How to Start Executing the Roll Up Strategy in M&A

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Doing great. Thanks a lot. Thanks for having me.

Thanks for making the time. We are here live in person in Chicago at the M and A Science Studio. So I appreciate making the trip and taking the time from doing deals and being a CFO to have this conversation.

It's always a pleasure.

Can we kick off a little bit about your background?

Absolutely. As you mentioned, I currently support the finance function at fastlab which we talked about as a consolidation player in automotive service industry. Prior to my role in fastlab, I was over a decade with Goodyear as a VP of Corporate Development. Grew up through finance, mainly worked in North America and Latin America as well as some European deals and areas. Definitely enjoyed transitioning from regular corporate development into CFO role in a very acquisitive company.

That's a big shift. You're going from heading up Corp Dev at a pretty big strategic good year to now doing a PE backed rollup. Can you tell me a little bit about what the difference was from particularly going from a Corp Dev role to becoming the cfo, corporate development, you're very.

Focused on one deal or two deals at a time. Move over to the next one. The CFO role, you really take over a different kind of umbrella of responsibility as well as a scope of thinking. And for me, in some ways it was a natural progression because I grew up in finance, went into corporate development and then went back into the leadership role in that finance M and A world. Probably what made a difference and what made it interesting and exciting for me as the opportunity it is that we are very acquisitive that we. Our strategy was to grow through acquisitions. Not only do you actually execute deals, you are developing strategy on what deals to go through. Why do you want to pursue certain deals then once you get the deal done? And for me the hardest thing is actually to stay away from letting the M and A guys actually do the deal. But then how do you do integration and what happens afterwards? Because a lot of times M and A people in corporate development, you do the deal, you kind of do the integration, nimble in it, and then you hand it over a year or two down the road. You're really not responsible what happens to the deal. Being in my seat right now, I'm very responsible. So even in your lens on looking at the deals is very different than when you're just looking how to execute them.

It's interesting because it sounds like there's a variance of how you're involved with it. But bottom line is ownership of the success. Sounds like you have a lot more ownership of success.

Oh absolutely. You have to live with a P and L afterwards. So it's a very different type of perspective what you're looking for. Because a lot of times M and A professionals, you, you want to get the deal done. You just want to get as many check marks next to deal as possible. Being in a different role as an operator or as a head of finance. I want to get the right deals done, not only any deals done. You want to make the deals that can make you look great afterwards. And that's the difference.

I want to contrast a little further because if I talk to Corp dev folks, they'll tell me that they'll come compared to the banking background or anything like that of oh, we have to own all this. I need to know how the business works and I got to work with all these other stakeholders. But you're even contrasting something different than that.

You're not judged by whether the deal was successful two or three years down the road. As in the M and A world, as a Operator or as a person who are heading the finance or the organization, you are responsible of what the results look like. There's no excuses. You can't blame it. Well, had we done it this way or have we done it that way, you are at the end of the day responsible for what that looks like after year two, three, four. So that's a different lens. So your baselining is very different. Your due diligence is. You look at it very differently and all those things are just a little bit more of take everything with a grain of salt as you approach it.

How about the operating approach of going from large strategic for me at least.

It was more, more of a natural transition. I was always a very kind of a roll up my sleeves kind of person. So even when we were leading the deals, I never thought of myself as being the leader. I was always maybe the captain of the team rather than the owner of the team. Going back into the roll ups and just doing more deals and being part of that culture, I think that was probably easier than most people will tell you. It really wasn't that hard, at least not for me. But maybe just a personal style, how involved I was before and afterwards.

Fair enough. Let's fast forward to the fastlab current role. Did you choose go into a roll up strategy or did it happen by chance? Out of necessity?

We were very intentional about a roll up strategy. We identify an opportunity and especially in the automotive service, you'll know people that are in the industry. There's I think 80,000 independent shops around the country. So the industry is ripe for consolidation. Now the question is at what level do you go after chains, 10 to 20 stores or do you go for one season, two season mom and pops? And we went for the, I would say the moms and pops shops more and because we identify a bigger value. So when you're doing a roll up strategy and where we approach the market in the industry, first there was an opportunity for consolidation. There was opportunity to improve and bring technology into existing operations because they were underinvested. And then there was a multiple arbitrage. So we hit all three things that we thought were very integral in successful roll ups. And that's why we saw the opportunity, looked for the right investor and proceeded with our dream.

Let's break it down. You talked me through everything it takes to set up a rollup.

I probably can't talk you through everything, but I will take you through what it took us and what I think it took us to do the rollup. When you really think about it you really have to break it down. Okay, what do you really need for the foundation of a rollup? And one thing I would say is you need to have a good network with an industry. You need to know the product, you need to know the industry in order to be able to be successful at it. The second thing is you need a team of people that you can truly rely on that are very, I would say even known in the industry as experts. So people trust them. So you can build the trust with the potential sellers pretty quickly. You have to identify the gaps and opportunities and what is going to be your differentiator. If you're just doing a roll up to roll things up and not differentiate yourself, you're not going to be able to add a lot of value. Just back office synergies are not going to get you maximum return on investment at the end. That's what you really want to identify. You need to select a capital provider. A rollup strategies are not for everybody. It's every industry slightly different. You have to select a capital provider that is willing to go through your ups and downs to be resilient to the industry that you're playing in. To be able to identify of how you are different. You have to build a strong pipeline. And this is one thing and years ago I think there was a McKinsey study that said what makes it a successful M and a team build your reputation as acquirer. And that was one of the top four things that they've identified. And I find that to be so true. When people know that you are an acquirer, that you're a great acquirer, they will come to you. First of all, they want to do business with you. They'll know that you'll treat them fair and they'll make this process as least complex and painful as possible for them and they'll refer you. And that's. I think there's a lot of value in how you do deals with people because word goes around, industries are small, they all know each other and the references that you get to get a new deal is very valuable. That brings me to the next point. Build a strong pipeline. Pipeline is all about numbers. And your flow of deals is you have to have a certain number of deals to start with and you're going to do maybe 10, 20, 30% depending on how successful you are, maybe 50% if you're really good at it. But you have to have a pipeline. So when you have money and capital to start, you got to move because it takes time to build a pipeline. And you don't have six to 12 months to start searching and talking to people. You probably need to have two or three things that you want to execute right away and then start moving forward on it. The other thing is be diligent about execution, create a plan, be very specific on standard operating procedures, stick with them. It's very easy to get lost in the art of the deal. But there is a science to the deal as well, a science to M and A. If you follow those processes, that's going to be a lot easier on your team, a lot easier on the seller and a lot easier to plan your cadence of deals of how you move through it and at the end get the right tools. And we actually after knowing you for years, I think I was your probably one of the longest potential customers that never bought anything from Deal Room. But we finally we got on Deal Room and it really changed the game for us because you could really plan and see where you're falling behind or where you're moving on track and what are things that are missing because you have to populate the cells or the folders and the folders are empty. You're missing things. That's really hard to do without the right tools. So I would say invest in the right tools in order. Your deals are going to flow a lot easier.

