How to Structure Teams Approaching Diligence

Hello M and A Friends. This podcast is brought to you by dealview. M&A is coming back. Would you like to avoid wasting hundreds of hours managing Excel Trackers and building PowerPoint reports? Do you want to make your process more efficient? Well, I have great news for you. Deal Room is MNA management software to save you time, headaches and improves collaboration so you realize value faster. Learn more@dealroom.net here's to the deal.

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.

Foreign.

Welcome to M and A Science Live, 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 publications so you can continuously improve your M and A skills. Again, that's mascience.com I I'm your host, Kisam Patel, CEO and founder of M and A Science. Joining me today is Ken Bon, Head of Corporate Development at Cetera Financial Group. I should also mention you're Aon head of Corporate development for about 20 years.

Not that long, 12 years. And I ran a good portion of it.

And you were doing corp dev before that?

I was. I've been in corp dev since 99.

Also, Ken is Transaction Advisor Board Member, M and A Leadership Council. Today we're going to talk about structuring teams who are approaching diligence and how to find an outstanding Project manager. How's it going Ken?

I'm well, thanks. It's good to see you Kisam.

Glad to have you here. Can we kick things off with a little bit about your background?

I've been in corporate forever. I certainly came at this profession probably a little differently than others. So I did not come through the front door as an ex investment banker. I came through the consulting side and for a lot of people that's pretty, pretty typical. I drove submarines around with the Navy for a little bit and after I got out of that I ended up getting an MBA and went to McKinsey and out of McKinsey I joined a corporate development team, Level 3 Communications. It was a lot of fun. I really enjoyed working for them and I stayed in the tech space and bounced around with a few other big names. But about 13 years ago I joined AON on their corporate development team and that was a big Shift for me was out of tech and it was into risk management. Insurance ran on a global basis. Their corporate development team for the PNC reinsurance and global affinity teams did a lot of deals. About 250 deals over 12 years. Half acquisitions, half divestitures outside the US. 40% in and set up some joint ventures. Tore a couple down, sold off big chunks of our African network and set up some interesting GVs along the way. So excited. Joined Cetera in January so that's a new adventure for me. It's very interesting. They're private equity owned so it's good to be out of the public markets and enjoyable to be part of a private equity sponsored firm for the first time.

It's our first interview, done it all. I can ask you so many different things here. Well, I'm going to get to the nuclear sub things later, but Level three, how is that? Did you work with Dan Crusoe over there by chance?

Yes, I did in fact. Yeah, of course.

What was it like working with him?

He's a great guy. When I was looking for opportunities, I talked to Dan at one of his port cos after he had left. This was even after he did the select thing and he had founded his private equity fund in Boulder. And a lot of the X Level 3 alum are hanging around the hoop with various companies that are still sponsored by him or engaged with me.

I thought I'd be curious to know what it's like to work with him. But yeah, I met him when he was at Zayo. I think he ran into him in Chicago when he was presenting at an event and just introduced myself. Kept harassing him over email like I do every other executive at big conference events.

I ran into it recently because I was in London and I was doing a guest lecture at lse. It was actually the University of Chicago facility there, their adjunct campus. A friend of mine was doing the guest lecturing and he brought me in as a speaker to his MBA class. And as I'm walking through the halls there's this giant picture of Dan Caruso on the wall in the middle of London. I sent him a note afterwards saying, hey, there is a really large photograph of you in this hallway in London. Were you aware?

That is awesome. We're trying to get him on the podcast. I'm going to get your help on that. We went from Level three after that I went to.

After Level three I went to Motorola, then to Dell and then to Aon.

For the sake of time, we're going to go through those and Go for the most recent one from Aon, the Satira, because you went from a large public corp dev team, pretty significant scale and then going to the current role where you're basically standing up the function.

If I remember right, there is an existing team and I came in to help manage the team. Small but mighty. They need to become a high volume shop and they're not a high volume shop today. They were very interested in the practices and your approach towards managing the team and how I might scale it to accommodate greater volume flow with effectively the same resources.

You still have a lot of building to do.

I do.

What's the difference? Like I want to. I love to get this big contrast because it is one extreme to the other.

It is, it is. I was effectively running two shops out of Aon, right. There was a team in Chicago and there was a team in London. Thirteen resources in total, but about three deal leads, couple analysts and some a lot of project managers. And we will talk about that a little bit later as well. But at cetera there's about four people and I have one project leader, one deal lead and to fairly senior managers and analysts might even call them a senior analyst. They're beginning to take over responsibility for running their own deals. Crazy, crazy competent. And my deal lead there is extremely capable, in fact quite qualified to run the team by himself. I think the issue was simply scaling the team so that it could accommodate more volume. And a lot of that I'm doing through process change as opposed to adding resources at the moment. For example, one of the things that was holding them back from accommodating greater deal flow was the amount of diligence they're doing in the pre LOI space when the team that's engaged in the transaction is actually quite small. And so his team was doing a lot of the integration planning phase. They wanted a really good blueprint on exactly what would happen before they would even proceed with a letter of intent. One of the changes I made pretty quickly was now let's make some assumptions based upon your historical experience, get the LOI in place, because I think we all know that that exclusivity period is really valuable, turning this into a bilateral as opposed to allowing them to continue to shop. And then once you've got them locked down, you engage the greater organization to start the diligence and plan the integration thereafter. So long as you've got enough of a hypothesis on what the integration is likely to look like, you can build and you can. You feel comfortable that the financial model you're Building is probably right or at least more likely than not to be correct and that the variance around what it's going to end up isn't too large. It's good enough. We're just afraid of engaging or signing an LOI with a very high level of certainty. And that's really not. I didn't feel that how you ought to go about doing that once I got more comfortable with risk. Sign the Lois, figure it out in diligence. When you're engaging more functional experts, then we're getting good outcome. So we got three deals done already this year, got a deal already signed, more in the pre close period that'll close next year. Two more deals in diligence now and two more LOIs that are currently outstanding. So the deal volume has definitely picked up and I haven't added anybody to the team yet.

