bridge Street Advisors. I mean think of them as an extension of a corporate development team because we can't go out and call hundreds and hundreds of companies every single quarter. So we need to leverage partners to help us do that. They've been a great partner. I've been working with them since my log me in days. They're a small team, but they can help us do that initial evaluation of companies and given that they understand our financial parameters, be able to reduce the number of companies that we as a small corp dev team do an eventual outreach to it makes it much more manageable and much more effective in the management of our deal flow in our pipeline.

Primarily led through yourself director and using a buy side advisor or search firm.

Yes. And they're fantastic. Bridge Street Advisors. Anyone with a small corporate development team where they're struggling to do that sourcing part because they, they just don't have the team in place to do it. They're a great resource for it.

I mean walk me through this. What do you do to build your pipeline?

We look across the entire infrastructure software ecosystem. So it really starts with taking a step back and evaluating what are the different subsectors of the infrastructure software ecosystem. And we did an exercise when I first got here where we identified, I can't even remember the number of subsectors, probably 50 to 60 different subsectors across that software development life cycle and within each of those subsectors additional themes. And we identified around 1200 companies through that exercise alone. Then as part of that exercise we also then do outreach to the business unit. So Progress has three business units and so we work very closely with the general managers as well as with the product leads within each of those business units to understand what's important to them, to understand important areas that could be relevant for M and A so that we can then go out if they tell us, this is an area that I'm excited about, say cloud security posture management as an example. We'll then go out and comb the universe of all the companies that are in that cloud security posture management space. But if we don't have those conversations with the business units with those product leads, we're not going to naturally think that cloud security posture management might be an area of interest for partners. And I'm just using that as an example. And so having that kind of regular dialogue with the business unit leads, with the partners, product leads within those business units is really valuable. And then we go out and we have regular dialogue with the venture capital community. As I talked about before, we have a really good relationship with around 75 of the top investors in infrastructure software. And we just have a regular dialogue with them. And we're very clear with them. We know we're not going to be able to afford your high flyers, but we know that for every home run or two home runs that you have in your portfolio, they're going to be those singles and doubles. And those singles and doubles are still good companies that have built good technology, that have good teams and have loyal customers. We'll look at those companies all day long. So getting them to understand that's another way that we generate deal flow and ideas for different companies. And then we work closely with the investment banks. And it's not just working with the bulge firms, it's working across all investment banks. Lincoln International is a great one. They're building a really strong software practice. We have a great dialogue with their team and they bring a bunch of great ideas to us because they understand what our financial parameters are for deals, like what we're looking for in an acquisition and what just doesn't make sense for us in an acquisition. And when you can get investment bankers that really understand your strategy and bring you companies that are relevant and fit within those parameters, you're going to have great relationships. And so we have ongoing dialogue with tons and tons of investment banks, from the big ones to the boutique ones and everything in between. And through all those different vehicles, we're able to keep a very active deal pipeline. Our top of funnel at any given time has four or five hundred companies that we're evaluating. So we have a very healthy top of Funnel. And then the work then begins with bringing that down to the bottom part of the funnel with deals that could be actionable that fit within our financial parameters, where there's an actual interesting strategic relevance and where there's an interest with the company in potentially being acquired as well.

All right, we got to break this down into some steps. Step one is map out your sectors where you really want to understand what are those areas that you're looking into, Start thinking of those companies. And then you mentioned talking to your business leaders internally and understand what are we trying to understand through strategy.

And really, what we're trying to do is we're trying to understand what the different products are that we have in place today, what could enhance the value proposition for those products, what are interesting adjacencies, what are interesting technologies that could potentially bolt onto those product suites. And then we go out and try to identify the companies that could potentially do that. And because Progress has a suite of solutions that run across that entire software development life cycle, that means that there are a lot of themes in a lot of different areas that we're looking at any given time. So it just allows us to cast that very wide net.

Okay, so we understand our product portfolio, the complementary products, and really help define that criteria.

But it's important to note that we're not just looking at acquisitions that fit nicely within one of our products today. We're open to looking at acquisitions that fit within infrastructure software in that entire ecosystem that might not necessarily be a natural fit within one of the products that Progress has today. Maybe it's an additional business unit, maybe it becomes an additional business unit. Maybe it's an additional product line within one of the business units, but isn't necessarily bolted onto one of the products that we already have. So it's important to note that we're not just limiting ourselves to looking at things that are adjacent to the products that we have in place today. We go much broader than that. When we're outsourcing deals with the business.

Unit, you're getting at least some direction, but maybe even some ideas that, hey.