All right, that's a lot you gave me. Let me make sure I got it right. I got one, the industry expertise. Really having the network that knows the industry has relationship that can open up doors. Two, a view on the valuation, a model, a team that can really value these businesses. Three, the differentiator which is essentially your operating strategy. How are you going to capture synergies? 4 capital provider that you're going to work with. 5, pipeline is critical to getting this thing happening. 6. The pitch, the differentiator and why us and essentially how we're going to build the reputation of being good acquirers. 7. The process itself, diligence through integration, the science of the deal. Eight monitoring costs can actually measure how things and how well the things are moving along. And number nine, the technology. Having everything in one place and being able to optimize the deal process. Now we got the hard part. We got to click down into each of these and talk through it.

Absolutely.

Let's start with industry expertise. And I'm thinking to myself I'm building this investment thesis to do a roll up. How do I convey that? How do I say hey, I didn't just wake up and decide to do a roll up in the automotive industry. But this is what our leverage that we have is uniquely created. This team that's got the industry expertise. And then why is that important?

There's a couple of things that really drive the importance of it. And you touched upon one thing, that is the understanding of the valuation, Understanding what is a good business, what is a bad business, and the fundamentals of what makes a good business in the industry good or what makes a good, I would say a pig with a lipstick. A pig. That's really what drives the need for it. How you get there is really about understanding what each team member brings to the table. And whether one is an operator, another one is an M and a valuation guy, another one is a procurement guy, or just network or sales guy, or a girl. I'm dealing with automotive tire industry. So there is a diversity is a little bit lacking there. But those are the really important parts of the getting the right team together. And once people see that you have the right people in the place, they will trust you. They will trust you. Both the investors will look at you and be like, we have the right team. And the second thing is that actually which is really important, a lot of these sellers, especially when you go to the private sellers, their families built those businesses for years, sometimes generations. And when you are taking over, we had an example, we purchased a business of 115 years in operations. That's a generational asset. They're not going to hand it over to somebody who they don't trust or who they don't trust. They are going to is going to promote the name, the legacy, the customers, the product. That's where it's really important to have that reputation, that team of experts.

Trust. You're going to get trust from your investors, you're going to get trust from your targets. I get it. So that's why it's key to have that network. Is there anything you do to be even more proactive? So say I'm doing this roll up and I got my experience. But in terms of building the team, do you have a proactive approach to networking to expand that industry expertise?

When you started roll up, as we did from zero, before we purchased first Store, we had zero revenues, it was nothing. And then you go little by little, you start adding on who you need and who you want on your team. A lot of times what you do find out, which we found very valuable, is when you do acquire, you're going to find people in those organizations that are very knowledgeable and very valuable. And there's a number of examples where you Acquire a an operations and an HR person becomes your head of HR for the whole roll up machine or marketing person. And those are things that you really have to when you're evaluating the talent, look into, okay, am I only buying the operations or how is the talent that comes with that operations? Can I utilize them for more than just that one acquisition?

That makes sense just to have that leverage.

What you often find out is the dedication of those people is very high because they naturally in any roll up is when you are being acquired. You're always wondering am I going to have a job tomorrow? But in order to demonstrate that you not only you're going to have a job job, you're going to have a perspective of a future and potential that you never had in the original or the organic organization that's really valuable. And then you knew people that when they're being acquired I said oh, these are the not only they're not going to just buy us, they're going to provide us opportunities to grow. That brings a lot of value and you become a very attractive acquirer.

Trust, Trust. Trust is all I'm getting out of that.

A lot of it.

Yeah, it makes a lot of sense. And why you want to be proactive to establish a strong network if you're going to pursue a roll up in a specific industry. Let's talk math. Valuation. This is the thing I'm really interested in. This is when I look at roll ups part of me is I should be doing a roll up. There's a level of predictability because we're obviously triaging. Typically an EBITDA valuation multiplier. I'm curious, what's the math? I look at some industries and you obviously know it scales up the bigger you get. What are some of the rough figures that you look at when you look at your industry?

There's a number of things that you look at. Going back to my corporate development world at Goodyear, this is probably where it's very different. When you are in a large corporate environment you use multiple valuation methodologies, DCF multiples or comps and all that stuff. There's a number of different ways of you can do it on the roll up strategies or roll ups the way we are doing right now and in the PE world EBITDA is pretty much the main driver of all the valuations. That's really what people understand. It's simple enough, it's proxy for cash and that's what you go after. However, there is exceptions to that and the reason there are exceptions to that because Reported EBITDA on P&Ls of non publicly traded privately held companies can be very interesting, let's put it that way. So there's a lot of EBITDA adjustments that you have to do in order to revive good and bad. They go both ways and you have to be able to recognize which is a good and which are bad and also which are going to come true after the acquisition. Is this really going to be an add on or is just a fake add on? Then you're going to spend money on somewhere else. So those are the things that really impact the valuation. Second piece of the valuation or roll ups is you really have to pay attention though to those EBITDA multipliers. What are you buying it and what is a potential market that you can exit? Want to make sure that the spread is large enough to be forgiving enough because if the spread is not forgiving, you will never get the valuation right on some of these deals because you're working with very limited and very, I would say sometimes anecdotal data. And if you don't have that spread of multiple between buying and selling, then the creating the value is going to be extremely difficult. So those are the two things that we look at over what is the potential to grow the EBITDA organically and what is a valuation spread or multiple arbitrage opportunity that you are able to achieve by consolidating.

