How to Successfully Build a Corporate Development Function

I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Hi, I'm here with Nichelle Maynard Elliott. Nichelle is a public company board member and corporate deal maker with over 20 years of M and a business development and strategic partnership experience. She's a highly experienced corporate executive focusing on mergers and acquisitions. Today we're going to focus our conversation on how to successfully build a corporate development function from scratch. How are you doing today Nichelle?

Great, Kisan. Thanks so much for having me. I'm looking forward to our conversation.

Same here. This is an exciting topic. I know your experience. I've seen presentations you've done about this topic of building out a corp dev function and you've worked with boards in building out their corporate development function. Nichelle, can you tell me specifically how you work with companies to build out their corporate development function?

Sure. And it's funny because the first time I was asked to do it was really just again a networking situation. A friend who was a general counsel of a company said her team was looking at building Corp dev function. Could I just come and talk to the senior team? And what was initially just going to be a sit down conversation, I was able to put some slides together and I said there's a method to this and there's a way to do this. So I am absolutely happy to meet with senior teams and available to talk about what putting together a function looks like. Consulting on various people you might add to the team. It's definitely something that I have interest and I enjoy doing and am available if people need someone to just sort of talk about what it's like to put a team together.

When should an organization consider building out a corporate development function? Is there a benchmark in terms of transaction or revenue size?

There are a number of factors to consider here and I think it really depends on the company's growth strategy and whether or not M and A is part of that growth strategy. If it is, then a company needs to look at the number of transactions they would be doing annually based on their size, based on the company's internal resources to kind of determine if they want to do things with external bankers or if they're ready to really a corporate function internally.

Is there a certain amount of deals maybe they would start looking at before they consider it?

It really depends on the size of a company. So if a company is a few hundred million in Revenues, maybe it's a half a dozen deals, but if it's a billion or more, if you're doing a deal a month, it really depends on the size of the company, the size of the transactions. If they've got some sort of roll up strategy in their mom and pop businesses in the industry that they can move pretty quickly on, it honestly depends on the size of and the size of the transactions they're going to do. I would think more than a half a dozen deals to be completed annually, start to finish, might start looking like you need a corporate function.

Wow. Okay. Walk me through what to consider when building out an acquisition plan.

You start to think about what the targets might be if you're going to specialize in a certain industry. What's available for targets? Whether you have salespeople or folks internally that are going to be able to help you with your deal sourcing or just kind of targeting things on your own. If you're in a type of industry where there are a small number of players and you're going to use investment bankers who are going to bring deals into you, I think you really have to look what your sources are to start and then how you want to execute on any deals that you have.

Is there a specific way to sort of determine what sources you want to rely on between internal building, a direct origination process versus relying on bankers?

In my experience, we had done all of the above. If you've got a salesforce or an external facing operating team that really knows the market or the industry well and has relationships, it's always a good idea to be listening to those folks and taking those. In my last corporate function, I was in an oligopoly, so it really was a small number of very big players and then a lot of mom and pop opportunities to roll up. So a lot of times the targets came to us because they knew that we would be the right people to acquire or they wanted to, they wanted us on the short list of potential buyers. And then finally, if you've got relationships with investment banks, that's always worth listening to what the banks have to say. And if they know what your strategy is, then that's great. If you work with a few bankers that know your strategy and they know what you're looking for, that's great. Otherwise you just kind of review what comes in. If you don't have those resources and you're really more outward focused, then you might be actually looking for deals on your own.

That makes sense. A lot of it really relies on the landscape of the industry itself.

Exactly right.

What are the initial conversations that should be had when considering a corporate development function and who should be involved?

It's really a combination. Obviously your CEO would be involved. If there's a strategy function separate and apart from, again, depending on the size of the company, a strategy function that manages organic growth versus growth by acquisition. You absolutely need to have your finance team involved. Your CFO and a key stakeholder will also be the legal team, the legal department. So you need to understand how your deals are going to be supported by the legal team. If that's internal or if that's external. If you've got people in your law department who have transaction expertise, then you would use those as well. So really a common combination of the CEO finance strategy and legal, I think are the best folks to speak to.

What advice would you give to an organization deciding the size of their corp dev function? Is there a good metric to follow when considering the scope?

