Lessons from the Trenches: Mastering Tech M&A, Integration, and Carve-Out Strategies Part 2

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Scientists welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. If you're interested in learning more about how to optimize your M and A practice, or want to get involved with our community of forward thinking M and a practitioners, visit mascience.com and subscribe to our free weekly newsletter. You want to keep up with us on the go, head over to LinkedIn and follow MNA Science. Welcome back to the MNA Science Podcast. I'm your host, Kisan Patel. Today we're back for the second part of our two part interview with Dr. Amit Manga, founder and CEO of Sarah Point. You haven't listened to part one yet. I encourage you to check it out below in the show notes in the second part. Today we're shifting gears to explore software valuation trends, the challenges of structuring carve outs and strategies for managing deals with difficult CEOs. Let's jump into part two. I gotta ask you, in software, I've almost seen this trend of going from Ebitda multiplier to just revenue multiplier.

Yeah.

What are your thoughts on that?

It's a combination. Now, to be honest, it should be A combination. It's a combination. It has to pass the smell test for the margin profiles at the gross margin level, at the OPEX level, at the net income level, the EBITDA level, and then from that point onwards. The reason you sometimes jump into an EV to sales kind of multiple or price to sales multiple is because you're still investing in growth. At that point you got to say, am I getting the return on my investment dollars? It's like that's the part people start missing because, okay, I launched a new product. Excellent. That's the reason I'm not profitable this year. Okay, when did you launch the product? I launched it in end of Q1 calendar Q1 of this year. We are one year out. How many of them have you sold? You need to start kind of saying, is the execution working or is it not working? The other ones I've seen, and this is, I roll my eyes. Oh, we're growing 50%, 100% year over year. How much of that is organic? Oh, no, we were just acquiring companies.

You see that a lot, public and private.

Yeah. Guys, have you integrated them? No, we have not integrated them. Just by going on their website, you have competing products. It's like, yeah, we just haven't had a chance to look into that stuff. You see that as well. So I'm not going to give you a premium multiple on sales if all your growth is inorganic. If you are like, it's word of mouth, you land and expand like crazy. I'll give you that multiple. I'll give you that premium multiple and I will, I call it, I will inform that with all other metrics in your space.

It gets blurry when a company's acquisitive because a lot of times there isn't that transparency of what business lines are organic growth and the newly acquired. Do you get to that?

You have to model it sometimes. This is where if you have an advisor, you basically can go to the banker and say, hey, listen, I need to understand, why is this company so profitable all of a sudden? Guess what? I've seen softwares where we actually have added payments as part of this. So now we get 2 1/2% of transaction FE and it's all going to the bottom line. Oh, okay, so wait a minute. Yeah, you're right. Your customer base is shrinking. You've just added this piece and it looks as if you're growing more profitably now and so on. But your overall strategy is actually not stable right now. So it's like, okay, I'll take that piece out. Tell me, are you going to add more logos? Are you going to expand? Have you like maxed out your Tamil? There's only X percentage of companies that will use your software. Have you gotten all of them now? So you have to start looking at.

That stuff that was in the details. The thing we really distinguish is the mindset between venture capital and private equity. When I talk about just pure revenue based investments, pretty much a VC mindset, they want to see some key metrics in terms of the growth and those factors. We look at private equity, there's so much around the bottom line. Profitability and a lot of time the EBITDA is even a bigger factor, especially as you go upstream. And that's when you start getting into some of these scenarios where you're doing some artificial things to drive those margins up.

Exactly. VCs have done a great job in terms of funding innovation. Without that asset class, you won't have.

Some great hopeful investments. Have done a lot of great things for this country.

Exactly. At the end of the day, if you're looking at a long term viability of a company, you need to figure out how do you run it profitably over time. It's very important to differentiate that early on in the process. You don't have to worry about profitability obviously at the seed stage or series A stage or series B. But the moment you're moving towards the next round, which could be a growth round for the company, where the cap table is being cleaned up as in the early investors are getting out at a 10x or a 5x in less than 10 years or whatever the timeframe is. Anyone who comes in now wants to see the financial viability of this company as a standalone company without raising extra cash for funding their existing operations. Now you may need to raise cash to acquire companies or fund other growth initiatives, but it's on a steady state now. Can it survive? Because the risk capital has done its part and now you're here.

Those days are gone of actually buying a business that can stand on its own after the deal's done and you've stacked enough debt on it.

Yeah. The good thing is the people who are providing debt, they do their own homework. They look at company's ability to pay the interest and pay down the debt and things like that. So it's actually nice to have debt on the table because that adds just another level of due diligence. What you don't want to do is have a very a debt with a very high kind of interest rate or.

I was going to ask you like who's lending on software deals? Because one software, I feel like traditional banks don't like doing those deals in general. They want hard assets, they want buildings and factories. We got this huge emerging cash based funds out there, funds that lend on your cash flow at their high interest. They're all like 16 plus percentage.

There's a category of what they call venture debt, which is upcoming asset class, if you will. It's maturing now.

What are the rates on that?

Rates could be all over the place. It could be prime plus, 2, 3, 4.

It's not too bad.

Yeah.

Plus is a good sign.

Yeah. And it again depends on the risk profile of the company. So that's the way you have to look at it. The company has to have decent amount of equity on their balance sheet. It has to. At least what I've seen in software is recurring revenue. So you will get basically lent on a turn of recurring revenue, for example, because they can see that the company can actually pay based on that recurring revenue piece and then the equity piece has to be on top of that. But that market is maturing in Canada for sure.

I know, in the US versus bottom line tax return figure.

Exactly. Yeah. Because a lot of these companies at the early stage are still EBITDA break even or negative. So if I can see the recurring revenue piece, if I can map that out, okay, this is over the next 12 months, 24 months, 36 months, depending on the end markets, depending on the sector, depending on the quality of revenues, depending on the size of the contract and depending on what their balance sheet is. So if you just raised $50 million and you have a decent recurring revenue base, you will be able to access debt as part of that good thing.