It's funny because it seems a little foggy that we know everybody's net income on a tax return. Zero.

Exactly.

But then you get your Performa with a million ad backs in there or millions of ad backs and then all of a sudden it's, this is a great business. Yeah, the bankers involved. The chart even goes further up to the right.

There's lessons learned. I can tell you stories. Why does an automotive shop need an airplane? They don't need an airplane. But the owner was expensing it because of he lived further away or his house moved further away, needed to commute, things like that. Those are funny add backs or funny adjustments that you'll see. But you have also the other ones that are real. Most owners will tell you, oh, I'm not involved in a business at all. The store runs by itself. And in theory it's true, the company runs by itself, but the owner is a controller. They are the head strategy officer. They're a head HR person. Nobody gets a raise without the owner approving of it. The bank accounts, they check every single. They don't need bank reconciliations. When you are the sole owner because you know exactly how much money is in that bank or who spends your own credit card. But when a larger company takes over, you have to put those costs in place. So even though that was like a morning newspaper read or whatever you call it now, the iPhone scroll for the owner didn't consider it work. You actually have to pay somebody to do that. The cost would be you add back the owner's salary, you got to discount it because now somebody has to do the stuff that the owner really didn't even think about as work.

So general rule of thumb is EBITDA for valuation. Do you look at it as here's tiers that I know. These single assets are going to be maybe 5x EBITDA. And then once we accumulate over 30 million revenue, our portfolio is going to be worth 8x EBITDA. And once you cross 100, it's going to be worth whatever, 10 plus. Do you look at it that way?

Absolutely. That's exactly how you look at it.

What are those numbers for you?

I can't tell you exactly the numbers because I'll give you the secret sauce away from us.

Okay, okay, okay. Let's just say what I proposed is generally the gist of it.

Generally gist of it. You can definitely in a consolidation play depending on the industry. Honestly, it really does depend on the industry. But you can start anywhere between four to eight on a single operations and go 15 to 20 when you consolidate. So the multiple arbitrage can be two times, three times.

Is it part of the model that I, because I know this, I'm going to be able to put an attractive offer to these single assets because hey, when you're a small single asset, one, there isn't as big of a pool of buyers. And a lot of times you don't really get lucky to get even 5x EBITDA on some of those assets. Is it the fact that I can come straight away offer that much? Is that part of the model is that we have strong buying power.

We don't approach it that way. We actually really do not approach it that way. And the reason why we don't approach it that way because you're right, there's not that many buyers because it's extremely difficult to consolidate and integrate mom and pop shops that were in the business for 30, 40, 50 years. Another story is we've asked, okay, what is your inventory? You guys pull up his pencil and paper and wrote down on a yellow sticky note and said, okay, these are, this is my balance sheet. This is My or this is my fixed assets register and you're looking, it's like are you serious? How does that work? How do you integrate that? You can't integrate it. You have to have somebody go into inspector, write them everything, try to find out what your the assets were acquired. It becomes really difficult. So you really don't pay a premium because you have a arbitrage opportunity. Because each time you have to pay the premium there is a reason why there is the valuation gap is usually because you'll spend a lot more money integrating. Then if you buy operations of 25 stores, that is his annual audit and with the systems in place. So those are the differences that you probably see in the marketplace.

Let's talk about the operating strategy because I think that sort of lends to the organic growth. How do you look through and build that approach on the synergies you're going to capture? It seems like that's going to be a big part of the pitch.

Absolutely. And it's interesting a lot of times in our industry as well as many other business, a lot of businesses build on trust and when you go from in a consolidation play, you lose that trust from a perspective of a customer because the customers have been going like you're Barbara. You go to barber or hairstylist, whoever you kiss and use because of this person. Not necessarily because there is a name on top of the building is you go because you trust the person who is going to make you look great after you're done with it. So the same thing goes in many other services. They trust you because in automotive customers don't know what's hidden under the hood and what goes wrong with it. So they have to trust the person. So that goes away when the business is sold. So you have to offer something that will replace the value of why the customer's coming to you. You have to rebuild the trust, that's one thing. But you also have to do ease of purchase. You have to bring some technology, you have to give them some other value that they can't get somewhere else. And that's I think that differentiator. What are you bringing into it? What are the part of the operations that are going to make you more efficient and where you're going to be able to pick up the synergies. There is a back office synergies, but the back office synergies has their limits as well. If you can't grow the top line and if you can't expand the margins versus the previous operators, it's going to be extremely Difficult to have a better EBITDA and to achieve organic growth.

So this builds as a playbook that keeps improving over time because you'll find out, hey, this is the marketing strategy that works. Maybe you learn something from a new acquisition, you keep improving it. Now when you do an acquisition, you have a playbook to really run localized marketing and get the best for new customer.

Acquisition is every business strategy. You have to revise it every year or two because you have the new players, you have new competitors, you have new technologies come into the industry. So it's always. It's an ongoing live document that you have to do, but you have to know also what your core is. For us, the core was technology. We want to make sure that we introduce a technology that was not present in those areas prior to our acquisitions. And we all wanted to make sure that we offer a level of customer service that was unprecedented in the industry. So those are our key strategies, and we are executing very tightly against it. How does that take place? That varies. And that will vary probably a year or two from now than it is today. But those are the core strategies that I. What I talked about are differentiators. You really want to make sure you have going in that will set you apart from previous sellers or any other competitor will come and do another Rob strategy in the industry.