You want to determine first how the internal group is going to function. And as I mentioned before, you're going to determine how much you want to outsource versus bringing in good internal resources, bringing folks in house. You've got all kinds of deal sourcing consultants, investment bankers, those who will do work for a fee. If your company warrants an internal function, it's just going to be more cost effective for you to bring in a couple of resources. If you can function relatively leanly, that's sometimes a better bet than doing your outsourcing work. And then I think another question is really to determine how the team is going to be staffed. My experience, my company was very lean, so we did things with a very small group and we did as much in house as as we could. We found that to be most cost effective. And what you have to be careful of is that the M and A cycle can sometimes ebb and flow. So there will be times where you'll have plenty of deals or there are a lot of things that you're looking at and then times where things are a little quiet and you've got to kind of staff your group appropriately. So people are always busy and not kind of sitting around waiting for the next deal to happen.

Gotcha. And then what would be the right way to start building that corp dev team? And I've always been curious about this in terms of what are the right mix of backgrounds to get going.

It really is a combination of finance and legal. You'll see that a lot of corp dev heads either have finance experience or have legal experience. And I Myself came from a legal background. We found that our team functioned best when we had someone who had legal expertise, someone who had sort of standard finance expertise, maybe even bringing in house investment back that have worked for you on prior deals because not only do sort of they know the analyst work that needs to be done or valuation and models, but they may have some understanding of your industry which is also helpful really a combination of your finance professional, your transaction lawyers, your investment banker types.

What are your thoughts like promoting internally versus sourcing externally?

I think that a combination of both is good and again it depends on the culture of your company. So we did a lot of internal hiring and what was interesting and you can. This is kind of a two edged sword. Right. The positive is you're going to have people who have, who understand the industry, who have operational expertise. So when it comes to things like diligencing target, they're really going to know how the target should function and where the these sort of the holes are or the spaces are that you need to fill in. The other thing is really whether you're going to have kind of long term professionals versus rotational type opportunities. Sometimes the perception in a company is that M and A is quote unquote sexy. So therefore a lot of people can be banging down the door asking to be, you know, I want to have a rotation through M and A. They may or may not have kind of the background they need and they may also need more time to get up to speed, which may not be time that you have, especially if you're very active in M and A. I think you can have a combination of people who are internal because there's merit to being homegrown. But you should also have some external bankers because they might bring just a different perspective or a different and more current expertise.

Yeah, I think particularly with negotiating, it seems like that's kind of where they add a lot of value in terms of keeping up with the current trends.

Absolutely.

What are the best practices for hiring an effective team?

Strong analytics are key and negotiating skills are paramount. And not only people who are great negotiators from a base perspective, but also know that the again the culture of your company and what kinds of things, you know, gives and takes you're willing to deal with in the negotiating space. And really an understanding of the business of the industry, do they fit with your organizational culture? There are a lot of companies that are higher risk takers and then there are a lot of companies that are very conservatives. The same corp dev professional who happens to be conservative in a Very high risk taking environment is not going to work and vice versa. If you're someone who takes a lot of risk and you're in an environment where people really don't want to take that kind of risk, that could backfire, right?

That makes a lot of sense. So there needs to be a cultural fit there, right? How should the operational structure be considered? What unique organizational characteristics should be included in this consideration?

So this is an interesting question that I did some reading on a couple of years ago. I think it makes sense to assess this. So you can have a couple of different structures, right? You can have corp dev person who reports directly to the CEO. And as long as the CEO has a manageable team of senior execs that report to him or her, that's probably the best place for it to be because the CEO knows and understands the strategy and will be less likely to have concerns that might be conflicts of interest as compared to reporting to the cfo, for example. And there are a lot of companies that have structures where the head of M and A reports to the cfo and there's logic to it, because obviously it's under finances is a heavy consideration. What are our resources to buy and sell? The challenge there, the potential issue is that the CFO may have conflicts of interest because he or she is looking specifically at do we want to spend money in this area or do we want to spend money in something else? And they may not always have the broader view of things. And I think the other area where corp dev can sit is in the strategy function and that makes a lot of sense as well. So sometimes people will have teams of where the corp dev person both has expertise or oversight for mergers and acquisition, but also has expertise in the area of organic growth, different kinds of greenfield.

Opportunities, what about the structure, or maybe more of a approval process of doing the deals and creating these sort of checks and balances to prevent the CEO from catching deal fever and just going on an acquisition spree.