You ever had to convince someone to sell their company?

Yes. Someone who was, without going into too much detail, a client of a bank, wealth management. And you basically sit down with them and say, listen, what's your succession plan? The longest time the person was grooming his kids to take over the business and then you say, listen, they're not interested. One guy is doing this and the other person is doing that. We also believe that you don't want to miss the window because what you don't want to happen is you slowly start to pulling back and then it's actually value erosion. So you want to do it when you're still in the game, you're talking to customers, you're visiting them. So yes, at that time you say, listen, think of this from just personal wealth management perspective. And then also look at your age, you are at a point where you want to enjoy. This is when you have to do it. It's very tough because people always think you have, if I could do another more, five more years, the value will be 100 million or 300 million or something like that. People don't want to leave money on the table.

The right time to sell, that's where you're selling on is, is this the right time to sell?

The best thing is actually rather than trying to convince them, say hey, this is where the trust model comes in. Do you want me, you give me the permission to just like casually socialize with some of these potential buyers of how much they will pay for the company. That's another way of looking at it. You will have your permission. And if you're the trusted advisor, it's like Amit, you know what, actually go for it. Not even signing the engagement letter because there's a level of trust. And then I say, you know what, actually I talked to five guys, three of them are willing to offer do I have your permission to now share the numbers? And at that point you want to sign the letter. So now you've signed the letter and what I want to do is just have a high level teaser with just a high level numbers and tell people like hey listen, why don't you give me IOI indication of interest. Where would you land on something like this? And that's the other thing. It's not a spray and pray approach. This is not sending off 500 teasers. This is a very targeted approach to people you think will give the most value for the company. So that's another value an investment banker brings to this. You actually call it targeted outreach. A very targeted outreach. A combination of strategics, combination of private equity guys who may have a portfolio company and it's an elegant tuck in into that.

So a little bit of hey, why don't we see what we come up with. Let's test the water. It's not a hard sell, you got to sell, but let's just see what's out there.

Test the water. Price discovery. We thought this would be 175. Like people are willing to put in 250 and it's like well 250 now you've really gotten my attention. And let's go.

Right, time to sell is when you're on the up and up.

Yes, absolutely.

There's a range of an up and up right now boots still bootstrap company pushing at 60% year over year growth, which is great. I talked to some of the venture backed folks and they're on the clock to go hit 100, 200% year over year.

While 20% of a billion is different than.

So that's, that's what I was getting at was now you start looking at companies that's more realistic or typical. It's. You're in the 10 to 25% bucket, you're in the 0%, the negative. How do you look at that growth percentage and the impact on valuation?

If you can continue to scale, grow at scale, that's great.

There's almost, here's your year over year. But there's gotta be some history to it to really give you more confidence as opposed to okay, was that a fluke year?

It's very analytical. You look at new customers added. So that's new logos then for the existing logos. How much did you upsell? Maybe I just bought your M and A module. I was like, man, I really like this product. I'll take the funnel, I'll take the other one. That's huge for me because you've created a stickiness here. Even though I don't need this middle piece which is on a gonna be a transaction based basis, actually have this, these two pieces now. So net new logos, for example, the ability to add more, sell more to your existing land and expand, all those things are very valuable and they say a lot about your execution strategy and so on. The table stakes are 20 to 30% at scale as well. A billion dollars. If you're growing at 20%, you're going to get premium valuation.

There's clicking in to understand the quality of the growth, which is the logo count and the increase of their retention revenue. The size matters. Why would you tier those? I feel like we're just getting out of the 0 to 10 million mark and then you're sort of at the 10 to 30 million mark. And then there's. What, I don't know, what's your definition?

I think the first 10 is the hardest. In my opinion, going from 5 to 10 is the hard. But I think if you can get from 10 to 25, 25 to 50, you basically have new set of entrants who basically want your company.

20 is when it opens up the floodgates. This whole world of private equity, they look at you less of an acquisition target, more of a platform.

You got it. You can also flip that in an EBITDA term, a million in EBITDA to 5 million in EBITDA to a 10 million in EBITDA. All of a sudden I can lend you like 30 million, three times your EBITDA and even accelerate your growth. So think of those buckets. It's absolutely fine in that growth strategy if some of that growth is inorganic because that also shows your ability to convince other players to become part of your family. So a lot of times people are like, oh, but some of that is inorganic. Are you going to discount that? No, I'm not. I'm going to be very rational about it. I'm going to look at it. And I encourage people to do small tuck ins as they are in the $10 million range because this goes back to our internal muscle kind of memory that there's a value for that team over time because the PE guys are looking at it. They have, yeah, we've been after this space for a long time and I've got like 10 companies. I just don't have the right management to do the consolidation. It's like, well actually we've also know these companies and by the way, Am's my head of M&A, he's got five guys underneath. This is okay, great. How would you roll this in? This is how we would roll this in. This is the one we would integrate. This one is in Germany. We would not integrate stuff like that. They're like, let's go. And actually at that point they're going to say you do have the ability to grow equally organically and inorganically.

If you're that company looking to do their first acquisition, what type of deal would you look for? Right now I'm looking opportunistic obviously. But then there's stuff where it's aggressive. It's can we pull the customers over and kill the product? What would you actually look for on that first deal? You're still in that growth organic and you're looking to do that. You're looking to prove yourself before you go out, hit 20 million ARR and start raising institutional money. That hey, M and A is a big appetite thing for us. We're taking it serious. What would you be looking for?