You said you had a deal lead and a couple of analysts.

Yeah, so a senior vice president and so he's very capable. He is the primary deal lead and then I've got a director who is just now beginning to run transactions on his own. Actually was an analyst who is such a rock star that we've actually started to hand him some of the smaller deals to manage on his own and he's doing just a fantastic job with them and planning on asking for more budget next year. So I'd like to add a couple more bodies to the team but I'm going to add them at the bottom, junior folks to help come in and support the team that is stepping up and starting to run their own transactions. So adding at the bottom, pushing the existing folks up and asking them to do more.

Where's the pipeline come from?

It's all over the place right now. Independent brokers, dealer space. If you're running a BD that's got anywhere from 5 to 10 billion of AUA assets under administration, your life is miserable. Right. You really don't want to be in that space anymore. We're getting a lot of flow from those folks.

Can we get into just that tail part? It would be interesting to talk about just contrasting the more the aesthetics between a public and private company function. You mentioned a shift already in your ability to execute with getting comfortable taking more risks. What about some of the other components? Obviously public, you got a lot more reporting, I'm assuming responsibilities and so forth.

You're optimizing for the long term. Generally I think there's a lot of pressures in public companies that cause you to optimize in some instances for short term outcomes, quarterly outcomes that may not be in the best long term interest of the business. When you don't have those quarterly obligations anymore, it's a lot easier to make longer term investments, which is super helpful. And not having that pressure frees you up to do more value added things as well. There are a lot less reporting requirements and there's just less people that are engaged in the decision making process. And count on two hands the number of people who run the company, including the board members. You get to know those people, you get to understand what their risk appetite is and what type of transactions they'll support. And life becomes a lot easier in terms of just engaging and moving transactions quickly. The other thing that can't be underestimated is just the ability to take risk and price risk more appropriately. A large public company, you get certain functional stakeholders who may be more risk adverse than others and we just fail safe more often than not and don't want to take on or wear a risk that could potentially blow up. With a sponsor backed company you can I think more appropriately or properly evaluate that risk and wear it if needed or transfer it to a third party more effectively. You're willing to take on that tail liability that may be attached to it.

It sounds like there's a lot more efficiency, a greater view on balancing the long view around this without that pressure and then faster decision making, you can actually get to make decisions a lot.

Quicker and higher expectations, I would say of deal volume as well. So the whole playbook for sponsors is M and A. That's probably the last piece that I'll say in terms of what's really exciting is man, you are impactful. M and A is critical to a sponsor's growth plans. They need to grow. They need to grow a lot. It's part of how they get the returns that they need to justify the initial investment. And when you run corporate development, you're a key player now. You are core to their value proposition and then getting a good return. So they care a lot about you and the volume that you're bringing and you're having impact, which is nice.

When they say they'll have your head. It kind of means a lot more.

To buy the sword. Die by the sword, my friend.

Let's talk about nuclear submarines. I don't want to jump into it. Then we'll get back onto the M and A stuff. But how is your background coming from the Navy helped you as a corporate development practitioner today?

Man, you wouldn't think it would be applicable, would you? But one of the things that very Quickly, you learn in the nuclear Navy is winging. It doesn't cut it. They like process. They like you to start up the reactor according to the manual. And when things go wrong, they want you to execute the procedure that they've outlined point by point. You don't get to ad lib it. You develop a pretty good appreciation and respect for the power of process. At the same time, the Navy is a little bit different than some of the other armed services. It's a community that's been built up over many years, understanding the isolation of being at sea. So there's also an accommodation for the fact that you can't write a procedure for every potential scenario that you face. So while they do outline a lot of process, they also give you some freedom to adapt that process to unforeseen circumstances. So from a deal context, you understand, from my perspective, in terms of how I apply that to a corporate development world, is process having a good process for execution of diligence and contracting, integration, planning, integration, execution is critical to a good outcome. It also becomes the mechanism by which your organization learns from failure. The way you incorporate lessons learned and you also understand that a rigid process can serve you well. But also you need to be flexible enough to adapt that process to every deal, because every deal is a bit unique, every integration is a little unique. So you need to be flexible enough, but definitely need to understand that process is your friend and you need to embrace.

Awesome. That's a key one. That's a lot to unpack. Our theme around project management today, was there any other key lessons from that experience that ported over?

There are so many, my friend.

Waking up at 4am and getting your day picked off.

Yeah, but organizational learning and process are probably the bigger pieces, right? Learning how to be functional on three to four hours of sleep after three or four months at sea is also a good lesson learned. So you came out of that with a healthy appreciation that any other career you go into, you're going to get more sleep at night and that's kind of helpful. When we work deal hours, you've been there. You get an understanding that you get training for it.

When you say organizational learning, can you walk me through what does that mean to you?

Yeah, absolutely. There's lots of different aspects to this. One is we make mistakes. We all make mistakes. We're never going to be perfect in what we do. Understand that every transaction though, has more downside risk than upside. So you need to be thoughtful about how you go about diligencing all the different phases of a Transaction. The process that you put in place that you are executing should have fairly defined elements to it, from artifacts to aids to people that have cruised the steps of the process. Let's put it that way. The other key aspect is not only do you have process, but you've got professionals that help you execute that process. And those are the project managers that I talk about. Even if you've got a strong process, if you're executing it kind of differently for the whims of the deal leads that you've got, you're opening yourself up to making the same mistakes you've made in the past. The process is there, been based upon and built upon the mistakes you've made. And you tweak it each time you're like, oh, let's not do that again. Oh, we structured this earn out wrong, let's not do that again. Oh, we didn't check PCBA liability last time we looked at a call center. Add in that make sure that we understand we need to look for these types of exposures when we're looking at a firm that's got these characteristics, or make sure that the due diligence checklist contains these items. And so next time we're a little smarter or we get a warning light before we step into the shoes and start wearing that risk. I like the process is super important in making sure that we as an organization don't make the same mistakes again. The next question then is then, how do you make sure that you learn from that and you make the most of that process when you're executing, and that's through the project managers. Make sure that the deal leads execute the process according to how it's designed. And when we deviate from that process, it's with good intention and an overt decision, as opposed to a whimsical one, that the circumstances of the transaction that you're in, maybe it's because you're in a compressed process, an auction process. Maybe it's because the environment or the culture of the country in which you're doing the diligence isn't as open. And the disclosure process, for example, is not historically run the same way as in the US Those deviations need to be done, but you need to be thoughtful about them and just understand the exposure you're taking on when you deviate the process.