You want to have limits of authority that are absolutely in place. So you don't get to a situation where a CEO can make a unilateral decision on whether this particular acquisition is the best opportunity for the company. So I think it starts as far back as analyzing the deal, the potential for growth and financing, and what your rate of return is based on the modeling that you've done. So there's an agreed understanding in the company that we don't do deals with a rate of return that's less than X percentage, for example, and that rate of Return would be derived based on what kind of standard rate of return might be for your market or for your industry. Right. You're going to look at all kinds of metrics, like what's the EBITDA of this company? What do you think you can do in terms of synergies, how you think you can improve the company? So there's kind of a base level of. Here are the metrics we use to determine whether a deal even rises to be approved. Right. And then based on the size of the deal, you would have maybe an executive team of people, including the CEO and the cfo, who review deals and can decide, okay, it looks like it meets our metrics, it falls within our metrics, so we can move forward. Then once the deals rise to a level of dollar value, for example, a potential purchase price, if it's over X, then it has to be approved by the CEO, the cfo, the general counsel. If it's over Y, it has to be approved by the CE and the board. So that's really how you set up your limits of authority to make sure that more than one set of eyes is reviewing the deal and making the decision.

It's important to have that.

Yeah.

Can you tell me about bringing in specialists to validate assumptions and organizing your team by functional experts?

It's important to bring in specialists, particularly if you're looking at targets that are in maybe an adjacent space. If you're the type of company that has kind of deep core knowledge, you probably have your experts that are internal. If you're looking at an adjacent space or something new or different, there's certainly merit in bringing in specialists who may know a little bit more about that particular area that you're going into. They might help with the diligence process. There may be something quirky about sort of the financial structure or inner workings of a company where you might need financial experts that might help. Or it's just the deal is large. If it is a transformational deal or it's something much bigger than you've done before and you want to kind of kick the tires on, you know, these are what our internal models generate. Let's compare that to what investment bankers generate, for example. I think that's really helpful then organizing your team by functional experts. Again, depends on how large your team is going to be. I mean, our team was relatively small for a company that was, you know, 11 billion in revenues. There were really, at any given time, three of us, including the head of corp dev, three or four who were in the core corporate function Our assignments were really based more on availability than necessarily on functional expertise. We all were jacks of all trades, if that makes sense. So, but you may, if depending on your function, if you have something that is integration is something that's managed at the corporate level rather than at the business level, clearly that would be an area where you would have functional expertise internally. That would make sense to kind of separate maybe your integration teams from your actual deal kind of transaction teams and getting the deal to the finish line.

Yeah, I mean, is that common where it's separated? I feel like I've seen more and more of them, companies combining corp dev and integration.

I've seen it both ways. I've seen integration as a subset of the corp dev team. And then there are people on the team who manage the integration exclusively. They kind of come in maybe towards the end of the negotiation of the deal. I mean, they need to be involved in the diligence process to a certain extent because they have to get up to speed and what it is that they're integrating, but they may not actually be the same folks who are negotiating the deal to get it to closing.

Gotcha. And I think that's the value of building that partnership between integration and corp dev. And I think you mentioned even having as the subset part of the team.

Absolutely.

What's corp dev roles with divestitures and also in terms of working with joint ventures and alliances as well?

Yeah, I mean, I think it makes a lot of sense because in a company's life cycle you may actually buy the same assets. So it's good to have the institutional knowledge of what it was you acquired when you acquired, why you acquired, what you've been able to do to improve that business and improve the value. Because that speaks to what you can get for the business on the market when you're trying to divest it. So it makes sense to me that acquisition and divestitures go hand in hand and should be managed by the same people. Kind of a different skill set, but by the same, slightly different. But by the same token, if you know what you're looking for in a target and how to diligence, a target that informs how you prepare diligence for an entity that you're or a business you're going to divest, number one, JVs and alliances. I think it also makes sense to use corp dev because JVs will eventually have some sort of exit structure that's negotiated in the documentation. So you'll need to bring the corp dev people along at that point anyway, because if the exit strategy is that you've got to buy this company out or if there's some sort of kind of earn out potential or some end point, it just makes sense for corp dev to understand that at the time that the parties come together so that it'll be helpful once one or the other party decides that they're no longer interested in the venture. Alliance is also similar to joint ventures because sometimes those are spaces where you found another entity and there's some work you can do together and do better together. And they could be potential targets down the line or they might be potential buyers for some asset that you have down the line. So it all makes sense to have those within the corp dev function so.

They can start building some of these partnerships out. That could potentially lead to M and A down the road, which probably makes more sense for them to.

Absolutely.

What are some of the largest mistakes companies make when building out an M and A function and how can these be avoided?