Check out this company, which I like coming from Akamai, coming from logmein, where the model was very much focused around, let's develop a couple of themes and let's go prosecute those themes and do an acquisition in those themes to Progress, which is, it's nice to have some of these themes, or that's not going to preclude us from looking at things that don't necessarily fit within those themes. And like I said before, if it fits within infrastructure software and it fits within the Progress financial parameters, then we will take a close look at that asset and we'll figure out how it fits within the portfolio.

You mentioned product leads. Do you go down and actually talk to product managers?

I do. I find that they're actually more valuable because they have much deeper knowledge of the products than the general managers. The general managers are thinking at a 50,000 foot level, which is helpful because they're thinking about the overall strategic vision for their respective business unit. But then the product leads, they really understand the needs of those respective products. They're listening to the salespeople, they're listening to the customers and they're figuring out what are the next things that we need to develop on our product roadmap. From there they can determine these things we can build. These things will take us too long. Let's go talk to Jeremy and see if there's a way to potentially acquire to get certain functionality. Now the interesting thing for Progress is we're not doing Aqua Hires. We're not doing small technology. We are looking at assets that have scale. So 20 million revenue and above that becomes challenging sometimes when a product lead just wants really cool technology to hold onto its product. I can't look at those types of opportunities because they just don't fit within the corporate development mandate. And what we're focused on, we were very focused on M and A structure in my prior gigs. I was doing big deals, I was doing small tuck ins, I was doing Aqua hires. After Progress, it's very focused on doing acquisitions of scale. So north of 20 million we don't really look at anything below 20 million in revenue.

Okay. And then we get the relationships there. Hey, if you see some got new ideas, here's my number, reach out to me.

And that also helps me sound smarter when I'm talking to the venture folks. Sound smarter when I'm talking to the investment bankers. Because I can talk the talk and explain why it is that you're interested in area X or area Y and I'll be able to explain this is how it fits within this product that progress or that product that progress and that helps them understand and then they can go process and then they can go look amongst the deals that they have in their portfolio or that they have mandates to sell and know, hey, this is going to fit within what we've talked about with Progress. Let's go talk to progress. And that's what it's all about. My big thing from an M and A Standpoint, as someone who has done this for 22 years, is I want to see everything. My biggest fear as a corporate development leader is to miss a deal that I should have looked at. To have a banker not think of bringing a deal to progress. Having a venture capital firm not think about progress when it's selling one of its assets, which is why we have such a consistent regular dialogue with all those different constituents. Because it's important for them to always keep progress top of mind. That's worked out well for me. It was a CEO back in my Akamai days who said, jeremy, just make sure you don't miss that deal that we wish we could have looked at. And that stuck in my head for all these years.

Yep, you mentioned that with the expanding that network around the relationships of the VCs, hey, maybe you got some weren't home runs, but they could potentially be a opportunity.

They're not all going to be home runs and they can still be great outcomes for the venture capital firm. Great outcome for the company. Progress. As a $600 million company with 100,000 enterprise customers, three and a half million developers, 1700 ISVs that are using our solutions, we are a very valuable platform for a lot of companies. It's going to take a lot of companies a long time to be able to build up that kind of customer base of the kind of distribution model that we have built up here, both from an inside sales, direct sales partnership model. We bring a lot to the table for a lot of sellers.

So we talk through the business unit leaders, product leads, VCs, investment banks, any other areas that opportunities are sourced through.

We talk to large companies directly that might be evaluating their portfolios and maybe they're looking to carve out certain assets that are just no longer core to their company and their vision. But that could be interesting within the progress portfolio. We'll talk to companies all day long about those kinds of opportunities. And why didn't talk about private equity? We do talk to private equity firms too. One of the challenging aspects sometimes for us when talking to the private equity firms is they typically and a lot of the assets that they've invested in already extracted a lot of the operational efficiencies and have gotten those EBITDA margins to levels that it's hard for us to get additional operational efficiencies and execute on that total growth model. That is a key part of our initiative from an inorganic standpoint.

So we got in addition going to companies directly, even going to big companies that may have an opportunity to Carve.

It out, we do it. All that proactive outreach is critical. We talk to a lot of companies that we just reach out to. For me, I'm executing on a five year M& a plan. I know that there are certain companies that might not be ready to sell now, but maybe they'll be ready to sell in two, three years. So building relationships with those companies now is valuable. Getting that trust with those companies, getting them to understand that, hey, progress could be an interesting home. When I do hire an investment bank in two years or three years, let's make sure progress is on that list of companies that they reach out to. And that is just as valuable to me as talking to the companies that are ready to sell now.

Okay, let's take that and open it up, walk through it. You got a company that catches your eyes before you even reach out to that company. What does your initial diligence look like?