Your view on organizational learning so essentially parallel to having a culture of continuous improvement. And then you mentioned the project management role as almost being a pivot point around this, but also owning this process. Talk to me more about that person, who is that person? Where do you find them from the characteristics about it? I think there's misconceptions on this because then there's people like M and A needs more than the project manager and there are certain other attributes that get added on. So what exactly is that?

It's a great point. And one last item, let's go back just a second on the process improvements, because there is another way that you improve the process as well. It's from the feedback when you do the post close reviews. There's an element of the post close review which is also helpful, which is just open polling of participants in the due diligence and integration process on what went right, what went wrong, capturing those learnings and then making sure that the process adapts to accommodate those learnings. So that's probably the one other area and you hit it right on the head. This continuous improvement process. You're always looking for feedback and trying to get better and understanding that it's a continuous process. There's no end game trying to keep getting better and better. The other area, which is probably relevant, especially in light of some of the panel discussions you've had me on and thank you very much for including me in them. My comments come from somebody who's looking to optimize around volume. If you are a low volume shop where you're doing only one or two or maybe three deals a year, then this process might not apply to you. And maybe the deal lead can also wear the role of PM as well. If you're trying to do five, six deals a year, meaning you're also you're probably looking at 10 to 15 deals in a diligence process. Assuming a couple of them fall out either due to findings or you just don't win through the auction process, then this is the process I'm talking about is probably more applicable for you. So back to the PM question. Where do you find these people? These are project management professionals. They're generally people who have managed integrations in the past that are steeped in the operations of your business. More often than not they come from IT simply because if your organization has a PMO project management organization or a Central group where PMs kind of hang out and get tasks to do stuff, whether they're strategic process, strategic projects, or more often than not IT projects, that is a potential source. I find generally the IT PMs don't do well in the role and that they need to have broader exposure to the other functional areas of the organization and if you're fortunate enough to find people who have managed integration work in the past, they're best suited for these types of roles. Heavy operations experience. These are people who get stuff done and then what you do is you bring them into the diligence piece and you teach them the diligence aspects and how a diligence process is run. They actually run that piece as well. And then they as you shift ideally out of diligence into contracting, the diligence team then shifts into pre integration planning phase and they continue to manage that aspect while the corp, dev and legal teams get to work on the contracting piece.

The key thing is get somebody that really knows the business.

Yes.

And to get the cream of the crop is somebody that's got experience integrating into the business.

Yes, that's right. And you can find them. A lot of those people are outsourced already. So if you've managed large scale integrations before, you'll hire externally for kind of that flex capacity. Whether it's one of the big four or some of the other consulting shops that provide project management resources or post merger integration support PMI support. Those people that have some tenure in those organizations would fill that role really well. So even if it's not within your organization, there may be an ability to find folks who have played in your sector or your your industry from the teams or consulting shops that provide PMI support for your industry.

Awesome. So coach one from local coach from PMI.

Yes.

Very easy to execute on LinkedIn these days.

It is, it is, it is. It also gives you the opportunity to rent before you buy. You get some experience with these folks before you bring them on board.

I think that's the biggest thing this industry is missing. Ken, I work in tech and we use upwork all the time. We hire contractors, we try it, it doesn't work. Not a big deal. And I've had two of my key management team that were hired that way. You know, you jump into full time hires, it doesn't work out, it's expensive and it sucks for the other person to make that transition. I think M and A needs it because we just got this like flux capacity that happens. Majority of the organizations deal with. Unless you're on a steady roll up consolidation where like you're at a huge market that's just going to keep growing in terms of your function. It should be there. I don't know. I'm interested in that space. If you ever want to do something, let me know.

You come in one of two flavors. If you're A corp dev person. There's vast majority of corp dev shops out there. They spend 80 to 90% of their time doing PowerPoint decks on strategic projects and about 10 to 20% of their time actually doing something. And then there's another group that spend all their time, they're just deal execution chiefs. And that's what you just do. Deal after deal and you try to get as many done as you possibly can. And that's the latter is where I come from and I find it more fulfilling as well.

That's the right profile to look for when we think about the deal. Just to identify other players. You got your key project management person that could potentially deal depending on your volume. Any other key folks involved as you go approach diligence.