A potential mistake is having a one sided experience. So we talked about the benefit of having strong finance, but also having strong legal and negotiating and strong operational input because that gives you a more holistic view of any transaction that you're doing. If for whatever reason, you have a team that is, let's say, heavily finance based, they may look at the numbers and have an analysis of the numbers, but not understand how that works from an operational perspective, what flexibility they might have or how they can negotiate, you know, sort of what the legal landscape might be. So I think the challenge is having a team that's really too heavily focused on one area. You might also have a team that's for example, all lawyers that don't and you won't typically have this. But the function, the focus is not as much on the numbers and whether the projections that a target is giving you are realistic or can be met. And then you could fall into some problems there. The goal is really to have just a broad area of expertise so that you have a couple of different diverse opinions and views on the deal.

I strongly agree with your perspective on diversity. Makes a lot of sense. What advice can you lend practitioners tasked with developing such a function?

One of the first steps is really to look at similarly situated companies. Understand best practices that other companies may be employing in your space. When you think about some of your competitors even do they have a corp dev function, what size is their corp dev function? Particularly companies that you admire and you think that they're doing well in the space, then that might be a place to start to build a team and then I think it's also important to be flexible and build in the capacity to be nimble. So if you're looking at, you know, we're in a roll up phase, we're going to be acquiring a lot of entities. We're not really thinking about divestitures right now. You might be looking at people who are purely buy side experts, but you have to look down the line. Will there be an opportunity or will there be a time where we're looking to divest non core assets? Understand the landscape of your market and your industry. What are the opportunities for acquisitions? Are you looking at doing things that are just regional or within the United States? Are you looking to expand globally? Are cultures different? Is the way people negotiate different in different countries and do you need to take those things into account? So does your strategy differ by geography? Are there other greenfield opportunities that are more appropriate and in what situations? So you always have to be considering that. Do you need to buy IP and then you need expertise in buying intellectual property or technology for your next growth opportunity. All those are kind of places that you can be thinking about how you're going to build out your team.

Yeah, sounds like it's really key to define your strategy.

Absolutely.

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

I've thought about this and the lawyer in me, as you can imagine, is trained to forget the craziest things because they're not things that you can share. But I think one thing that comes to mind, really, and I touched on it in the previous question, is how different cultures negotiate deals differently. And an example, there would be a transaction that we did where we were looking to sell a business and it was actually an auction. We had a number of bids that came in and most of the bids kind of centered around what looked to be a reasonable number. And then we had just an outlier that was maybe 3, 2 to 3x the kind of average bid that we were getting. And they had a whole explanation for why they were looking at this number. And I think we were led astray by that and came to understand later that it was really more from a cultural perspective the way they bid on a deal in this different geography, they sort of throw out the highest number just to stay in the game. And then when it came to actually kind of getting down to narrowing to a smaller group of bidders, you want that number in there because it looks like a great number. And if we could actually get somebody to pay that, then we've done a Good thing here. Only to find out that in their second or third round, then they've cut their bid to even below what the average was. So that was the craziest and the sort of most frustrating type of deals I've worked on. And then in subsequent deals, once I saw it, I was able to identify it, you know. Okay. In this particular culture, they don't bid on deals the way we would customarily expect to see here in the United States, which is it's either some sort of multiple revenues or it's some discounted cash flow analysis. They're just sort of throwing out something that they can present with a relatively straight face without any expectation that that's really what they're going to bid or pay for.

I'd want to take that buyer back in the backyard with a stick.

Oh, absolutely. Especially after you've presented it to your CEO and your CFO as a legitimate bid. Everybody's going to the back shed on that.

That's a really interesting perspective. Anything else you'd like to share, Nichelle, or any thoughts you think we haven't covered or should cover?

I'm not thinking of anything that we've missed. I do think that it's really exciting to be in a company that is at the beginning stages of putting together a team because it kind of speaks to the life cycle of the company and it means that you've got hopefully a lot of growth and opportunity ahead of you. I know people who do this type of work. Most people who do this type of work are kind of deal junkies. We really love the transaction, love the process, you know, enjoy it. Not everything is going to work. Sometimes you might hire the wrong team member and that doesn't work for whatever reason. Or sometimes you might need to change strategy or the market changes and you need to do things differently. I think just have a good time with it. If I were giving some advice. Right. Sometimes you got to call your banker. Sometimes you have to know when you've exhausted the expertise that you have internally. So that's another tip. But other than that, really just have fun with it.

Great. So we'll put your contact in the show notes if anybody wants to reach out to Nichelle. I really appreciate you taking the time to have a conversation with me today.

Great. Thanks, Kisan. I enjoyed it. I really think it's a great opportunity for companies and a great time to be considering this.

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