A real life example where I suggested the same dilemma is it's time Amit, we need to start doing some acquisitions. Otherwise like, you know, it's boring. Our product is so good. We need to do something more than what we are doing. Today I went to the salespeople, I said, are you cross selling with someone? It's like, yeah, I'm cross selling with this platform. Okay, what do they do? It's like, yeah, they do this and they sell the solution. But as Part of their sale. This is our equipment. I was like, okay, are they just pure sales? I said, no. They actually also have their proprietary front end that is a UI and dashboard. What's their business model? It's SaaS. I said, okay, how many people? It's like, well, bootstrap. 15 guys. You guys know them well? Oh, we're best buddies. 90% of the deals they've done, we are basically selling. I'm like, okay, great. That's it. That's the intelligence. I've got my next meeting, internal meeting. I was ringing the CEO and the cto. This company said, yeah, I love those guys, man. Go out for beer after every trade conference and stuff like that. You want to do your first acquisition? That's your first acquisition. Wow, we never thought of that. It was just great. It was seamless. All of a sudden there's a telco equipment company, different gross margin profile. We bought a SaaS company and the markets are like, wow, this is amazing. You guys can do this. And seamless integration. Actually they loved it because the guys were like, thank God. We need to worry about payroll. Oh, you have an IT department. Because if the computer breaks down, I got to call someone. It was just perfect. So that's one where you've been cross selling. There's a relationship you go with that. The second one I would take is a standalone, non integrated geographic acquisition in a geography where you're comfortable working with. I have great experiences and again, this is not working with northern European countries when it comes to acquisitions. The Finlands of the world and the Swedens of the world and Scandinavians, the Vikings. Like, amazing.

I see a lot of commonalities between being out here in Canada and northern Europe.

Just absolutely love it. Had one of my best acquisitions in Netherlands. It just was perfect. So still standalone. The guys are running perfect operations. And then over time we started cross selling each other's products. It was just perfect. Not leading with integration, not leading with synergies, quote unquote layoffs. More like, hey, you continue doing your thing, there might be an opportunity to cross sell this product there. That will just happen organically. That would be my second scenario, but the first one that I told you was just perfect. Just go to the sales guys who's selling your product. That's how you build your pipeline in a corporate and of a setting.

Very cool. When we are boarding the companies, we gave example of you had to convince someone to sell and the right time to sell. But in almost these scenarios we've covered a couple of the extreme Ones right? Here's a company we're going to dismantle and take the scraps out of. And here's one operating in a completely different geography. Is the pitch going to be different? Teach me that part. How do you pitch the deal? When you're sitting down with the founder, getting them to start thinking about selling the business, but, you know, you just got to put the sugar on it to get them excited about it. Teach me. How do you drop that sugar to get them excited about the deal?

You got to find out stuff they hate.

Oh, Celeste. Finding the good, you go for the hate. What do you hate about it?

Like, why would I start to upsell them on stuff that they may or may not know or. The problem is eminent teams sometimes can oversell how good they are.

I do, I promise, like, how good we're growing and in the future ahead of us. And this is a good therapy session. I'm already getting some realization of what I'm doing wrong here.

Or say, like what you hate and if the stuff that you hate and if we can take that over from you, we'll be more than happy to kind of, you know, then you become part of this. The second piece is also the sometimes founder fatigue or investor fatigue in the company. So what you're doing is giving them an out and saying, listen, you have multiple options, but we can give you an out at this point in time by becoming part of this company. And you just go from there and see where that goes. But at the same time, if you're going to offer them, look at how good we are and where you should sell to us because we are growing, then you got to show to them how they get to participate in that growth.

The part of the good's still there.

Yes. So maybe it's a hybrid deal. It's upfront cash, but then they get to roll over percent or 20% of their equity into your company so that they get the upside of that as well. Then we are part of the same family at the end of the day, and our interests are aligned. And maybe they've been bootstrapping this for 15 years and the guys are like, man, I need some exit. You basically give them some liquidity to their shareholders, which could be them and some of the investors, and then you bring them over as part of the upside.

So dig into what do they actually hate. It could be some things operationally about the business. It could be founder fatigue, it could be an investor fatigue as well. And then you got the plus side of here's a Dream we got a vision for the company and where you may fit in that. And then too that you could roll over some of this value of just getting cash and having the tax headaches to figure out. You can actually just roll this over and become part of something even bigger. At this new growth future we have.

Or in some cases what happens is it's very hard to structure a hybrid deal because then the invest oh, but this person's getting the upside, we're not getting the upside and this and that. So what you can also do is you can do a hard complete sale of the company. But the key employees that come over, they become part of your esop, the share option plan, employee share option plan. So they have a new employment agreement with their new kind of stock options, which you would give to your senior executives or whatever level they're at. And then they get to be part of that upside. So that way you've cleaned that entity completely. You're bringing them over as brand new employees. It's good to do what they call an asset deal, for example, so that way you leave all the liabilities behind. You don't have to worry about where the skeletons are buried. You basically are handpicking things that you want.

You ever done a deal where you hate the CEO? Yeah, like hate the CEO. You know, there's some investor fatigue going on. So you sort of are attempted to pull the rug under that person.

No, you can't pull the rug. What happens is it happens during the process because you always walk in with the intent of doing the deal and then you realize, man, that this guy is going to be so disruptive to our culture. And you basically have an internal discussion and say if this person comes on board, it's going to be a disaster for us. And then at that point you need to figure out whether this deal is with or without that person.

What if they're the one trying to block the deal and you know, the investors want to sell.