Yes. So as you depending on the volume and depending on your organization's ability to staff or invest in the function. And when I say invest in the function on a run rate basis it really does pale. I know everybody gets all excited about hey listen, you're asking for headcount in a very tight. Everybody's got tight budgets. But truly the investment on a run rate basis, especially given the potential impact of M and A is just not that great. I think generally the corporate dev teams are understaffed and not the investment is just insufficient for the impact that they're looking to achieve. The areas where you see the greatest complexity, if you're doing professional services that's generally going to be around it. And HR adding resources that are specific to those functional areas that speak M and A or speak corporate development can be very helpful whether they're hardlined into the corporate team or dotted line doesn't really matter so much as they are dedicated to M and A. And this actually is the other key element for capturing corporate lessons learned and keeping that knowledge that's gained from a transaction and being able to leverage it for the next deal and the next deal and the next deal. So HR professionals, HR ops, there are so many aspects of HR that are really complex that you're asking almost always to break systems. Because onboarding, bulk onboarding of a bunch of people that are coming over from another company is just not how HR systems are built generally. So transactions almost always cause you to break the system in order to jam people in. Or say you've got a long gated pre close period, say you've got, you're buying a firm and you don't have a legal entity in the area where you're acquiring people and it's an asset deal and not an equity deal. How are you going to hire those people? Who's going to employ them? How are you going to keep paying them? There can be a ton of complexity and you need solutions. You don't want to be reinventing the wheel each and every time with the transaction. So having a professional on the HR side who has seen a lot of deal volume is super valuable. You really don't want to lose them after each transaction and bring up somebody new. If you're at a multinational corporation, then it's even more valuable because you're likely dealing. Depending on where you're doing the deal. This could be your first deal in Colombia or Latin America or in Asia. And that person hasn't done a transaction before. It compares you to an HR professional that can relate to their counterpart in country or in a business unit that has never done a deal. They can guide them through the process and that's super valuable for an impactful for that individual. So the other area though is also it exact same issues, ton of complexity. Navigating the organization can be very difficult. Ensuring you have the right sub functional experts. Do I need an infrastructure person? Is this a business application system? Is this a cybersecurity issue? Making sure you've got the right functional experts deployed in the bead, in the diligence process, on the team and in the integration planning phase that needs to be coordinated. And having one person who works in deal time that has seen a bunch of transactions that understands again how we break systems, that understands. Listen, the assumption here that we're going to reimage their machines is not a good assumption. Don't ever think of that. And here are the three different things that are probably going to go wrong if you do that. Just order the equipment now and get the equipment ready to go, things like that. So you're not relearning them. I would almost guarantee that those are common and I hear them across panels. When I sit on panels and talk to people who work in other industries, everybody agrees those are the things that matter to all of us. And then there's other areas that also matter, depending on your industry. In my new world conversions, getting assets converted off of one platform to another is a big area of complexity. So making sure that you've got resources that have seen transactions that can speak to that expertise is important. If you're in tech, there's other areas that are equally painful that you need to have specialized resources for. Across all of that, how you organize yourself. Honestly, I think a little less important. I think I felt differently about that before. If You're a functional team, a healthy team and you've got good strong leadership. Whether those people dotted or solid line into you don't really care. They're there to help you solve problems and if you lead them properly, the team will be healthy and functional.

I totally agree. What about the lawyers? Would you look at building that as a full time capability?

There is almost always somebody who's got transaction experience on staff in house counsel. There has to be. Right? And they're your partner, they're your closest function within the organization. The attorneys that I've worked with side by side at Aon have been some of my closest friends. I've learned so much from them. We are joined at the hip and is so long as you're a team and you work collaboratively together, you test each other, you push each other and you are humble enough to understand that you need them as much as they need you, then you're going to work really well together and you're going to be very successful. So. So I would argue they're your closest teammates. When it comes to getting transactions done. You always need external counsel just for the arms and legs piece of it. Somebody who's very current on parent state of the art, understands what market is and is licensed to perform law in that jurisdiction. I need those folks. But having in house counselor that understands your risk framework, risk sharing framework and how your organization wears risk and what is comfortable accepting and can think collaboratively with you on solutions for passing risk off or mitigating risk that's uncovered in the diligence process is really helpful, that is critical and you don't need a high volume shop to justify that. These are people who probably in low volume companies are wearing other hats. Whether they're the corporate secretary or they're the corporate attorney in general. They probably have. You've got somebody in there who has deal experience, a transactional attorney in addition to general counsel, who in our world almost always is an ex litigator.

Would you bucket your strategy one as a roll up? I mean would you look at it more as a roll up? We haven't really got into that.

Yeah, kind of part of it's a roll up in that I'm buying things that provide us scale, that do what we do. They're accretive, they're bolt on. So I am buying a bunch of bolt on. So yes, in many ways I am doing a roll up. Any high volume shop though is like that. You're not doing high volume, step out, you're not doing 10 deals in adjacent sectors. A year. That's madness. Maybe one. So hey, listen, I know we need a robo advisor. Can I go buy one? I don't know. We'll figure it out. Maybe we can build it in house better. So we'll figure that piece is still kind of in flight. I'm curious to see how do you reach that corp dev guy or gal who is running a shop and they're the only one and now they got to get a deal done. How do you reach them? How do you create awareness with those folks that there is a way for you to get deals done that is significantly less risky. Then you wing it with hiring your investment banker and trying to get the deal done that way. That there's a better way to get it done that leverages best practice and also is significantly cheaper than doing buy side. I think counsel or the big four is one of the ways you're probably going to creating the awareness through those folks or M and A council in general. The legal team is always looking for continuing end credits. Right. So to the extent you actually scratch that itch, create awareness of the offering in that world, William's done a good job of that for what it's worth. And that creates an awareness of there's a community out there you can lean on. There's actually a solution you can lean on through M and a science to help you execute these deals. When you're in a corp dev world, when you find yourself in a transaction with not enough resources to do it properly or process.

Let's talk about how you run your team. A little practical. Give me the how to's how you do it and then we can just like walk through made up example timeline wise how it would go down.