Before I reach out? We have access to different tools. We have access to PitchBook, we have access to Capital IQ. So we're able to get some data. We're like, oh, that company is interesting. And then we'll go on PitchBook and see they have 10 employees and they've raised $2 million. We're like, it's probably not very realistic for us because they probably have very little revenue and they're too subscale for us to look at. We'll look at PitchBook, we'll get a feel for what kind of fundraising they've done. Pre and post valuations, they've had, how many employees they have. Is this a company that we think would have a level of scale that makes it worthwhile for us to do an outreach to? We can pretty quickly determine whether or not it's going to be a company that's going to fit within the parameters or not. And that is one of the preliminary things that we do. We obviously don't have access to the things that are important to us. Once we start talking to a company which is a financial package, try to understand the financial of the company in an anonymized employee census, which allows us to take a look at the company and see, is there an opportunity for synergies? Are there redundancies within progress so that we can get synergies and make this model compelling and create the kind of shareholder value that we want to do in the deals that we do. We're not buying these small companies with no revenue, taking a flyer saying, well, in three to five years, maybe they'll generate some revenue for us, but for the next three to five years they're going to be bleeding money for us. That is not our model. Progress has operating margins close to 40%. While most deals that we look at are going to be accretive from a top line standpoint, we need to make sure that those deals over some period of time are not going to be diluted from a bottom line standpoint.

So it sounds like you have a few third party data sources. You look at the key things you'll look at at glance or headcount how much revenue they've raised. Maybe if you have some revenue data you can look at that initially or.

How much finance how much capital they've raised.

Okay, it sounds like they're in that realm. We're not totally off basis here being too early, too big type of stuff.

Let's go reach out. And given that that I've been doing this as long as I have, usually we can identify a good way for a warm up because the last thing I want to be doing is a cold outreach. Those are tougher. I will leverage my network to get warm introductions to companies CEOs just to make the connection. All it is in that first call is hey, I wanna learn a little bit more about your company. I'd love to share a little bit more about who we are at Progress and I'd love to just talk to you about like how we approach M and A strategically that ever becomes something that's of interest to you. We're happy to have that discussion and that's how it works.

Is that same on a cold outreach? I don't want to give it easy for you. You're going to. You're found this deal where they don't.

Know Jeremy who the cold outreaches are tougher. I've been doing this a long time and I have a pretty decent hit rate with the cold outreaches too.

Walk me through that. What does that look like I want to hear? Read me off your email message. I'm assuming you send an email first.

I'm just introducing who I am, introducing progress and just saying hey, I've heard about your company through dialogue that I've had with my sales team, with my product team and we'd love to just get to know you guys and really that's all it is. It's not hey, I want to come up by you guys. Let's have a conversation. That's too in your face. So it's definitely tries to be a lot more smooth and not as aggressive of an initial outreach. Let's Leave it at that.

You're a little flattery. I noticed some nice things you're doing. Let's ask him on a coffee date. Let's go grab coffee sometime. Do you try to do in person or is it, hey, did we just grab a phone call?

I love the in person. I love going to the banker conferences where I can meet with 10, 15 companies face to face, face in a day. We are starting to get back on the road a little bit more. But a lot of the initial conversations are typically zoom or teams. Just because you're just. It's too early to just say, hey, I'm going to fly to City X and meet with this random company that I have no idea if there's going to be any vision match whatsoever. We are definitely getting out there more and being more visible. As opposed to the chef acquisition, which was done 100% virtually. Kemp we had a lot of interaction face to face.

What does that first conversation look like? What are the key things you cover? How do you frame it?

Just trying to understand the business history a little bit more, like where it got started, where it is today. Really try to understand the product set a little bit better. Really try to understand how it's differentiated, to understand why they win, understand why they lose, to try to get a feel for the company, the people in the company. How big of a team is it? Is the entire team located in one place? Do they leverage low cost centers for some of their development? That's something that's interesting to us because we have built up a lot of very compelling and powerful low cost centers for development in India, in Eastern Europe that we can leverage as an potential efficiency when we're looking at acquisitions. So trying to get a feel for that too. Getting a feel for the customer, the customers, the size of the customers, the sales motion. It's really just trying to understand the company better and understand what the big drivers are, where they are in their life cycle. Are they at a point where they're going to be thinking about selling soon? Are they at a point where they're in full execution mode and they're fully capitalized for the next three years and they're just going to go for the stars? We're just trying to understand all that.

Yeah, I like how you're spending time to understand that organization, where they're going because that's obviously what's important to them. It sounds like some of the things that you're trying to piece together is essentially what you need to have as a business case to present up to get the deal approved.