Depends on who has the control. So I'll give you a real example. Again, this is why it's two decades of lessons from the trenches. A great company buy side M and A working on behalf of a company, find a company in Spain. It's 15 years ago so I can be a little bit more specific. The example I gave you cross sell stuff. All that good stuff is happening. Hey, we would like to kind of come over and see you. The company is in Madrid. Fly in Madrid. All good. So guys like, what's up? I said, listen, do you want to be part of our company. He's like, who gave you the impression that I'm selling the company? I'm like, okay, sorry, this was a little bit of a misunderstanding. But listen, you have a great company. What had happened was, you know what a lifestyle business is. So investors invested in a company to get a certain type of return. But what happens is a venture capitalist wants to sell the company when the company is growing at a 20%, 30%. And this goes back to I got to exit when I've got very predictable 30% year over year growth, long term contracts. I got to sell the company now. But what happens is, what if the company becomes profitable? Breakeven and the guys are having a good time. They have no urgency to sell. But as an investor, you got to sell, no problems. We come back it disappointed a little bit, Got on a plane, went all the way. Then I said, wait a minute, I need to look at their cap table. Has three VCs in it who are in this company for the last nine years. Usually the venture capital model is a 10 year fund. So they need to wind down the fund at year 10. Usually they start the process at year eight. If you haven't exited in seven years, like, hey, what's our plan B? So now I look at the partner because it's partner is on the board. I've called that venture fund. I was like, hey guys, Amit Monga representing this company. What's up with this company? And the guy's like, do you want to buy it? I said, yeah, we want to buy it. So he's like, okay, so go and see the CEO. I said, as a matter of fact, I was there last week and they told us to get lost. Do you mind taking the flight again? It's like, yeah. He's like, you're going to fly into Barcelona, we're going to take that train to Madrid together. He made it happen. He's like, it's not your company, it's my company. So the guy was fighting back. You know what, you've just shown to these guys that you actually are not a good fit for the company. So the VCs told us come up with an IP transfer plan. And how are you going to run this company without this team? As in a couple people and that's it. So this would be the most kind of hostile. It's a private company. It's not like a hostile takeover of a public company. But it's like. And we're like, oops, okay, we gotta put a plan together. And then you have to be very careful. Hopefully they're not sabotaging things. We had to sign very strict non solicit and then you're in a different country. So then you gotta figure out like how North America is easy, right? You know the U.S. laws and Canadian laws, but like Europe, if they do something, what's gonna happen? So you gotta go through all those scenarios. But perfect example, investor said, go, I'm with you. I said, okay, so he's fly here, we'll go together. And unannounced, we walked in, he said, do not tell them you're coming. I'll come with you. I was like, are you telling me you offered them? And he said, they should have informed me about this meeting. He said, did you socialize a number with them? I said, yes. He says, what was their response? I said, they told us to get lost. Okay. He said, can you put that in an email for me? I said, email, we'll give you a non binding offer. How about that? He's like, let's go. I gave him the non binding offer, subject to right DD and so on. He said, all right, this is good enough for me to kind of move forward.

I think a key piece was that cap table. Getting access to it gave you a full picture of who's running the show, who you need to influence and almost like which order of people you should influence.

And then our biggest risk assessment there was how do we manage the key customers? Because the key customers were in Europe. How do we make sure that these key customers don't go anywhere? The beauty is there weren't that many companies in this space and for people to switch to a new technology was very hard.

How do I get access to that caf table? Do I just ask one of the investors for it?

No, you can't. I basically reached out to that VC because he was on the board. So I just said, hey, you're an investor in this company. We were thinking of acquiring it. So you've been in for nine years.

Any investor, or mainly a key investor that's a board member, would be the one that would have access.

In a lot of the cases there could be shareholder agreements where they say that if an exit doesn't happen, it's X number of years, they have the ability to influence that outcome. So definitely they do have some kind of an influence. And we took care of all the employees by the way, and it was a severance and all that kind of stuff. Good outcome, good outcome, fully integrated.

I don't know, this deal might turn out that way. Can you want to help me with it?

Absolutely. Anytime. Anytime.

Have you ever done a carve out from the buy side?

Carve out from the buy side, Especially.

When something like proactive, when you have to shape the business case and champion it to get the board to approve it.

Technically, no, I have not. I have unsuccessfully socialized that with big conglomerates multiple times. So it's all about unlocking value in that situation. That's what a car road is all about. You are a corporate, you have a real business. Actually, this is a good example. You're in a trucking business. You basically are managing a very complicated fleet of vehicles. But you also have a proprietary software that you have built to basically run that operation. Can other people use that platform? But then in order for you to do that, you need to have a salesforce to sell that scheduling software and fleet management software. But if you're willing to do that, that's like pure unlocking of value in that company, not the fleet example. But I have approached a couple big conglomerates back on the day saying that have you thought of spinning this out unsuccessfully? And the reason has been they're so intertwined for them to say, okay, great, you can take this business out, but now where are you going to move the people?

You almost need some kind of urgency or motion already there to latch onto versus trying to champion it from scratch.

I think the regulatory thing is always the trigger. Regulators will say, hey, you two guys are becoming fun, you need to sell this business. So then actually there's a full blown exercise where you actually do have the consultants and they basically say, hey, this is what you need to run it as a standalone company. You can't use 25% of Amit, who is the group CFO because Amit's not moving with you. So now you need to hire a full person on this side. You can't model a 25% of my time on that side. So someone has to build a brand new model with that. Then the next piece is technology infrastructure. Hopefully you are not intertwined ERP systems. For example, if you're going to take over 100 people now, you got to have your own ERP system. You can't be part of this ERP system. You almost have to create a company from scratch. And I have seen carve outs and spinouts that have gone public as well in Canada actually. You need to show three years of historical financials in a prospectus. So what happens if you're carving out or spinning out? You literally have to recreate these kind of Three historical years of financials as if they were running as a standalone company.

So almost look for indicators. Consulting firms. I just think of one that would have conflicts that come up.

Yes.

Conflicts of interest because they're doing audits or whatever unrelated company. So finding those where there's going to be likeliness of a carve out, knowing that part of your business case is going to be building the missing pieces when you detach that company and all these fun TSAs and stuff.

Yes. And you have to model those and also have buffers for things that you haven't thought of. You know your costing of something around technology might be completely off because you won't have the scale to get the same price on this side. You almost have to create a standalone organization.