How much do PE firms like pick at that? Were you involved when you did the fundraising?

Yeah, I was involved from the very beginning of it.

What were like, the tough questions asked? Do they dig into that a lot?

Absolutely. They got into it. That was an interesting process and in many ways different than I expected. They were a lot more operational focused. And one of the things, when we send them the decks and all the financial modeling, we asked them, hey, what questions do you have on a financial modeling? I think the biggest compliment was like, nope, good with financial modeling, you guys did a good job. So there was no questions like that, but the questions were really, can you execute? This all sounds great on paper, but why do you think you can execute versus the next guy? And those are the things that they really were going after. It was really important for us to be able to demonstrate that capability of execution. We had a good story, we had a good strategy. We backed it up with the financial modeling that was solid and sound. And then it was, can you execute? What is our execution risk? And probably we spend more time on the execution risk than on the other two.

That's really fascinating. And I think that's going to come back up in our other areas here. The Capital provider you have the P firm that you end up partnering with is sponsoring this strategy. Other sources, are you lining up debt ahead of time or figuring out who those resources are going to be? Does a PE firm help you with that? Are you doing like rollover equity on these acquisitions or what are the other angles you're thinking about? Capital providers?

We're a little bit more traditional at this point because we were very much a piece by piece acquirer. If you had a platform that you start acquiring, you can probably utilize debt a lot sooner than we could. But yeah, you start thinking about it, we didn't have those lined up. We had a network, my network of professionals that could jump in and have stayed in touch with them throughout the years. So I was not afraid that we were not going to be able to find somebody. But it wasn't that we had anyone particularly lined up. The equity piece of it was really the important part because a lot of the debt providers as well, look, how committed are you guys on equity and do you have enough cash flow to service the debt? So those are the two key questions. So as long as you secure the first one and you make sure you have enough cash to service the debt, then the debt will be easier to find. We do equity rollout, but not too many people depend when they decide to get out. Most of them would prefer cash than equity. But we do it both ways and we're all open to it. As you go through larger acquisitions, that becomes a little bit more overplayed and something you want to entertain and engage in.

You do a lot of earnouts in your deals?

No, not that many. And I've learned even the few we've done, I would probably stay away from them. I love them from the concept perspective. I hate them from a practical perspective because there's so many factors on the earnouts, how you do the deals, how you account. Just the accounting methodologies can just cause a conflict. On earnouts. If you go. We go a lot of times from cash accounting to accrual accounting. It's a debate. It's saying things like that, how do you accrue for manufacturer rebates? Every single thing becomes a debate. Although they sound really great and they're really great in concept, practicality of earnouts is very challenging.

I'll believe that I'm pushing hot buttons. That leads to a whole other podcast conversation which we've done all about earn on the capital provider's big focus is going to be on the equity side. You get that dialed in and then the acquisitions what you're pursuing, the debt's going to be a lot easier to figure out and there's plenty of options there and interest rates going up. You might be trying to avoid that with other tools as well. Pipeline, Pipeline. You're pitching the P firm. I would assume that you'd want to have to demonstrate pipeline. Even in the early stages of raising. How far do you go? Do you show, hey, we've got a pipeline. In fact we've had some initial conversations and have some hot ready to go targets or what does that look like?

That was probably one of the most interesting parts of our roll up strategy in the beginning. There's a lot of questions about pipeline, managing pipeline, reviewing the pipeline areas. Once we started rolling and executing on the pipeline, we don't get any questions from P for many more. Whether our pipeline is strong or we have probably 50 to 100 targets in the pipeline right now. We've demonstrated that we can close probably about 50% of those. It's only up to us of how fast we want to go. So once you demonstrate the execution of it, it'll probably die down. But yeah, pipeline is a huge risk.

For the consolidators in the beginning. To get that first check. I'm trying to get that first equity check. What I think is the hardest. What level of validation do I need to do on that pipeline? To get somebody you need to list.

Probably your 20 to 30 potential deals because the expectations of the Funnel is probably 10 to 20%. So you got to have 30 candidates for acquisitions in order to be able to close maybe three to five. That's kind of our experience have been how they've looked at it. We were fortunate enough that we had a different story and much better story on that. So that was no longer really is no longer a discussion. But in the beginning it was a lot about pipeline and that was the number one thing about that execution. And great. You tell me it's good. You have the strategy. You showed me that math works. Are you going to make it happen? Can you really bring people to the table they are going to sell. Once we demonstrated it was a lot easier.

A conversation very typical. Like a sales pipeline.

Yeah, absolutely.

Our sales team is probably listening to this. But you want to be able to prove that, hey, I got this much in the early stage of the pipeline. This is what I'm likely to convert and close.

That's correct. Yeah. And it was really proving that concept for us that made a difference.

Tell me about nailing the pitch. I feel like there's Two sides of the pitch. There's pitch the P firm of why us and why we're going to be great. Aside from here's our economics and here's our approach for the operating model, here's the pipeline. I still think there's like a pitch to tie together. And then you got another pitch to the target company.

Absolutely.

Of why us? Walk me through those. How'd you finesse those and make them land?

Maybe cliche to say it again, but it's one of those things. You got to really think about it. What is in it for them? So whoever you're pitching to, don't talk about your strategy, talk about what is it in it for them. As I was going through some of the transition between the corporate into P world and few other deals that I was advising or being part of, a lot of the pitch was around, oh, we're going to build a great company, we're going to build a great product, we're going to bring build it. Not enough. What is in for the investor? How can investor get their money back? What is that? Those numbers, those ratios that because everybody loves a great company, but I can tell you probably list five or ten great companies that never made money and went under. For the investor that's great company or great brand or great product does not really do everything or anything for them. You really need to speak to, okay, what's in it for them? How error proof is your model, that's one thing. For the sellers it's probably slightly different. Not that much different though. A lot of these people, as I said, build their history, their families on these businesses. You got to ensure then that you're going to take care of it. For the private sellers, you wouldn't believe. Number one concern for I would say for majority of them is what's going to happen to my people? What's going to happen to Joe, Sally or Megan that work in my business? Are they going to be secure? Are they going to be okay? That part of the legacy? Because if you think about it, those guys are involved in the communities they live in. They see the people in grocery stores, they see people in churches, they see people in country clubs or wherever they go on the street. They don't want to say, oh yeah, you walked away with millions while I now I have no money to feed my kids. Those are things that the sellers are very concerned about. And those are the two things that you need to also pitch. What's in it for them? How are you going to take care of their business, of their People of their legacy.