It's all feeding into that business case. You're spot on. Yeah, it's all feeding what is the potential strategic rationale for the deal? It's all feeding the company overview slide. It's all feeding who are some of the other players in that space and did we go talk to those other players in that space? Because the last thing I want to do is say hey, I want to go buy company X and go in front of my board and have them ask me who else did you talk to in that space? And we say oh no. And I like company X. So it's very important that we really do a good job evaluating all the players in the space, all the key competitors and really understand why company that we get excited about differentiates. So you're absolutely right. It's all this dialogue is building up that business case and arming us to be able to tell the story as to why we want to do a deal when we ultimately get there.

Any like tips and tricks to do that to start getting the right thinking and information to build a strong business case that'll help you get this deal done or at least get the buy in from other stakeholders if it's a.

Competitive process or if it's a banker led process. The key things that we get up front are the confidential information memorandum. It's usually 50 to 60 pages and covers all the key areas that you want to understand about the business. Get a financial pack which gives you all the detail, the financials, everything from ARR trends to customer concentration to how is your opex built up, what's in your cost of goods sold, giving you really a good visibility into the financials. And then the anonymous employee census, really with those three things we can pretty accurately do a first pass valuation assessment, determine what kind of value we could pay for something, what is it worth to us? Progress. Can we create that shareholder value that's important to us and then have that discussion with the target company or with the banker. If it's a company that's being sold by a banker and we can do that really with those three pieces of information. That's really all we need, that SIM financial pact and the census and we can go do a preliminary view of that.

But if you're doing a direct deal, they're not going to have a SIM put together.

If we're doing a direct deal it's a little bit tougher and then it's more of a process. Yeah, and that's, and that's a great point. You know, we've looked at a couple assets over the last year where they didn't have a banker, where they weren't really thinking about selling the business. So getting the kind of information we need can take a little bit more time. It's more of a process. The flip side of that is the value on that is you can get exclusivity and you can and spend more time in some of these competitive situations nowadays you can't get exclusivity. They're not going to give exclusivity to a buyer until the very end of the process when you're negotiating the final terms of a definitive agreement.

And at times you can do a direct deal, they get interested and they can pull in a banker. Let's go back to this. Our same example here where we directly source this deal. We've gotten this initial meeting, the person at that thing where, hey, this conversation is coming up. Our timeline with investors is running short and they want to get some returns. At that point you mentioned even to start getting this case together on your side, you want to start looking at the financials and things of that sort. Is that when you had introduced that, hey, I'd love to look at this with the team and put something together in front of you. I'm going to need to send you a list of some information. What does that look like?

We typically don't bring a broader team into the mix until we've executed either an indication of interest or a letter of intent. Before we get to that point, it's typically corporate development. Maybe Yogesh, my CEO is involved in a couple calls. Maybe the GM from the business unit where this will, this asset will sit will be on some of the calls. But it's a very limited team. Once you get to that point where you're signing an indication of interest, you're signing a letter of intent and you're getting more serious. It's at that point that we'll share due diligence request list with more information that we're going to want across all the different functions. And those functions are everything from legal requests to HR requests to finance requests to IT requests, to marketing requests to sales and go to market requests to product engineering requests. It's a more robust request list. But we've done a really good job over the last year really prioritizing those requests so we don't overwhelm those companies. Because the last thing you want to do, particularly in a proactive deal where you've identified and sourced the company and they don't Have a banker, the last thing you want to do is overwhelm them with this massive due diligence checklist. You want to try to keep it as focused as possible. And we've worked really closely with each of the functional teams within progress to really get them focused on what are the key things you need to help us get to a go no go decision. Like, I know there's a lot of things you'd love to ask. That's good information to understand, good things to know, but what is it that you really need that could potentially affect our desire to want to continue executing on a deal or not? And we've really gotten the team laser focused there so that when we're talking to a company that we meet proactively that doesn't have a banker, they're not overwhelmed. And similarly, when we are in a process that's banker led, we're not putting ourselves at a disadvantage by asking for everything under the sun. When the other companies that are looking at it are just asking for a select set of things, it allows us to stay at parity with the other companies that are evaluating the company.

So we're still pre loi. You're getting those requests from your functional leads to be able to put together an loi.

It depends. So let's step back because I refer to an indication of interest and a letter of intent. The indications of interest are part of a banker led process. The letter of intent is what we typically use when we're more proactively approaching a deal. In either of those cases, we're going to execute that letter before we're asking for a significant amount of information across all those different functional areas. We're not doing that before we execute that letter, whether it's or reach agreement on an indication of interest or reach agreement on a letter of intent.