Listen, from a structure perspective, my team is divided up into three components. I've got some resources deployed on sourcing, resources that are deployed on transaction execution and then resources deployed on integration. So those are kind of the three critical areas. You could say sourcing strategy for some teams. You also see that function rolled in and some corp dev teams are organized as kind of strategy and then transaction execution. So if you're going to be doing a lot of deals, then I think having dedicated sourcing resources is critical. We can go into how you structure all of that a little bit later. But obviously those folks are looking a lot more like sales teams and they have comp plans that look a lot more like a sales comp plan where they're rewarded, getting transactions closed or introducing and then paid on transactions that actually close the Deal team are a bunch of investment bankers, right. Ex investment bankers and analysts who are very experienced in getting transactions over the line. And then my integration leads we've already talked about a typical deal will get engaged in the sourcing timeline. When somebody's reached out, my team has either reached out or somebody's reached out to my sourcing lead and wants to have a conversation. So we get engaged, talk to them about what their objective and start batting around potential solutions to their either succession issues or if they're just looking to get a transaction done, how we might find middle ground. That's good. That's a good outcome for both of us if we get to the point where it's worthy, exploring, get the NDA in place, exchange a preliminary set of data. My deal leads will then get engaged. We'll collect the data from the other side and then we'll build a valuation model based upon some assumptions around how we think this thing would ultimately fold in. Notice right. I'm trying to rely on the expertise of the team. I am not engaging the organization broadly yet because they got a day job and they're working on some pretty critical things that I don't want to disrupt at the moment. So I'd like to leverage the expertise of my own team, both the integration team and the deal execution team, to build an initial hypothesis around how the business would fold in. We socialize that with my boss inside the finance team, make sure that everybody signed off on it, and then we present pricing. If the pricing is acceptable, we'll ink it in a letter of intent. I'm not binding, of course, because there is nothing other than a non binding loi. They may be marketed as binding, but in reality they're always subject to confirmatory diligence. So we're going to get a letter of intent done just so everybody understands what was agreed at the time because memories kind of fade and what was agreed sometimes gets retraded. So letters of intent are always helpful. What isn't helpful is negotiating an SBA and a letter of intent. So I'm not going to talk about indemnities, we're not going to talk about limits of liability, we're not going to talk about a bunch of other items that are going to be predicated basically on what you find during the diligence process. So of course, what I'm talking about right now is a bilateral process. If we're in an auction, I think everybody understands how auctions work. But assuming we're in a bilateral, letter of intent is mainly going to cover basic transaction structure, strategic rationale for the transaction and then cost or value of the organization. And in the wealth management space, which is a little unique, we need to talk about transition assistance for the advisors that are associated with the other broker dealer and how we're going to what value will ascribe and what type of assistance we'll be willing to provide to them for the conversion process after that's done. Listen, it's a standard process, right? Open up a data room, assuming that everything's inked and we'll go through a diligence process. Diligence generally takes kind of four to six weeks, assuming we've got a cooperative seller that's fully advised and has knows how to manage a data room if they're really nervous about the transaction leaking. In professional services worlds, of course, right. Transaction diligence process is really risky to sellers. If the transaction leaks prematurely, their clients or their personnel may get a little wobbly and could walk. And that could cause economic harm to the sellers and impact value of their business. So they're generally going to be pretty tight with who's going to be in the tent and that could generally impact you. That can sometimes impact your time if they don't have enough people in the tent to respond to your data requests. So I say four to six weeks, assuming they got a good number of people in the tent and they're responsive to your data requests.

Have you tried using Deal Room? You could probably compress that timeline with a nice product line for diligence management.

Yes, sure. Yeah. Great product.

What's after that diligence time frame?

After the diligence phase, we're going to shift into contracting and integration planning. So that's when corp dev team gets even more engaged and working hand in hand with the legal team to get the contracting piece done. Generally that takes about four to six weeks. It can go faster, it can go slower. People keep saying, oh my gosh, why in the world does it take that long schedule? That's what takes that long almost always. There's a pretty significant scheduling burden attached to all of these deals and it just takes a while to get through all of that schedules. You're going to make a bunch of reps and warranties around how the business is operated, but there will be exceptions to that. And when you have exceptions, you're going to detail them out, you're going to schedule them. And those schedules, once they get produced, which is a burden need to be reviewed, that will then it's actually a bit of a diligence problem. You promise that the business is operated X and it turns out it's actually X with the exception of the following items. And you find that those items that they're taking exception to are material. Maybe that poses additional risk that you need to wear. Maybe you need to mitigate that. Maybe it's a price chip, maybe it's other. It might open up the negotiations and you might have to adjust the terms that have been agreed, unfortunately. Right. The schedules always come out after the contract is pretty much close to final form and people are tense, people are exhausted, been working pretty hard. Sellers are not of a mindset to down and dusted. They don't really want to negotiate anymore. And it's one of the areas where I think a lot of mistakes are made is in that nth hour when you're doing the schedule reviews and the final turns of the document. There have been some material changes that happen at the nth hour and you just need to be really vigilant. I guess that is where the Navy training pays off. Right. Being comfortable on fairly short hours of sleep and making sure that you're frosty as you get closer to the signing and you're really paying attention to those final edits that are coming back and forth and the schedules that are getting sent across is absolutely critical. Too many mistakes are made then.

Wow, I'm glad you expanded on that. Otherwise somebody would email me and ask me and I won't be able to answer it as well as you did.

Well, the journeys will answer it even better. So I just plan a journey on television.

I'm thinking about creating a series where we do back to back. We have the deal practical experience and employer. Because then you get like a layman explanation, you understand? And then the real like technical. Hello.

No, no, you can't do it back to back. You got to put us side by side. I've got two guys that would love to come on and they would have no problem throwing me under the bus. That is the worst idea I've ever heard of. And here's the real do that.

I'm gonna have you help me set that up because I have not covered enough lawyers so we definitely have room to cover more topics. So we got this part. Are we done with the deal? Are we closed?

No, we're signed. And now becomes the hard part of making sure that you get. Depending on what you're doing, there's a lot of different permutations of what could fall out that either you are. If it's a sign and close you could be closed sign and closes don't happen that often. Almost always there are some pre closing conditions, some conditions that need to be satisfied. CPS conditions, precedent to closing is the shorthand that people just say CP's to close that need to be satisfied before you can get there. Sometimes it's regulatory approval, sometimes it's consents. If you've got a highly regulated industry like the wealth management industry, your entire integration takes place during the pre close period. Because the whole process of closing is the conversion process of moving assets from one platform to another. So there's a great deal of planning and coordination that have to go into custodians of the assets and making sure that you convert those assets in a very methodical manner and a controlled manner so that there's little to no impact to the actual investors that own those assets. It's a highly regulated process and that can take up to four, five, six months to get. So you can have a very long pre close period, you can have a very short or no pre close period. Depends on the circumstances of the deal. I think what people fail to appreciate is that the longer the pre close period, the more risk you're worrying there will be impact onto the business and you have very little recourse even though you try to contract it. Operating pre closing operating covenants on how they're going to operate the business. But the reality is if there's a material degradation in the business, MAE clauses in Delaware, what next you once. And while people say really there's only been one, but the reality is there's been a lot more renegotiations of contracts that could claim an MAE event and that ultimately the terms of the deal were changed to accommodate the change in the business. You don't want.