I know it sounds cliche the for you, what's in it for you? But it's the easiest thing to forget.

It is the easiest thing to forget. Yeah, exactly.

We always forget about you go into hardcore pitch mode of like why us? When you said it, it reminds me of just conversations I have my kids because I'm always like, the greatest skill learned is to convince anyone anything. I'm like, how do you do that? It's all around empathy. I'm like, if you can get inside another person's head and understand how they think, why they think that way, how they feel, why they feel that way. I feel like it's really similar as you explain that. Here's an investor you're looking to deliver returns to your shareholders. You want to make sure you get a healthy roi. You want to make smart investment decisions.

Absolutely.

Let's talk through that. What are you specifically looking for? And I feel like that's a way to solidify and get on common grounds in terms of the thinking and facilitate the relationship development so that they know that hey, we're aligned on best interest. And then same goes for the seller of that company being able to understand that your people are what's really important beyond the cash. Let's talk through that. Let's figure out what is going to give you that assurance that they're going to the right home, that there is a better together. Once we close this deal, is there anything else magic with the.

No, no, that's really it. The simpler the delivery, the better, the more successful you will be.

Hey, let me ask you this too. Like on investment thesis, did you have to like write out formal investment thesis?

No, not really. We had a pitch of PowerPoint presentation. I was pretty hefty one I would say. They went into the details. We had a pretty good financial plan behind it and that was it. Those are two, two key things that we went to the investors with.

That's what I'm. I'm working on one now and I had 15 pages drafted so I got it thanks to good AI technology condensed down in the two pages. But I think you're right. I need to put it together to the the next thing as a nice deck. Once you shrink it down, it's oh, I can actually get through all this key information. Fair point. B, Brevity's key. That way you get your key points across. Anything else on the pitching I should.

Know as every presentation you're going to get better as you do it. Be prepared. But also don't Overly script it either. The best conversation we had was like over dinner or over, I would say a few drinks. And you talk about it, you talk about the stuff you know. But it doesn't have to be super formal either because the more scripted you are, the more skeptical the investors will be of what are you hiding? Because you're telling them you're not going to be as genuine if you're too scripted. They're like you just took pieces that you wanted us to hear, not whatever what a true story is. So know your stuff and know your presentation. Just be yourself, be natural and be honest.

Does alcohol help you close deals?

No, I'm not believing in that.

Just curious.

I will recommend against it, but not.

That I've ever done that.

No, but you bring up a good point. Networking does. So how you get there, whether you do it over a glass of wine or you over. You do it in a golf club or on a hike or whatever it is, networking does help you close the deals.

Okay, we'll leave it at be organic, natural, whatever that is. And then get your reps in the old. Get the a hundred no's to get to yes, be persistent to get your reps in process. Diligence, integration, the science. How do you build? And I'm curious too, on when you're pitching the P firm and they're wanting to understand, they get a sense of your operating strategy, but is there a level of detail that you're elaborating there or is it more of when we do our first acquisition, we're going to figure this out?

No, I think you have to start with a certain knowledge and a process approaching it. But I think that was one thing that evolved the most for us. Because there's always the balance of where you're trying to please in many ways. Is it the finance team, is it the investor, is it the seller, is it the operations guys? So you really have to fine tune it. Also, you have to find out what is the appetite of the sellers for process. Because when you're dealing with highly sophisticated sellers, and I don't want people to misunderstand, I think the people, mom and pops, are extremely highly sophisticated operators. But they may not be the highly sophisticated sellers of businesses. Very different. But when you're dealing with companies, the corporate development world, where that's what people do for a living, when you tell them, oh, would I want to go to term sheet or let's talk about it, everybody will be like, okay, let's do it. You tell that to a mom and pop Shops running a small business they'll be like what is that? So you have to really be very careful about it. The other part is that it is very difficult and probably one of the biggest differentiator between corporate development and small rollups is in corp dev. We always signed at one date and closed a month or two months later in order to prepare for transition. In rollups you just do it everything at once. The owners are super sensitive about confidentiality or letting people know that they're selling their business. Extremely sensitive. So almost zero time we allow or they would allow you to approach people in their business. So that's really big different venture. So having that simplified structure helps them through the process. It takes a lot of emotional anxiety out because they know what's coming after another create 5, 10, 8 steps and say hey, we're going to ask for this and this. After that we'll create an ally. We'll do this. Then we're going to do a due diligence or quality of earnings and that's what's going to mean this and that. Explain the process. It's going to be a lot easier and the only way to explain the process is to have a process.

Do you use consultants?

No, we are nowhere use legal team, external team and we use third party for quality of earnings but we don't do consultants for.

So we got a few, we got external counsel and QOV providers. That's good, that's great.

Yeah. There's the level of I would say expertise that comes with it and credibility comes with it. That's very important if you think about.

Executing and even early because to me it's a big learning curve and most of us you learn the hard way, which you probably know. But if I wanted to start thinking through staffing my dream, my M and a dream team and it sounds like a good thing. You're not overly reliant on external folks. This is like me building a tech company. A lot of people want to outsource it right off the bat. We didn't do that. We built an in house team and it was probably the best early decision because it paid off and we've got nice quality control and it's an advantage. I sense the same thing. You earlier build out the in house capability with your MNA team. You can really execute better. Who are those key people? Who are there going to be those people? In what order do you want to bring them in?

You want to start with people who are in each department or each function?

Let's start with a badass cfo?