Okay. That leaves us in this example, working with this private company. As you get to that point, then the process gets pretty familiar. Although it sounds like it's better to have a proprietary deal than a banked one, if you can control your timeline and maybe just have some leverage over.

Terms in general, here's what I've learned. In those deals that we've identified proactively where they're not part of a banker process, I still really would like to have those companies hire a banker, particularly if they've never done it before, because they just have no idea about what it is they're doing. They're incredibly naive around the process. They're incredibly naive around how to negotiate a deal. And it Makes things actually more difficult. Bring a banker in who has that experience and can say, this is why they're asking for this, this is why they want this deal term. And helping them understand can smooth out that process significantly. My perspective is I love to find those proactive deals where it's not a competitive process with seven other companies looking at it, half of which are strategics, half of which are PE backed strategics. But it's just me. But even in those cases where it's just me, it probably does benefit me to have a banker there because they're going to help the seller understand the process, they're going to help the seller better prepare for the process.

That sounds good, but wouldn't you be concerned? The banker is going to flip over to an auction process and that's a challenge.

When you're doing that. You want to get exclusivity so that you have a time period so you.

Get exclusivity, then be like, hey, you should probably hire a bank to help with this.

Yeah, exactly. I've got the exclusivity. Hey, you might want to have a banker help you through this process.

I want to come back to this. Let's go back to the pipeline. How do you prioritize your pipeline? Because obviously you mentioned looking at hundreds of companies a year. How do you really prioritize it?

We're able to wean it down pretty quickly because of the financial parameters that we look for. And what I mean by that is we're not looking at assets that are growing super, super fast. So for us, we're looking at assets that are growing anywhere from low single digits to mid teens. If you fit within that financial parameter, we'll move you down the funnel. If you don't, you're probably out of the funnel. We're looking for assets that have high recurring revenues. You don't have the kind of revenue streams, recurring revenue streams. You're probably out of the funnel. Similarly, we're looking for customers that have really strong net retention. Their customers are very loyal to the company. So if you don't have high net retention rates, high gross retention rates, you're probably out of the funnel. And then the last piece is, where are you from a profitability standpoint? Are you bleeding money? Probably going to be a lot harder for us to make that deal work within the operating margin parameters that we need to get to. Are you at break even to maybe 20, 25% operating margin? Those are the deals that are right in our sweet spot. And so we'll focus in on Those deals. And then it really boils down to what are the deals that bring us the kind of scale that can really move the meter faster in what are the deals where there's a really interesting strategic story too? Let's move those down the funnel faster because it's going to not only hit all the financial aspects, but the strategic story is really strong. Sometimes the strategic story isn't going to be as strong, and those are harder even when all the financial parameters are met. So our preference is to focus on the ones that check both boxes, financial and strategic.

How do you keep tabs on it? Do you keep your lists in like a descending order and you just float up the ones that fit better? It's of kind.

So we have a deal CRM tool called DealCloud that we utilize and we would break it out into different buckets. So deals that are like, there's a process and we're actually in discussion to monitoring. And the monitoring ones are ones that are of interest or parked. And if they're of interest, we're probably having some dialogue. We don't know if there's going to be a potential deal there, but we'll continue the dialogue. The ones that are parked, we've immediately determined that they're either too early in their life cycle, their valuation expectations are too high, but we want to keep an eye on them because even companies that have really crazy valuation expectations now, in two to three years, things might change. So we want to keep an eye on them. And then we have the companies that we just passed on that deal Cloud CRM really allows us to manage our deal flow. And the director on my team and I, we meet regularly to review that deal CRM and take a look at those companies. We put reminders in the deal CRM that tell us when we need to reach out to a company after say, three, six, nine months to get an update on the business. We track all the active companies in there and we keep all the different sims and financial data that they provide for us in there. So it's a really good vehicle for allowing us to manage our deal flow. That's how we're able to take something that might otherwise feel overwhelming and make it more manageable. It's a great tool.

Do you have a scoring system where you actually. I feel like this ranges when I talk to companies about this, where you go from a little bit simple system which is fairly what you described. Have some buckets and we track them that way and put some reminders to make sure we keep tabs on these opportunities. Then I hear some bigger ones, more people involved, and all of a sudden they create a whole criteria list and they literally have a numerical score. It gets calculated and that kind of is where our opportunity sits. And I don't know how it leads to a go or no go decision.