How do I network in to find these deals? I got a list right now of about 30 large companies that play in either fintech, legal tech or some kind of enterprise collaboration. The large companies, these are 5 billion plus market cap that been around for 30 plus years. And in there is like hey, strategy shifts or things like that. There could be some potential. And some of them just done massive merger of equals. And it's like well how do I start socializing this and what's my approach?

If they were organized enough and if they were disciplined enough, they should go through some kind of an annual or every two years or three years exercise. Whereas what's core and what's not core?

Yeah.

Or what are some of the orphan products that are worth just spinning out thing in that situation they basically would like oh the CEO to go talk to that CFO. CFOs.

How about corp dev?

You could talk to corp dev guys. Yeah, CFO corp dev would be the two inbounds. It all depends. Because corp dev sometimes the reason I don't didn't say corp dev right away was corp dev is so focused on bringing stuff in. Yeah, they're not focused on spinning things out.

I feel like they're not the first to know about it, that's for sure.

Exactly. They might have acquired a bunch of stuff. Now as outcome of that exercise they might say hey, we may not need this. So I've also seen where there's been a merger but we also know eight months out there's gonna be spin outs and at that point you should be ready with a check and with very efficient due diligence process and should be willing to pick up the assets for cheap because that's where you actually get stuff for cheap.

I agree. The cheap part. Cause it's just A lot more work to do and the more risk to take. Not as many people willing to do that. What's my pitch to Corp Dev or.

The CFO that you're walking in with a fully financed deal. So a lot of times people have ideas, they want to buy it and there's like subjective financing.

Well, I'm still in discovery. This is my cold pitch. When I did hospitality banking it was, do you have any hotels for sale? No salutation, no signature. That was it. I used to email that out and had the highest conversion. Do you have any companies for sale? I don't think would work here. What would be.

I think the way you do that is I have access to capital. I'm looking to acquire companies with these metrics, this financial profile and would love to chat with you if there's assets that fit that profile. Recurring revenue, gross margins, this, that easily able to carve out the customers and kind of go from there and then say this is not subject to financing. But of course, customary due diligence and.

So on, being really upfront, hey, I'm looking to buy businesses, maybe compare some industry notes with you.

And also in some cases you can also work with the bankers and say, do you know someone here? Because I'm interested in this business, because I don't think they're doing anything with that business and they would be like, yeah, let me make that call and find out.

I'm going to start paying a premium if I start tapping a banker to help put a deal together.

The buy side banker should be acting on your behalf.

Ah, so the buy side banker is already out there. Yeah, Engage with them, which isn't a big hit. You're going to pay some fees.

You got to pay some fees. Yeah, exactly. The buy side bankers will always act on your behalf. Absolutely.

I shouldn't be trying to increase the price.

Yeah, exactly.

Fair enough. So that's helpful in terms of getting that conversation going on a carve out and if they got some ideas, you can really help finesse and build those and take those opportunities out. Also the negotiations, I feel like carve outs is going to be its own thing. For the most part they probably just want cash out. But some of these other deals, when it goes back to dealing with the founder. You mentioned rolling over equity. Is it the same play of a little bit of finding out what they want, what they're trying to do?

Yes.

And what I'm trying to get at is for me, I'm always, I want to preserve cash because I can obviously reinvest in good areas within the company. If I can get 100% owner financing, if I can get a big chunk on earn out or roll over equity or the combination of those three, I'd be pretty happy. How do you get to that? The optimal structure.

Step one is what does the core team want to do? Is the team motivated to move into a new company? I mean, we're talking about carve outs now, right? So you want to make sure.

Let's play both because we'll do carve outs and then let's go back to the traditional example because I feel like that's more what I'm looking at now. But yeah, so carve out. You're a good question. Do they actually have a team that wants to move with the business?

Exactly. Are they comfortable coming into a new environment? For example, a year ago I actually visited a company in one of the cities here and I walked in, I'm like, there is no way. There's a cultural fit. These guys are different. The client I'm working with, the personalities and the culture is not going to gel. So I don't want to misrepresent what we're doing and all that. So then I come back and say, do you want, are you comfortable running them as standalone? No, it's really predicated on them working with this division. So I was like, I don't think that's going to happen. So I told the company, listen, I think what you should be doing is you should be trying to raise capital and become an independent company rather than trying to become part of another conglomerate. That was my advice to the sell side banker. It's like, oh, Rahmid, I really appreciate it. Oh, by the way, do you know anyone who would be interested? I said, okay, happy to make those intros. So that was one scenario. And the second one you're saying is having these. How do you make sure that this team is comfortable in a company that you bring them into?

Well, I'm just thinking like optimal structure. We're going through the negotiation and putting out the financial terms together. Because you always put this offer and let's say 10 million for a simple number saying, hey, I'm going to give you 10 million for the business. That sounds great, but I want you to take one third as a financing term. I want you to put 1/3 as an earn out and 1/3 rollover equity.

They will need to individually evaluate all these options in a combination and hopefully the sum of parts should attract.

That's for this exercise.

It's easier if there Are external investors. Forget your example, your bootstrap, there's no external investors.

I'm a pain and ass seller.