Exactly. You know, then what's next? You want to start with we have a really good operator that can really drive the business.

Like a gm?

Yeah, exactly. I would say then at that point you need a really good finance person and somebody that's going to help you grow the pipeline and do the deals. I will tell you one of the lessons learned, that if going back I would bring a really good IT head of CIO a lot earlier than we did. Because in the consolidation play, integration, especially data and system integration is the key. And if you don't have that person guiding and directing it, you're going to be paying for it for years to come. That's something that I would definitely advise.

That's the number three. Okay, what else?

After that you start building the teams. And also you need somebody who can direct you in strategy as well. Now that doesn't have to be a full time person in the strategy, but somebody who really takes care of. Are we on track? Are we measuring to what we said we were going to measure and go through it? It can be probably a role of either a CFO or CEO. And I think then you build a team around it just little by little.

Like you don't need to hire like a head of corporate development per se or some of the financial analysts right off the bat. Sounds like you can start getting the momentum going and then as you scale, you start building.

Yeah, I mean we started with more of a 1099 structure in the beginning, but we did have a head of corporate development to build that pipeline. We did have that. I think that is important now. CEO or GM can do that a lot, but if you have somebody who is dedicated to it, it's probably a really good thing. I would say the GM, the head of finance, head of operations, IT&M and A, those are the core things that you want to have in a roll up strategy as a key team.

Tell me more about it because I think of obviously you got to keep track of costs and know where things are, but what are the intricacies of it?

This becomes truly a challenge in a roll up, especially when you're doing a very aggressive rollup. You never have a really good base. It's very difficult to compare it to, okay, how did I load last year? Because last year you were managing the business, somebody else was managing the business, most of it. So you really got to stick to your KPIs. What do you feel that you need to do in order to be successful and do the true good business in your industry? Within the, I would say framework of KPIs and monitoring. That way as you get into it, you got to understand where are you going to extract the value? Is your value going to be in a cost or is your value going to be on price or volume, whatever that is. So wherever you create the value is or you think you need to create value, you have to really monitor it. Are you really getting it out of there Purchasing? Make sure you get the synergies that you are expecting. If you're not getting, ask yourself, why did I make wrong assumptions coming into it? Did the market change or am I just not executing? So those are things that I would truly pay attention to. Couple other things that you probably need to do good due diligence. So there's no hidden cause that creep up.

How does this roll up into a macro view in your financials as you do these acquisitions? Because I can just see that whole picture changing.

Yeah.

What are your key metrics to know you're doing healthy deal. You're getting to the cash flow out of these companies fast enough to keep doing more deals.

That's such a different approach than a corporate dev or even corporate finance approach. What you do with rollups, you always look at what you call what it's referred to as LTM. Last 12 months you have this pro forma going backwards which is had I owned these companies for last 12 months, this is what would have been my earnings and this is what would have been my cash flow. It really becomes interesting and tricky situation of monitoring where you are at. But that's really the only way to measure yourself whether you're doing better than what you have acquired or you're doing worse than acquired. So you always look at that LTM at acquisition or LTM number that tells you whether you're doing better. And sometimes you have to pay for the sins of others. They had a good month, now you have to live with it. Or if there's for example a gap between the LTMs that you acquired or when you did valuation versus the acquisition, the business sinks when those two or three months you're paying for it. Because now you all of a sudden have to make up the difference. Now you can't walk back and it's part of your numbers.

And then you're taking the LTM and are rolling it forward into your numbers to get that view of how we're performing. But does it also give you a broader view of and it goes back to private equity thing. Like what are they looking at? Are they looking into more of these individual acquisitions or they just want to see the performance of their overall.

There's two things they want to see. They want to see performance of overall consolidated company. That's number one. That's what they're worried about. How are you doing now that we've consolidated everybody? Are you covering your extra overhead that we brought in and all that stuff? But what they're really also worried about is how are you doing versus what we purchase, what we paid for? If you pay for a business, let's say 10 times the EBITDA and your EBITDA, you just, you erode the EBITDA, all of a sudden the valuation is no longer 10 times and maybe 12 times. If your exit was at 13, estimated 13, you just eroded 66% of the differentiation of that arbitrage. I don't want anybody checking my math, but that's where you really have to be careful of whatever you buy not to go backwards. Because as soon as you go backwards, your deals become a lot more expensive because you're measured against the effective multiple today. So if you buy a business with a million dollars of EBITDA and you pay 10 times, that means $10 million. If you erode the EBITDA from a million to 500, all of a sudden you paid 20 times for it.

You got to pay attention.

You got to pay attention to that. As long as you're moving up, you're doing really good. As soon as you step back, it's really hurting you.

How long are you going to track it for that individual asset performance against your overall?

You track it for the 12 months. But you do also track aggregate basis, on aggregate basis, whether what you bought at acquisition versus where you are today. And then you track that, I think for the period until you sell that.

12 months after, you're really validating that even though you originally purchased on.

Yeah.

And then it really becomes part of the overall operations.

Yeah. But at the same time, you're always measuring yourself. What was my invested capital? What did I pay in the beginning? And how does that compare to my expected capital at the exit, rolling it.

Into an IRR figure?

Yeah, pretty much.

That's what everybody wants to know.

But there's a nuance which I find interesting, if not funny, in the PE world. And that was probably a nuance to me going from a corporate development into the PE world. Ps don't necessarily deal with IRRs. You only deal with, okay, four times earnings, five times earnings. Whatever you invest on your invested cash, it makes a big difference whether you Earn four times in one year or you earn four times in five years. That reference point is not ever really talked about. It's only like well it was four times exit, that's great. But if you wait 10 years it's really not that great.

I agree. It's like the net RR is the true telling figure. I like looking at the fund data. If you ever, I don't know if you ever get. You don't have time.

I don't really have time for it.

But you know like CalPERS they always publish all of their fun performance data but that's like the key thing they have the multiplier. But if you look at NETR and you would build your own leadership board around it. Yeah, it's a little different story.