But we do not have a formal scoring system per se. But there's certain metrics that we're looking for as we're evaluating these deals. One of them is return on invested capital. One of them is the pro forma EBITDA margin. Basically, we might pay an EBITDA multiple of 13, 14 times based on what the company has for EBITDA today. But when we get through with our operational efficiencies and executing on that, that pro forma EBITDA multiple, something significantly lower. So as we look at those kinds of financial criteria, the ones that are going to bring us a greater return on invested capital, the ones where we can get that pro forma EBITDA multiple lower, are the ones that are going to get prioritized. We don't necessarily have a scoring per se where we say this is a one, this is a two, this is a three. We use those financial criteria to help us wean out and really focus on the ones that make the most sense for progress for us to go try to execute. Even with all the ones that we're excited about and we're trying to go execute, the hit rate's still low because they're either competitive processes and those become challenging or even on the proactive ones, maybe the seller's going to get cold feet right before they're about to sign a definitive agreement. That's happened to us before too. Deal's not done until the finite agreement is signed. And so that's why you're just constantly keeping an active deal flow, an active pipeline of deals.

What are some tricks to building and creating a good, healthy pipeline? Give me the secret sauce, Jeremy's secret sauce to doing this really well.

Part of it is just making sure that you have a very active and strong top of funnel. That's the key thing here. And I've talked about this a lot with my CEO and my CFO recently. We've missed out on a couple deals recently. We don't sweat it because we have four or five deals that are right on its heel that we're just as excited about. It's managing that kind of deal flow so that you constantly have companies that are in what I refer to as that active category in my deal cloud CRM. So there's always a handful, five to seven that we're actively looking at. We might get one or two of them done, might get none of them done. And we as a corporate development team know that us adding value is sometimes saying we should walk away from this deal because we've learned things in diligence that we're just not excited about. Or we should walk away from this deal because the seller is not being very flexible from a negotiation standpoint. And key deal terms that are important to us. While it hurts us to be able to come out of a process like that without a deal, we know that we're adding value and we're doing the right thing for our shareholders. And at the end of the day, that's key.

How do you convince someone to sell their company?

For one, it's building that relationship, it's building that trust. It's spending lots and lots of time with the CEO, getting to know them, getting to know them personally, going out dinner with them, going out to drinks with them, building that relationship. So it's not just this formal zoom interaction, it's getting them to meet with my CEO, it's meeting with the principal stakeholders of the companies and educating them on who it is that progress is and why we're an interesting buyer for so many companies. The Yogesh talks, he's very passionate about how committed he is to. And it's something that we have a maniacal focus towards. When we tell sellers that we have this maniacal focus towards customers, that resonates with them. When we tell prospective sellers that we're going to take care of all the people extremely well, the people that we keep, the people that we don't ultimately keep, they're all going to get treated well. That resonates well. And that's something that's really important to Yogesh, sort of maintaining that kind of reputation. This is not just me wanting to learn about the target company that we're looking to buy. This is me talking about progress too, and getting them excited about progress. We were looking at a company recently and it was exciting for me because my product lead and the seller company's product lead, they were like kids in a candy store talking about what we could do together. And that is music to my ears. I love to see that. When I see that kind of connection, that helps. And those kinds of things are what help. And ultimately we might not be able to pay the highest price. If the company is excited about working with progress, if the company sees the real opportunity and value with progress, maybe we'll win that deal even though we don't have the highest price. And so that's what it's all about, just continuing to build that relationship, continuing to build that trust, leveraging all the different vehicles. I'm not just going to rely on the banker on a deal. I've got to talk to the CEO and build a trust there. I got to talk to the principal stakeholders. I've gotten burned in the past because I've relied on the banker, didn't build a relationship with the principal stakeholder. Principal stakeholder was buddies with the principal stakeholder of the seller company and they got a deal done because they were buddies. They were golfing buddies.

Is this like putting a bid on a house where you can opt to present the offer in front of the owner?

Oh, yeah. You can write a letter about why we're the perfect couple or the perfect family to buy your house. Yeah, yeah.

Or you could ask, request it. I'd like to present this offer to the owners directly.

There is value in the intangibles for sure. And the qualitative stuff, not just about quantitative, it's not just about the ultimate price.

I need further breakdown on this because we have two different tracks. We have the auction scenario where a lot of what you just described through that applies really clearly into having that leverage by building the strong relationship, connecting the dots into your organizations and why it would be a big win. Organization, missions, things, the vision, so forth on the private company. On the other hand, I want to start there because that could be a little more complicated where the big thing is if you get in first, you can find your own deal, get to exclusivity that positions you to have better leverage on the timelines and just put together a better, healthier deal for everybody. And a lot of times in those scenarios, you're entering into that dialogue with somebody that doesn't have selling the company top of mind. How do you approach that where you can start fostering that interest or at least, hey, maybe the interest is there when they start seeing how combined visions and some of those synergies would work.