If I'm an external investor and this is my ninth year in this company and someone's offering me a hybrid deal, I want as much cash as possible because I want to close my fund front ended with as much cash as possible. I don't have the administrative bandwidth to manage the options. If you're an investor, I'd rather give you cash and close the fund rather than saying here's the cash by the way. But also there are options in this new company. We don't know when it's going to go public. If there's an investor piece, they would try to get as much upfront cash as possible. Let's say if it's a bootstrap, I would say I will need to sell them the vision of my company. And what is their path to liquidity once they get ownership in your company? I totally buy 60 to 70% growth rate and say, hey, I love Amit and he was on that podcast and he said you have the best product. This is great, that means a lot to me. But the problem is if I'm rolling in 50% of my equity into deal room, when do I see the liquidity from the equity that I've actually rolled in into your company? So you will need to then share your plan with them. And usually the way it works is, and I've been through those scenarios where the guys have said, and there are pros and cons of that, let's do an all cash deal. Okay, do the all cash. You get cash upfront or people say, let's do all stock deal because I'm going to go public in 18 months. And then you get the upside from there. But you can also have the downside. Not every stock is going to go up or down. When you're offering people stock in your company, you better be prepared to show them what is their next liquidity event based on the shares they have in your company. Because if you're saying I'm never going to sell, it's like, whoa, then I might as well get all my money upfront.

Do you scenario that out and saying, hey, in three years we're likely to have this liquidity event at this valuation?

Yes, you definitely can sell the dream. You can sell the dream. You cannot sell it as an official offer.

Not signing off any forward looking statements.

Yeah, like, but you can say, hey listen, hypothetically this could be the value of the company. Even then if I'm a seller. This should be like the gravy for me. I would like to kind of probably monetize as much as I can now, but at the same time, if the company is planning to go public in 12 to 18 months and I'm acquiring the company at that time, actually the entrepreneur or the shareholders, they may have a call internally and say, hey guys, maybe we should take stock in this company because the upside is going to be huge for us. If you have near term visibility, for example, in a company when it comes to liquidity, then you have the flexibility to make that call.

I like digging into their perspective and understanding what's going to be their driver and really how can you influence them.

The more near term options for liquidity, the easier it is for you to pitch equity and the stock in the company.

Absolutely makes sense. Is there a certain window as you look in two, three year seems to be the right area.

If you can show that in two years there's going to be a liquidity.

You would recap the business and be able to take them off.

Exactly. It's an IPO candidate, for example. Frankly, if you can get everything you want as a private company, I would stay private.

Yeah, that's a good point.

There are a lot of regulatory costs. There are of course significant pros to be public, but there are also cons to go public.

This game of capital allocation, I'm running the bootstrap business now, and we get a lot of interest to invest in the company and it changes the whole dynamic. Having a board right now, it's like true freedom. I can run around my shirt off screaming and nobody cares. But when you do that, I get a lot of inbound interest from all different types of. You got the venture capital, you got small funds, bigger funds that are trying to build early pipeline. And then you have, well, now they got these. Anybody thinks they can wake up and start a fund or a search fund, but then now you see strategics actually doing these kind of minority investments, whether it's their corporate venture fund or just directly off the balance sheet. When is the right time? Because part of it is, hey, I find this opportunity, but we're still growing. And now all of a sudden it's a little bit of a conflict of selling off some of the equity, rolling over some equity. You start changing that whole balance to do it. I feel like that's why I'm so cheap on looking at these deals, just because I know, hey, really, to get the long term, I don't want to change that picture right now, especially in that run to get to 20 million ARR. I'm a little bit sensitive about all that dilution you do. You can clearly see the impact it.

Makes if there's no urgency to take out cash. Because in some cases there is that catalyst.

What's that when you need the boat or the.

Yeah, exactly. Or you really want to get that private jet kind of a thing.

I do want the private jet, but I want the company to pay for the private jet.

Exactly. And then you can do that. Right now you may not be able to do that once you even have a minority shareholder because they will have veto rights on expenses that are.

So I have to acknowledge there's a lot of freedom to give up in.

Doing this in your situation, whatever that number that you want to go after 20 million or 50 million. And we all know that the moment you go beyond some of those ranges, the valuation premiums go up significantly. You have to make that call. You're still young, you're having a good time. If there's no urgency to take out cash, the only thing you have to think about is is there a product out there that's going to make your product obsolete or you may lose market share? If that's the case, then you need to think about it. If you are comfortable that this company is going to continue to grow at least for X number of years, then have a good time and kind of go from there. Looks to me it's a sticky business. You just continue to add stuff. I actually would definitely think about doing acquisitions in other geographies just for fun because you've covered every city in North America and you want to start going to Paris and Stockholm and Oslo and Copenhagen to do some M and A science podcast. I'll carry the equipment with you. There you go.

There's definitely confidence on organic growth. The dream is to do M and A. The dream is to build a business to a billion revenue and it's primarily an M and A platform and you see a lot of them out there in the public market.

I think, joking aside, from my perspective, you've got a very stable, solid platform now. Like minded CEOs, entrepreneurs, hopefully they're bootstrapped because what you want to do is have that founder to founder chat with them kind of a thing, give them some liquidity and then bring them part of your fold and say, listen guys, together now we are going to the next milestone. That's our 20 million ARR. Then you do the next acquisition. Say guys together as a family now we're going to 50 million ARR. And then you kind of do your math and say listen, we're hitting a billion dollars in enterprise value and you socialize that with a couple guys and okay, then it's time to exit. And then you decide whether it's a full sale or whether you just want to retire or whether you couple of these acquisitions you did where you've groomed some of the younger folks to take over from you who can continue with your legacy, but you've also cashed out. That's the way I see it.

So I should be focused on building a platform for entrepreneurs to grow that hey, there's in this space. Yeah, we're on a platform together that's allowing us to take best of and continue fostering growth.

Exactly. And the ability to share the best practices you have on your side accelerating value creation. It's your playbook. You start to build your playbook and see what you can cross.

That's why I look even the European company that we're looking at, it's. We could take what we learned here marketing and it's going to work wonders. I don't really believe in marketing over there, which is amazing. I don't know how this company survive and thrive. But okay, that's what I'm gonna do. I'm gonna focus on platform for entrepreneurs. I mean you've worked on both buy and sell side and thinking of the approach to each side. But even the risks that you're looking into, what are your big learnings from? How do you sort of differentiate your focuses between, you know, the buy side and sell side?