What is this?

Yeah, material adverse event.

Okay, okay.

Comet strike. Comet comes down to hit the building that you're about to buy. These are really big events that have a material change in the business that occurred during pre close period. These are really big events. So it's not they had a claim that there's they've been sued or there was a sexual harassment lawsuit that was filed or one of their products was not approved by a regulator. This is something even larger than that. So we call them comet strike like events. It's that level of impact and it's so high that in the State of Delaware 11 Mae event has been certified or worked its way through the court system. A true mae. But many events, many contracts have been renegotiated as a result of events. That could be construed as an mae. So purchase agreements have been modified more than once to accommodate significant events that have occurred that could have potentially been MPs. Nevertheless, the more risk you have, the longer the pre close period, the greater the risk to the buyer. You're obligated and you are incentivized to try to minimize that period. And the shorter you make that period, the better.

So you're not always doing sign and close at the same time. Use a variety of reasons you would split it up and also a varying degree of that timeframe. But objectively you want to minimize it as much as possible to, to keep things safe and secure.

The sellers are incentivized, right? They want their money as fast as possible, so they're going to ask you to bear as much risk as possible. In a standard deal, there's only two things that would cause the closing to not occur. At signing regulatory approval on the business. Until the government says or the regulatory body tells you that it's okay for you to own that business, there's no amount of weighting that you simply can't bear that risk. I can't say, hey, I want to close it now, and yeah, I'll bear the regulatory risk attached to that. That doesn't work. The other though, is consents. If a contract that the entity owns has a change of control provision in it, then you're obligated to go get consent from the counterparty that it's okay for you to step into their shoes and not blow up the contract. That is where there's a great deal of question about how much risk do you want to bear? Because if it's a vendor contract and you're more credit worthy than the previous buyer, they're not likely to throw any water on the situation. So do I really need to wait until I get consents from every one of those vendors? Probably not. Landlords are a classic example. I was actually forced one time where the seller absolutely and adamantly required us to go get consents from every single landlord that they had. And it was the worst mistake I've ever made. What a nightmare. I couldn't close until I got all of them done. It was horrific. On the flip side, you've got some contracts that are really, really material that you are not comfortable closing until you get done. And they're not necessarily vendor contracts. And they're more likely key partnership contracts, key business contracts with the largest clients of the company that you're acquiring. You want to make sure that they're along for the ride and they're comfortable with this transaction. So hopefully you've already done those client calls, those customer calls as a whole nother topic on how you tee up the key customer calls prior to signing. You want to make sure you get those done so that you ideally understand what you're walking into. So that is the trade you're getting pushback on a pre closing condition that you desperately want. Where I want to make sure that the top five clients of the business are going to be comfortable with this deal and the sellers are saying absolutely no way in the world are they going to consent to that. The next thing you need to negotiate is I need to talk to them before we sign. That becomes a fairly interesting negotiation about how you heavily script those conversations and who's on the phone, how long, what topics are you going to talk about and when exactly does that happen? And it's generally measured within hours prior to signing. Wow, it's a lot of fun.

That's where the late nights come from. I want to cover with our time integration now. Take the legal hat back off and put the project management one. How do you approach the integration side?

Integration? Listen, the best integration capabilities are the most important. All the work that goes into setting up the deal and getting the transaction closed and when we're sitting at our desks and more often than not, the expression is popping the champagne cork, but more often than not, it feels like putting my head on a pillow. Oh my gosh, we finally got this thing signed, thank God. And you put your head down and you're like, I can now finally take a breath. The reality is you haven't created any value yet for the shareholders. You've merely set the stage for a value creation. The true value creation occurs in the integration when you actually execute. So you've got a plan. A fairly well built plan. The expression of no battle plan survives first contact with the enemy is equally true in an integration. You've got a good plan, but the reality is you don't truly understand exactly the situation. And some variables will change. You'll get some curve balls thrown at you, things will change and you will have new data that comes to light that you didn't know was material before, but as it turns out, actually is material. So you need to be able to adapt. At the same time, you need good governance. Just like you had during the diligence phase and the contracting phase. You need a strong governance process during the integration phase. Steering committees and war rooms work really well. You need a war room and ultimately the process Around a steerco is having a steering committee is probably the most important thing. That and an executive sponsor. The job of the steering committee is to ensure that the integration is executed according to the business case that was originally invested in by the board, authorized by the board or the shareholders or whomever. Any deviations from that are prudent, you will need to make changes. We had an integration once in Netherlands that we were doing where we were going to restructure a business unit and then collapse from three works councils down to one. And what we figured out after we started getting into the integration, that it would be better for us to collapse the works councils from three to one so that we had one team that we could work with to accomplish the restructuring. We didn't realize that at the time, but when we were building the integration plan, but it became evident pretty quickly as we got into the integration that that was the best path forward. Steering committee met, we adjusted the plan, we pivoted and we executed the new plan. Still aligned with the business case, but. But the deviation was fully bought into by all the key stakeholders before we actually did it. The other key item is an executive sponsor. Somebody the proverbial throat to choke on the integration. Somebody has to be passionate, own it, champion it, they got to wear it. In my previous life, it more often than not was the country manager. Whoever was running the country was the most important person in that country and ultimately was the champion of the transaction and would ensure that all the functional resources that were deployed for the benefit of that country were aligned around the integration and executing appropriately. So if there were any red flags or barriers that we needed to pull down, that person would champion the integration and make sure that would ultimately happen. At cetera, we still have champions that own the integration, but the steering committee represents all the key functional areas with the senior leaders present. If you have multiple transactions going that basically has divided its time across the transactions that are in flight and we spend time talking about the areas where we need to either change the plan or where we're having some challenges executing the plan and then we just click through next deal, then the next deal, then the next deal. We've got one solid block of time for the steering committee every week that goes through all of the in flight transactions and it's fairly regimented so that we make the best use of the executive times that are participating in the sterico.