I think that's part of it.

Or being the first phone call at the very least, how do you make sure you're positioned to be that first phone call?

It's tough to sometimes be the first phone call because even companies that we have found proactively we might be the first strategic to reach out that they've probably received 20, 30, 40 calls from different PEs. Because these PE firms have 50 junior associates, they're just dialing for dollars.

I don't take those calls. I'll take it from you. But I want to know, I want to be the first one, top of mind, first call back because how do you leave that impression for us?

Some of the ones that are the best fit that we find proactively, they've been at it for 15, 20 years. Maybe the founding team is a little bit older and they're looking for that liquidity event. They haven't really necessarily thought about it but when we come and start having a dialogue with them, they start to think about that liquidity, start to think about the fact that we probably need to think about what is the next step for our company and what is the natural, best home for this company. And then it's similar to what we're doing on the banker led processes. Selling them on why progress would be a great home for them and building that relationship, getting to understand them, getting to know their team well because we want all the members on their team to at the end of the day when they're sitting around the table saying we want to do the deal with progress, we really love the interaction we've had with Yogesh or we really love the interaction we've had with Jeremy and we just think they're a stand up group. We're at that point in our careers where we need liquidity and we've been doing this for a long time. It's been a nice lifestyle business but at some point getting that nice big return is important.

Similar storyline, a lot of similar elements you would bring. You basically have one stage extra of getting them to decide about liquidity because in a bank process they've already committed to selling the business. And here you're kind of, yeah, in.

This case we have to convince them that they should be selling the, the business. The banker led ones where they're already on board. Although you'd be surprised, there's sometimes when their banker led processes because a VC has decided to sell a business where the management team isn't excited about it but they're just going along because they have to. So there are those scenarios too. But you're right with the proactive ones that we identify ourselves, that we source ourselves, there is that process to get them comfortable with the idea of potentially selling and it can start with, hey, you know, we'd love to learn a little bit more about your business. Maybe there's an interesting path for us to partner together. Maybe there's an interesting path for us to work together. And then you have A couple of those conversations and you're like, hey, product guys seem to really connect in that conversation. Should we be thinking about something more strategic?

Yep, open it up, ease into it. The partnership makes sense because now you start thinking strategically of how your organization, respected organizations, would work together. What if you get into a situation going back to the auction? I know I keep going back and forth here that even gets more intricate and complicated because you have different potential buyers that have their own unique value propositions. Use some of our sales acronyms here. And the one that's interesting is the PE firm that provides a growth capital to that business, allowing them to stay on board and get a subsequent exit down the road that they can be part of and capture the upside. I'm the company now and I'm reviewing my offers. I got the pitch from, hey, you're going to be the platform play. We're going to invest in your capital, help you evolve your strategy, do acquisitions. You're going to be the boss, you're going to run this and we're going to be part of this big exit that we have.

Well, I guess that's the first question I'd ask. Are you really going to be the boss or are they going to tell you what it is they want you to do? Whereas if you're part of progress, you're going to leverage everything that we have already in place today. We have that 100,000 customer base, we have that massive sales distribution arm. We have all those things in place and we're dependent on you to help us go execute. Whereas the PE firm may or may not want to execute within. So you roll the dice and yeah, you might get a nice liquidity event, but then you got to go execute for a few more years before you get that other liquidity event. And that may or may not happen. You need to figure out what kind of level of conviction you have in your ability to double dip and get multiple liquidity events.

Hey, they showed me some great models, Jeremy, that can promise me 5x higher on the subsequent exit. That's what gets me really excited. If I sell to you, it's just going to be a one time sell and then I got to figure out the next thing. And I don't mind hanging in this for another three, five years.

It's a scenario that we deal with. It's interesting. Three to five years ago, strategists didn't really sweat the PE firms because strategics could just pay more. Now the strategics, now the PEs can pay as much if not More than the strategics because they have so much money and is still relatively cheap. It's getting a little bit more expensive but still relatively cheap. They have all these vehicles to allow them to be just as differentiated on price and they're always going to move quickly on speed. And from a certain data close standpoint they have a greater willingness to take on risk when it comes to agreeing to seller agreements than a public company that has precedent on transactions to uphold to can potentially. So it does make it challenging for sure. Again, going back to the reason why it's so important that we build that trust and build those relationships. We leverage the intangibles in addition to being able to be competitive on price and being able to be competitive on speed and certainty to close. But the differentiating factor is the relationships and building that trust and getting them excited to be a part of progress. We're not going to get every company to be excited to be part of progress and that's okay.