So start with buy side because you live with it. Sell side is kind of very transactional. You're a sell side banker. Frankly you're working with the shareholders of that company that you're trying to sell and maximize value. That's what you have to deliver. Actually our fees are dependent on basically a percentage of the actual sale price. And obviously you hire a banker because their job is to actually identify buyers who basically will pay the premium price for it. Strategics might value you more because a certain aspect, cross selling and all that kind of stuff. So there my job really is to make sure that if I have an engaged buyer, I basically deliver everything they are looking for and maximize value for the shareholders of the selling asset. Simple as that. In some cases the guys we constantly need to make sure is the offer that's coming to the table is a credible offer. Is it a funded offer? People would say I pay this but it's like, okay, how are you going to fund it? Oh, it's subject to financing. I got to check whether these guys can raise cash, capital or not. So in most of the cases, I want a fully financed deal. There you are really on the sell side. You're providing a process support, simple as that. And your ability to anticipate any challenges. This is too good to be true. Or if this is a potential buyer, do a quick check who their banks are, who are their funders, and then challenge them and say, listen, I know you are doing this and you're saying it's a fully financed, but can we talk to someone just to give us a little bit of comfort level that this will happen? In some cases they might say it's subject to approval by X, Y and Z internally. Then you say, okay, I want to understand the process. You know what, I understand the process. I want to whiteboard that process. You give the offer, we agree to move forward in principle. When are you going to convene the board meeting? What is the resolution going to look like? Who's going to allocate money from the balance sheet, all that good stuff. Does that impact any of your covenants with your existing facilities? That can happen in our kind of a very large acquisition. Oh, it's a $5 billion acquisition, but subject to. We are going to have a debt facility and we're going to have subsequent bond offerings and things like that. There's a lot of risks associated with it, but that's a sell side thing. But the buy side is actually more around making sure that post acquisition it actually delivers what it's supposed to deliver. So financial metrics given, because that's Excel and that's how you basically agreed that you're going to buy the company. But is it going to align with the product roadmap? How are we going to cross sell this? Have we talked to people who are actually going to own this business unit? If one of our thesis was that we are actually going to cross sell this in Germany because the German clients don't have that product, what is our action plan? So there's much more detail because we own it, that actually keeps the buy side people awake at night. Now, if it's a completely standalone, non integrated acquisition, you're a travel company globally and you know you're just buying another travel company that is the Expedia of Europe and they're just going to continue to run standalone. This is more just market share and stuff like that. It's different. But if this is something happening in North America and it's going to be integrated with us, then you better have a good sense of how you're going to actually do it. That's why those things become a little bit more closer to home from that perspective. And you have to make sure that you have a good team that can do the integration. Not to forget, people just take for granted like the IT systems. The IT systems are so important. Do we have the right IT systems? If you're going to integrate which ERP is going to go where and those could be huge costs, security, for example, do we have the right kind of security framework? Because that could impact our insurances. So buy side, in my opinion, a lot of emphasis on post acquisition issues and points.

It's all about diligence. When you're on the sell side, you're doing a lot of diligence in your buyers, filtering out bad actors, pressure testing them to make sure they got certainty they're going to get the deal done and be the right buyer. When it's on the buy side, then it's very specific to your strategy, what's the value you're trying to drive from the company. And that will probably help you prioritize where you're going to focus on. And you're really getting a lot more people involved because you're covering all the different aspects of the company from the people side to the IT and finances, et cetera, in different weights depending on the deal itself. Does that sound about right?

That's absolutely right. Absolutely. You nailed it.

Surprises. The. I'm just curious. This is like where we try to have a little fun with this. You've done diligent. You're smiling because I know you know this. What kind of surprises have you encountered? Buy side, sell side, diligence, integration.

There was a period of non compete and people quitting exactly on the day their non compete had expired, for example, and things like that. The only one I've seen is where the acquisition just didn't make sense because the market shifted. You acquired a company because you thought you actually were going to cross sell something, but then that market just disappeared all of a sudden. Without going into specifics, you acquired an Internet company because you thought you could cross sell them content and that just didn't happen because people just went to content somewhere else. And your whole thesis was based on.

Cross selling, that you see that as a reason to kill the deal.

Well, the thing is, the deal had to be written off at the end of the day.

Oh, so the deal was done, but then you had to Deal with it.

Yeah, exactly. It became too strategic, if you will, like, hey, we need this because we can cross sell this. Because our market here is saturated. We need to acquire another company so that we can cross sell them our product and let's pay them as if we are. It's cost of customer acquisition.

That's not a good integration.

Yeah, no, and nothing like massively crazy. Because I would say the M and A over time has become also very sophisticated and more disciplined. Now there were days back in the day, aol, Time Warner type kind of acquisitions. The more you see now today is there is a very well thought through rationale for doing things you may Pay to acquire AI talent. People said, why would you pay 1.6 billion if that was a number for YouTube? Now look at the amount of ad revenues YouTube is generating. It's incredible. People said there were so many reasons not to do that deal copyright infringements. And how are you going to monetize the content? How are you going to manage all the bad content? How are you going to moderate that content? There were so many reasons, but they did it. And then here we are. And those are examples of deals that made sense. But then you also had AOL Time Warner, the best content company in the world, selling and monetizing the Internet for users. But it just didn't happen. But the world of M and A in the last two decades, maybe that's a great way to summarize some of our conversation. I'm super impressed with how sophisticated the pieces are. I think it's great to see how M and A is actually a core function of a lot of the organizations. It might not be a corporate development department, but there is someone who probably is responsible to monitor acquisitions, to monitor targets, even at the private equity level. Now they're investing in having a resource in their fund to just monitor, for example, potential targets for their portfolio companies. It's becoming more and more sophisticated when it comes to dealing with different players across the table. People have investment banking background, people have product background, people have sales background, people have senior management. There are some founders in some cases who are now running M and A for larger companies because they kind of understand how their product roadmap works. So it's good to kind of see that's how you see all these very diverse complementary skill sets that are representing M and A. Back in the day it was, hey, you're a finance guy, you basically understand how to work spreadsheets. But it's definitely multidimensional now.