You also have an IMO set up like a dedicated group for managing M and A?

Yeah, we do. We've got a. We've Got a PMO team, but they're primarily around the project, strategic projects and they're more IT focused. I do have a dedicated integration resource. She knows the integration, it feels like better than anybody that we know. She is deeply steeped in the operations of the business and she's a certified dm. She knows exactly what she's doing and more importantly, she scales. So I can throw temporary resources underneath her and she can manage them to accomplish the integrations because she knows how to structure the teams and make sure the right folks are addressing the right problems.

I wanted to go back to this timeline because we're mentioning integration as the most critical part, how you create value. But it sounded like you have integration involved prior to LOI in some capacity.

Not prior to LOI awareness yet. Engagement, no. So I've got a weekly staff meeting and during that we are covering the pipeline and yes, the integration team is present for that because just the way we walk through it, it's any high priority items that we're going through the pipeline, review of kind of in flight deals and diligence efforts and then we're also talking about stuff towards the end on sourcing activity and things that may be coming down the pipe more for awareness. So we're going to be doing an equity deal and that's going to require a bigger lift on the integration side. Getting their input on both transaction structuring and how we might think about pulling that business in if we were able to come to agreement on value. How we do that in the most effective way and what flexibility we might have based upon how we perceive the seller might react to our proposal and negotiating room is important. They're helpful in that regard, but they're not engaged at that point. The corp dev team, the transaction execution team, is really engaged in building the model and with the sellers on both data requests and then ultimately talking about structure and value and see if we can find middle ground. They're aware they're not engaged, but as soon as the LOI is signed then they are engaged. The same team that is ultimately going to manage the integration, they're engaged way up front. When we start building the diligence and staffing the diligence teams and ultimately building.

That pre integration, then PLO is you legal? Hr?

No, just us. Us and legal for the most part. We'll engage the integration team to help us transaction structure.

Okay. And then get LOI signed then game.

Time, then it's game time. Yeah. Understand if you're looking at a lot of deals, you're Trying to minimize impact on the organization of transactions that are unlikely to close. And every deal pre loi is unlikely to close. So I really don't want to impact the organization and I want to keep them out of it until we get something that's probably. And if you can find agreement around value then it's probable. You're a big step up in terms of likelihood of the transaction to close. Keeping the organization shielded from pre LOI activity is pretty imperative to making sure that you're making best use of everybody else's time.

I was just talking to ICE mortgage technology. So Ellie may before. So $14 million business line got acquired by ICE. Now the way that deal was sourced was they're essentially bidding on the same target. Afterwards it sort of cards open up and it was them two and the third party got it. So then they looked at Ellie and hey, you're part of the strategic strategy that we're going for anyways. Why don't we just acquire you? So already lined up, it was sourced and then they added the bankers $40 million in deal fees on the buy side. And I was like what'd they do? Nothing, nothing. Just slapped logos on that. Was it like. And he runs integration. And I was like, that's the thing. Why isn't there a service that is helping with integration strategy? And my view around the integration strategy part and even when you move into integration planning is if you do planning right, you'll inherently discover a lot of the diligence items from that.

That's number one mistake. There's no separation. I draw lines just for the discussion. When you send over the diligence request items, right? The diligence request items are the same things you need for the integration planning and the people building the pre integration plan are the same people doing the diligence. It's as there isn't like a switch that goes okay everybody, we're now in integration.

I know. So you use the same, you're using the same resources.

It just continues on.

But so you have the same team members working on both.

You need to start earlier. So the people that are hired to do integration, almost not a lot of.

People, not all people are doing it that way. They definitely have a full on handoff. Okay, so your process, you have your integration people are doing your diligence.

Yeah, my diligence people, the functional leaders that own the risk attached to the transaction that I'm asking to assess the risk. In my world, diligence has three functions. Discover undisclosed liabilities that aren't represented on the balance sheet that could be there through operations, through how they're operating the business or how they've operated the business in the past. Generally those are the biggest ways that those undisclosed liabilities arise. The other is validating synergies and the timing attached to those. And the third is integration. The integration plan determines not only cost necessary, the cost that'll be needed to bring on board the entity, but more importantly the timing attached to when the synergies can be achieved. I can't tell you what the timing until I have the plan. So I got to do all three of those. That is the purpose of diligence. So you've got to do all of that. The functional leaders own the diligence. If that plan isn't compliant, if I've got banding problems, all of that you own right now, build the plan to fix it.

Your functionalities are contributing to the integration plan. Where does your integration lead fall into that mix? Because shouldn't he be part of that?

In terms of they are driving the bus. They're the ones who are actively managing the process of what do you think they actually push back as well? I don't think this is the right answer. Or have you thought about X, Y or Z? Hey, last time we did this, the following happened and it didn't work well. So they're pushing back on the plans and pressure testing them from the functional leaders. But they're the ones in the center aggregating, setting deadlines, providing templates, meeting with them on one on one to drive resolution of outstanding issues. They're the ones that are coordinating all the diligence meetings and the war room. When we get into really complicated deals, a daily war room is helpful. Just hey, we're going to have a standing time open from 10 to 11. Here's the zoom. If you've got a question, click on this, come into the war room, we'll chat about it. Otherwise, don't worry about it. There's lots of different ways to manage that, but the process of disclosure, evaluation, remediation and then supplemental data that may be needed to validate your solution or further clarify the liability, that's just a cycle that just kind of runs the.

Way you describe it is a good best practice. Like there's a lot of stuff we compile and put together because that's not what happens. One of the biggest solutions that we sell, Ken, is most of the time it's project, the planning is off to the side, it's owned by the integration lead. It doesn't happen Till like closer to close. And it's a scramble at best because that person is just literally trying to get caught up to speed. All this diligent stuff has gone on and we basically showed them here's a sandbox where you can do your whole diligence process with the counterparty in the same sandbox and do it real time. Check boxes off, keep things in priority, but create a separate work stream that runs in parallel to that diligence process. So integration planning starts like what you described at loi and it's clearly visible you can copy an integration plan. Boom, boom, boom. That's what we sell is like enabling that to happen. Most people are not doing that.