The assumption is that usually PE's go into a hold a company between three to five years and that whatever two to three times exit is, it's always within that timeframe. But if you hold a company, there's a difference. If you call a company for two and a half years or for five and a half years and if you have the same exit multiple, it's definitely a difference.

Hey, this is more like a Treasury question, but how does it work? If you've raised like $50 million, you're doing a roll up. Are you managing the cash itself or is it more of a draw? It's a draw firm, it'll be a draw.

You know my experience has been and that might be different from others PEs, they like buying assets, they don't like buying expenses. What I say. So they will not give you money in the bank account for you to pay salaries or do whatever you want with it. They will buy hard assets that produce money. So they'll only give you the money when you are buying a hard asset and then that money then can produce or make money to pay for your.

Expenses when you go to the IR figure. I think the inefficiency is just the capital sitting there. But if that's not necessarily in your books, you're not pulling all this cash at once. It's sitting firm. I guess it's more their problem.

One thing that we can go this is completely different podcast as well but when you think about it is when you were measuring against exit against invested capital. It's always looked at it at one point in time but that's not a really reality in a roll up strategy is usually over two or three year period. So then you've got it. If I had put in $50 million on on day one is very different. And then I put 10, 10, 1010 over three years. Your IRR is very different.

Exactly.

So those are things that usually don't come into calculations.

That's what I was. It doesn't come into calculation.

No, it does not.

Usually that works against you then the irritant. The baggage.

Yeah.

Any other key KPIs that I should really be paying attention to? There's the math that ultimately comes into an IRR figure. But any other KPIs particularly I want my PE friends to be happy with.

That Exit multiple for them for the invested capital is always a key. The EBITDA valuation. EBITDA multiple of what the business's value add. That's truly a KPI that's measured Third piece to that is cash generation to service debt available. Cash generation to service debt with the way that you multiply your returns is by leveraging up the companies and using the borrowed capital to make money to purchase new companies. And you don't spend your own equity is. Well, you have to have enough cash flow to service that debt. So that's something that's going to become very important is are you able to generate enough cash to service that Key.

Things to keep in mind and communicate with higher ups.

I'll tell you, if you keep those three things in check, everybody will be very happy. Camper.

Easier said than done.

Much easier said than done. Yeah.

Technology. Okay. Disclaimer. You are a Deal Room customer. I'm obviously founder investor in Deal Room. Wanted to make the world's greatest platform to execute M and A. But this podcast is not a commercial for Deal Room. But I got you here so I'm just going to ask you. I know you could have picked any technology managed M and A in the whole world. Why'd you end up choosing Deal Room?

Going back to the comment, I've been the longest non paying customer probably. I mean we've known each other probably for like eight years or maybe six years before we actually went with a product of Deal Room. We weren't using it just for everybody to know. There was nothing and there was no usage of Deal Room for free. But where it is, whether it's a Deal Room or a similar platform, we went with a Deal Room for one reason. It was the only platform that was tailored to M and A processes that combined multiple features of the data room, the process management, the pipeline management and all that stuff. We didn't really find that anywhere else. There was a lot of data rooms, there was a lot of products that were managing only the Kind of the more dealer project management. But there were some that were very specific M and A project management, but there was no tool that really combined it all. And that was the attractive portion for us for the deal room and why the team actually liked it. But my perspective is when we talked about the tools, I suggested, hey, why don't you guys take a look at a deal room? And completely left it to our M and A team and they went and evaluated several product and then they picked a deal room without even letting me know that you guys were picked. So I was very happy about it.

Okay, cool. Then let's step back out and just talk more holistically because anybody can do the research and figure out what's the best tech stack for them. What else were other, I guess key things in terms of having tech to keep everything all in one place.

What it does really from I would say maybe three different points of view. From a seller point of view, it sets expectations. Kind of what we talked about, building trust and setting expectations. This is the first and maybe only time for most of them that are selling the business. So understanding, oh, these are the components of the deal that I'm going to have to follow through and have to provide in order for this to happen. That's fine. It's a lot easier than when somebody tells them, hey, Monday morning, give me blah, blah, blah, and then tomorrow on Wednesday, yeah, but you didn't give me X, Y and Z and I need A, B and C on Thursday in the morning. It frustrates people. So when they see that, okay, this is the structure we have to follow. It really does ease their emotional ups and downs in that this process. The second thing is it's data depository. You always have one place to go to. That's really great. But the third thing is it really keeps internal team on track of monitoring whether things are submitted or not, whether people are following up on items they are not. That's where that project management comes into place. If you see an empty folder for two weeks and it's past due, you're going to follow up on somebody who is supposed to populate and say, hey, why is this still empty? Versus if that folder is sitting on their computer, you're not going to know whether it's there or not. You expect it to be done, but it's not. Here you can really monitor the process of the deal and the project and I think that's really helpful and able to cut down the time of the deal cycle.

You sure about that? Cut down deal cycle yeah, absolutely.

We went from about 9 to 12 weeks to 6 to 8 weeks. Time frame.

That's pretty good.

Yeah.

Marketing team, if you're listening to this, that's a nice stat to put right there on the website. That's like roughly 30 plus percent savings. Okay. Three big points. It's a better experience for the seller. Sort of guides them visually through the process and it gives impression that you have your shit together basically. So that's one, two single source of truth. Everybody knows where to find stuff related to the deal. It's all right there. It's in one place. Third, managing the details and making sure things are acted on the real core of project management. So cool. That's the importance of having a good tech to run your deals. What were like the biggest or most important lessons learned from doing the rollup?