Yeah, I think you're Right. Just overall I've seen it doing this podcast, you and I. First thing I mentioned about your background.

Yes.

Is you're seeing the M and A change. It's not go to every lease school and become an investment banker. And it needs it. It definitely needs it. Because everything we talk about is all around putting diverse set of skills together.

The best buy side M and A I did was one of the companies. The internal team was myself working with the CTO and head of product with the cto. I said put the product roadmap and show me where the gaps are and we'll do buy versus build scenarios. And then we just executed on that.

That's pretty cool.

Here you are. All of them were non finance people. I would consider myself as a finance person given all the M and A I've done. But basically my core team was non finance.

So I like that because it really helps you focus on what's going to really drive value and solving.

And the buy in as well after you acquire it basically fits in their product roadmap.

Those are the ones that are going to have to lead integration. At least the key elements of what's going to create value. We talked a lot about different strategies but how have you seen this trending otherwise since you've been in the field? I think of like the 80s, the big takeover. It's all break the big sum into the pieces or pure cash flow and that's it. Things are really changing.

I think things are becoming more and more strategic. Things are becoming way more aligned with corporate strategy. Of course there are one offs all the time. There will be triggers. There is a breakup of a big conglomerate. This piece is for sale. Are you interested? But I find in majority of the M and A strategies we are seeing the core dev teams are very aligned in terms of what is their short term, medium term, long term strategy. This is our growth plan, this is our organic strategy. This is our inorganic piece. Let's see how we can execute it. I'm very impressed with the companies that are doing well or have a very good handle on their for dev initiatives. And a lot of those guys are for example on M and A science that you talk to, you can relate to a lot of that because they're very organized. The Paypal's of the world and the booking example, Carta for example, they know what pieces they want and they're not shy to sometimes take that risk. This is a great functionality. Would love to offer that to our existing clients because otherwise they're going somewhere else. They're making those bets. The second thing that I'm seeing is slowly people who have money on their balance sheet, they have strong balance sheets, they're willing to do minority stakes in the targets. Potential targets, pros and cons. Obviously cons for the people who are taking the money is hopefully they don't become tied to this company now. Hopefully they can still have the flexibility to sell it to someone. But I'm finding more and more the banks are interested in investing in companies in fintechs or companies like Salesforce, companies like Microsoft, companies like Google. They have their own venture funds and they are taking positions in these companies. Companies like Thomson and Reuters for example, have a venture capital arm. They basically are identifying opportunities that they might not be a target today because venture capital too early to. But hey, I can invest 10 million, 20 million, 30 million. Not a big number for that big company, but I get to be part of the upside and hopefully they can benefit from this partnership. So M and A is like back in the day, the 80s and the 90s was very transactional. If you said M and A is like you and I wearing suits, boom. Hermes ties, boom. White shirt transactions. M and A now is like building relationships, multi pronged approach being part of of course you're still doing transactions but also engaging with the innovation ecosystem and eventually they may acquire the company. It's much more kind of less transactional now.

Yeah, it's like you're looking at strategies from different angles, taking bets against them as well.

Exactly.

That's my big takeaway today. Don't be too opportunistic and much of a bargain hunter. You got to keep your strategy focused.

And think like medium term, long term, having a shareholder value. But at the same time, if someone puts a deal in front of you, be ready to act on it. And that's where the stuff you and I talked about, the playbook, comes handy. The muscle memory comes handy, the ability to pull together that team comes handy and go from there.

One important thing I got to ask you. What's the craziest thing you've seen in M and A?

Another interesting story is where at the height of the dot com bubble, and that's not my personal deal, so I will not take credit for that. But I've heard the story and it is a true story. Someone offered a price and we're talking bubble valuations. The lawyers were sending the fax, the thermal fax to a wrong fax machine. So when the seller or the target didn't respond for two hours, they thought that they had defended them and sent another fax with a premium of another 10, 20% to it, but it was just going to a wrong fax number. So in the end, they ended up paying 70% more than what they were supposed to because they thought the other person was saying, like, I'm offended by this offer. Anyways, that's another story where that's crazy. That is the craziest story ever. And it comes from a very credible person. And he tells me that story all the time as a mentor and he's like, amit, it was just going to a wrong fax machine. You know, like how you are like, you do these agreements and you put this generic fax number, which could be your head office somewhere, but you're expecting the fax to come to the CEO's personal fax machine because it's confidential. And they, for some reason this was not being sent to that number because associate somewhere basically said, okay, this is going. This is the number. So in the morning they said, hey, where is the offer? He said, oh, but we have sent it and this is the number. And the guy's like, oh, yeah, there must be some problem with the fax machine. Why don't you send it to this fax machine? Signed it right away.

Wow, this has been a fun conversation. Thank you so much for taking the time helping me become a better M and A scientist.

You're doing an amazing job. I'm learning so much also from your podcast and most importantly, I was able to get you a wonderful weather in Toronto for this trip.

Made it happen.

I cannot believe that was the case. But anyways, you made it happen.

You're the tipping point. I kept threatening to come to Toronto this year and you were tipping point to actually make it happen. So thank you for doing that. Fellow M and A scientists, if you've made it through this interview, I appreciate you. Love to hear from you. Reach out to me, tell me what you thought of this interview. Any feedback. I welcome the criticism. I'm trying to get good at doing this. Till next time, here's to the deal. Thank you for taking the time to explore the world of MA with our podcast. We love hearing feedback. Tag us on a LinkedIn post. Add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and a function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email. Kison K. I S O N Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal.

Foreign.

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.