That's music to my ears. You're telling me basically you're selling a product which I self discovered myself as the right process.

I actually like the way you explain it as here's the functional lead and this is what they should own. I actually want to steal that from you. I'll credit free from time to time.

That's fine.

Just one thought I was curious about was how much of your deals are banked versus proprietary.

Great question. We're fortunate the majority of our deals are proprietary, they're bilateral.

I liked how you called it a fortunate thing.

Oh, it's definitely fortunate, right? Think about it. The biggest risk of any transaction is culture. Culture eats strategy for breakfast, the most strategic deal on the planet. If you've got cultural mismatch, it's a doa, it's just not going to work. But. But if you're in a bilateral, you get a lot of time with the other side, maybe you've got exposure to them before. If you know the people and know the organization and you've got a 20 year working relationship with the seller founder, the key management team members, then that's a different story altogether. But if this is something new that's come across, that's approached you with an idea and you can engage them in a bilateral and you can spend a lot of time with them, it helps you assess culture. If you're running a process and this is the first time you're meeting, you get what you get a management presentation for four hours and then maybe a couple one on ones and a few other potential discussions. Come on. Four hours, that's total kabuki theater, man. I can convince you. I'm Scottish for four hours. This make any sense at all?

So glad you said that. I was just on another podcast and I had to let that point out that it's like any fundamental decision if you make a quick, impulsive decision, there's a higher probability it's going to be a bad decision versus if you really use time as your friend and take all this information and put the consideration in.

He's on. At Aon, I was really proud of the work we did together as a team. The HR organization, us, we actually built a tool to assess culture in an analytic way.

Wow.

And it wasn't a website that we directed everybody towards. And I'll give McKinsey credit, one of the partners there opened my eyes to the fact that potentially we could measure it. And then we went through the pain and suffering of actually building a tool to do that. It turned out better than expected because what we didn't want to do is create a new exercise that we had to put in place. The first iteration was what we want to do is direct all of their people to this website and fill out the following questionnaire. Is that really practical? There is an NDA in place. Most of the people in the organization aren't aware that you're going through a transaction and asking them to fill out this cultural questionnaire isn't really practical. So what can we do? And what we figured out was listen through the diligence process. You're likely engaging with a lot of different one on ones and different interactions with different people through the organization. And there are other artifacts that you're requesting that speak to employee handbook. How they make decisions, what their benefit plan look like, how they promote hiring practices, how they make strategic decisions, the engagement. When you're talking to the IT lead, their cio, what decision making authority do they have, how do they plan, how do they make decisions? You can gather a lot of data. You actually are gathering a whole bunch of data that is applicable to culture already. So what you need to do though is just gather that data, evaluate it with an eye towards what does this say about culture. And so what we did is we did that, we went through, we developed the tool, we execute that tool on the target that we're acquiring. But then we also executed it on ourselves because while we were at Aon, at least we were very culture driven and we had a strong central culture around the organization. There were regional variances. Aon Brazil isn't exactly like Aon the US which is Aon France or the uk. So you wanted to make sure that you understood the culture of the company that you're integrating into. End objective wasn't to say what is a good deal and what deals should we walk away from. It was really More with an eye towards, hey, these are the areas of where friction is going to arise. Be sensitive to it and build the integration plan with that knowledge so that you accommodate the cultural differences between the two organizations. In some instances, yeah, I raised my hand. I said, I really think this is a bad idea. Small deals integrating into a specific country. And if the best seller's culture was that different from our own, sometimes you do raise your hand and say, economics aside, I think this is a really horrible idea. This will not integrate well. This will be disruptive. This will cause more problems than we envision. And more often than not, that's exactly what happens. And it's not because I'm really good. Not at all. It's just culture is that important. If you see cultural conflict, good economics aren't going to overcome that. But also being aware of how they make decisions, how your target allocates authority that needs to be incorporated into your integration plan.

Yeah, there's a lot you can understand and mitigate with cultural difference, but then there's eventually a threshold where it's probably better off walking away. And I guess tying back to the prior point that the more time you have on your timeline, your deal to put consideration towards this part is probably going to lend to higher likeliness of success versus being on a very compressed process.

That is correct. Time is the seller's friend. It is not a buyer's friend. You like time, right? The more time you can spend with them, the better you understand the risk risks you're about to step into and plan accordingly or price accordingly.

What's the craziest thing you've seen in M and A?

Seen some wacky things I saw not in the US Fraud being advertised in a SIM as a performa adjustment. In a previous world, fiduciary cash is client money and you need to be treated accordingly. In almost every country you're not allowed to use that for operations. And the sellers were requesting for a perform adjustment for client monies that they were retaining without telling the client. Their argument was it's practice, normal practice in their industry. And talked with our team and they said no, that's called fraud and that's a problem. So needless to say, did not go through with that transaction and then actually had to go through pretty detailed analysis with our legal team to understand what our obligations were after that we uncovered that.

Wow. Yeah, that's pretty crazy. Definitely on the crazier side, it sounds like there's more conversations to have. I like the idea of picking a topic and having corp dev legal perspective. I think that'd be fun.

I think it'd be a blast. You've got some great corporate development professionals in your network and having them on with council that they've done multiple deals with, especially in house counsels that they may not be both at the same firm, ideally any longer, where they can talk freely about their previous transactions. I think that'd be an absolute blast.

We have our next summit February 23rd or somewhere. Before or after we'll do a session.

Yeah, that'd be great.

I'm counting on you to find the counterpart on the legal side.

I got two guys for you.

We'll let them debate and pick one. We'll start there. I like the idea. Let's do it.

Thank you so much for having me on, man. This has been a blast.

Hey, thanks. And 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 thank you again for listening to M and A Science. See you next time. 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.