Can I give you feedback on the last one? I like the little role playing we're doing. I like the part about the maturity because that gives a sense of we can do things actually faster. We have mature infrastructure, we have a lot of the stuff, the customer base to be able to actually accelerate it. I think the one part on hey, here's this double tick on my exit. Getting a better sense of the incentives that could be created from your organization that would compete with it in a different way.

Yeah, it's a great point. And yeah, any person coming into our company is going to get equity and it's going to be able to build an equity portfolio as part of being part of a public company. Whereas again you go the private equity route, you're rolling the dice and you're not getting that additional upside until a second liquidity event.

Because wouldn't that be a nice thing? Like you're public. So my liquidity, there's no long term lockup. Once I get in and start getting incentivized, I can have an option to sell as soon as I receive my options and whatnot.

They're compelling aspects there for sure.

Anything else we could talk through on Fifelight? You covered a lot. I appreciate you. Let me give you a little more hard time.

I feel tired after this one. This is. You ask a lot of good questions but it was fun and you saying can I just give you a little bit of advice? I'm hoping for that all the time. For every deal we do a retrospective and we're always looking for ways to improve Improve our process and ways to improve the way we approach deal. I've been doing this for 22 years. I am not going to say that. I know everything about doing this and always learning, always looking for ways to improve. So listeners who are on this webcast or afterwards listen to it. If you have ideas for how to enhance our corporate development effort, I'm all yours.

That's what the best have in common, this culture of continuous improvement and same reason why I'm doing this. I do it for fun. I want to be in the situation one day and know exactly how to handle it.

Yeah, great.

You already know what question is coming up. What's the craziest thing you've seen in M and A?

I've seen some crazy stuff lately. I think the interesting thing for me is we had a deal, we were super close to a signed definitive agreement. They got cold feet. They went and hired some second rate valuation company to give them an idea what their value should be. And this valuation company was like, oh, you can go out and market and get 2 to 3x. What progress is going to pay you all the power to them? And then obviously the market dynamics just changed dramatically. So that was pretty crazy. They had burden hands and opted against burden hand again. Sometimes that happens, you get cold feet. It's been your baby for 20, 30 years. You want to make sure you maximize value. I get it. We've been doing this for a long time. We understand how to establish value in a company.

This is such a tough decision to make. It's just one time irreversible decision. I'm just always curious the thinking behind it. I was once told if you get a good offer or is a reasonable offer, you should probably take it.

Right? That's the thing. And same thing on buying a house or selling a house. You got that offer. You're like, I'd love to get $100,000 more. I think I should stick it out and get $100,000 more. And you wait that 30, 60, 90 days and you're like, gee, I wish I took that deal that I had 30, 60, 90 days ago I was.

Doing some work on a deal with Mark Realty over in Chicago. They got 30 so office buildings downtown. I remember meeting their founder and asking him, what's your favorite building? And he's like, I hate them all equally the same. Which I think is like the right thinking behind it where if the math makes sense, it makes sense, we'll do the deal. Hey Jeremy, thanks so much for taking the time. I learned a lot. This is always a great conversation with you.

Likewise, lots of fun with you. Look forward to the next one and look forward to continuing to read all the great research and other write ups that you guys do. It's really valuable working on it.

We I appreciate you actually Special thank you for helping with these roundtables. You helped me start a roundtable group last year with heads of corp dev for publicly traded company which then in turn turned into starting a roundtable group for corporate M and A practitioners which led to inspiration in our company to start a women's and M and a roundtable group.

That's fantastic. I would love to get my integration lead on that. She's great and she would add a lot. Those roundtables are fantastic and it's a great way to just share best practices and hear what other people are seeing. And sometimes it's reassuring when you think that things are really crazy that you're dealing with to know that other people are dealing with some of that craziness too.

Totally agree. Got the M and A family of brothers and sisters together. I appreciate if it wasn't for you just kicking the idea and actually helping me kick the first one off, it really wouldn't turn into that series. Hey those of you with us, thanks so much and till next time, here's to the deal. Thank you for taking the time to explore the world of M and A with our podcast. Please subscribe for more content and conversations with industry leaders. If you like our podcast, please support us by leaving a five star review and sharing it. I enjoy hearing feedback and connecting with our listeners. You can reach me by my email. It's Kisan K I S o n@dealroom.net M&A Science is sponsored by Dealroom, a project management solution for mergers and acquisitions. Additional educational content is available on Deal Room's blog@dealroom.net blog. Thank you again for listening to M and A Science. See you next time. Views and opinions expressed on M and A Science reflection only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.