Any startup there will any you hear that but roll ups are very. Is it unique as well in. In in a way to their approach Especially if you're doing a roll up from kind of ground zero is make sure you're well funded. Make sure you're not asking or begging for money each time you need to do an acquisition that frustrates people who are doing the work and especially the sellers and you're going to ruin ruin your reputation if you're waiting for funding. Also make sure you are able to build a platform early enough and have a strong platform to hold on things going forward. That brings me to the second point is invest in it. That's probably the biggest lesson learned that I've experienced through our journey is invest in it. Your system integration system synchronization is going to be critical for everything you do later on. Everything from operational from the data to be able to run the operations to just pure synergies and efficiencies. You got to have that it buttoned up and you have to do it from the beginning. And in rollup specially it's heck of a lot easier to have the right solution from the get go and then just incorporate other acquisitions into it versus build until you have a hundred different locations or divisions and then try to synchronize. You're never going to get there. So build it early and then just bolt onto it and integrate new acquisition as quickly as possible. Third thing is as we I touched upon a little bit on the cost hidden costs those are really funny ones because especially the less sophisticated sellers are the more hidden costs you're going to have. Every single acquisition that we've done. I heard that two days ago and I don't know if it's true, every single one of them but probably majority. When they meet the new HR person it's like hey how about the raise I was promised? When can I get that? And everybody is a calm I would say practice or expectation or a question that when the new people, new team comes in there is opportunity to get that raise you were promised. Now whether you promise they were promised a raise or not, it's almost impossible to check or verify. But they set the expectations and now you're all of a sudden failing this or you have to meet them and then you have a higher labor cost than you actually paid for. So those are things that it can really hurt you going forward. Especially if you are in a labor intensive business.

Make sure well funded that we don't have to scramble for cash, invest in it. You don't have bigger technical issues down the road and you're prepared for it as you scale and need that kind of technical infrastructure and can probably integrate better. Watch out for those hidden costs, learn to identify them and get over them before they get over you.

And then the last thing that I found out specifically in our case is data integrity. The less sophisticated the sellers are, the bigger data integrity issues you're going to have and I want to differentiate is not that you're going to buy businesses with false data, you'll just buy businesses with bad data. It was good enough for mom and pops at the same time. It's not good enough if you're trying to build a multimillion or 100 plus million dollar company that's going to be audited next week or next year. So those are two very different things that you're going to be dealing with.

Even you mentioned earlier, just going for like cash basis to accrual is a whole different picture to look at.

You're going to need your audits or audit ready financials for debt to raise debt and things like that. So it's just one of those things you'll have to pay really good attention to and put controls in place very early knowing that the data they had before is very different for us year over year comparison is I wouldn't say meaningless, but challenging at best.

Looking forward, what are the trends and opportunities you foresee in the rollup space?

I do think the roll ups are in many ways getting a little bit stale and a lot of industries have been attacked. But also when you look at how many opportunities there are, there's really tons of opportunities still left in many industries. I would say we are kind of at the second half of the roll up craze with plenty of time left till the game is over. That's how I would view it. And because you are at that place, you really need to identify why you're doing it. I think in the beginning phases you could probably pick any industry and not add of value. Just get the synergies from back office and it was something new and great and everybody loved it and get the value. Now you have to be a little bit more strategic about it. What technology you're going to bring, how are you going to change your processes to improve what value you're going to add for the customer. That does not exist in a single operator.

I think that's going to be the big one, is whoever can integrate the best is really going to stand out. What's the craziest thing you've seen in M and A?

You always ask that question and I love it and I hate it at the same time because I've seen some crazy stuff. Five o' clock in the morning, you have to close the deal by noon and the deal changes. Like, okay, what do you do now? But I thought about it, you know, what's the craziest thing I've done is how many times people do the deal just because they want to do the deal, not because it's the right deal to do.

I think they call that deal fever. Is that what they call it?

That's what it is. And it's one of those things, I'll give you an example and won't go into names because I tried to stay away from it, but we looked at one deal for six years and it was like, yep, no, not strategically right thing to do. And then it's like within three months the board of directors decides to do exactly the same deal, acts on it without due diligence and executes on it three years later. You ask anybody and everybody who is close enough to his and everybody tells like, I have no idea why we did that deal. One thing that I really always emphasize on the deal making, before you do any deal, ask yourself, why am I doing this deal? What is the why in it? And if you can't clearly answer the why, walk away.

I think that's really what it boils down to. Yeah, all right, we got some crazy. You got like different levels of deal fever and you can be like the extreme. I don't even know, what do you call it? It's like you're super sick. If you got like an extreme disease that's incurable.

Yeah.

That's like the high level of this kind of deal fever where you just.

Just want to do it by all.

Yeah. No matter what.

No matter what. You just want to check that mark.

You see a red flag, like, next red flag, another red flag. We're too far in, too busted, and we can't back out. It's tough.

It's tough. Maybe one of the toughest thing for me was in my corporate development career was I worked on a deal for about a year and a half and we came to the impasse and we had to walk away. And it was my call. I was the director of the corporate A Goodyear at the time. And the VP came and asked me, it's your deal. What are you going to do? This is my line. And if we can't get to that line, we got to walk away. And we couldn't get to that line. And the next morning, okay, we got to walk away. It was tough. I think I was depressed for three days and he came to talk to me and he's like, don't worry about it. It's better to do no deal than the wrong deal. And I had to live with that because you put a year and a half or two into something that you really are excited about and you want to make it happen and at the end of the day, you couldn't make it happen. Feel a little bit like a failure. But it goes back down to it. If it doesn't answer that why it's better to walk away.

I think it's like a post departure depression.

Yeah, exactly.

And I've been there. I walked away from a deal this last year and I think same thing, depressed for probably about three days. But after you get over it, you felt really good. I felt good about it. I looked at it and realized this was really going to be a bad deal that would have hurt the company more than help the company. Then ultimately, like, I actually felt bad and got more clarity in the deals that we should be doing. Yvonne, this has been awesome. Thanks for taking the time helping me become a better M and A scientist.

Hey, thank you. It's always pleasure to be here and I. I learn a lot talking. So whenever you have anything that you want to talk about or anything that you want questions about, feel free to reach out. Listeners really appreciate their attention and feel free to reach out to me personally as well. Always happy to connect.

My fellow M and A scientist listening and you are an M and A scientist. If you reach this far in the podcast, you have learned a lot. 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. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.