Optimizing Your Corporate Development Team

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Joining me today is Andrew Kelly, BP.

Corporate Development Adventures at Five9 traded on NASDAQ under FIVN Five9 is an intelligent CX platform provider. Bringing the power of AI innovation to.

Customer experience and service for more than 2,500 customers worldwide and facilitating billions of customer engagements annually.

Today we're going to talk about optimizing.

Your corporate development team. Andrew, how are you doing today?

I'm doing great. I appreciate you having me on.

We're here live in Irvine, Texas just outside of Dallas.

Yes.

At one of your newer offices or acquired offices.

Yeah. So Aquion, this is a tremendous transaction for 59 as we keep building out to the portfolio. We're happy to have the team. I sound a little under the weather because I'm just back from Bangalore, Chennai visiting the team in India last week.

Great.

Thanks for taking time from doing deals to have this conversation. Yeah, after enough persistence, it took a lot of chasing to finally get you to do this.

That's not a flex. I am trying to delegate more and more. So I'm not as busy happy to do this.

This is the number one lesson already that persistence will get you everything you're shooting for. So like all deals, you got to put the chase in to make it happen. Can we kick things off a little bit about your background?

I've been in the deal business a lot so I've done roles this at IBM and Adele and I'm an equity portfolio company and I'm also a recovering investment banker. So I've seen a lot of different things both on the buy side and the sell side here at Five9. I've been here for two and a half years and just a little perspective on Five9. We've been in the customer experience business for 20 years. So what Five9 is doing is helping customers streamline their contact center experience by delivering AI in a purposeful way. So that for example, the genius AI launch that we had recently wraps a process around what can be a very complicated large language model, natural language processing, machine learning ecosystem of technology where customers want solutions. And so as the technologists in the room, we wrap a solution around a technology so that customers, unless they're a CIO or VP of engineering who really wants to get into the weeds of why anthropic vs chatgpt vs something else, of course we can have that conversation. And of course we are sort of multimodal when it comes to different technologies that are out there, but ultimately they just want a solution that works to either save them time or save them money. Most things in business. And so that's what we're about.

We tries M and A for the organization speed.

So one of the things that I think in business that is underlooked is speed, the need to go a little bit faster. And so there's multiple different vectors to speed. So there's strategy. Where are you headed strategically over the course of time? There's your product roadmap. How quickly can you execute on that vision that you have for three years, five years? And then of course there's a financial element to it as well. In the technology space, for the 20 years that I've been looking at valuations, growth drives valuation about 2/3, profitability about 1/3, pretty consistently booms and busts. And of course we can argue whether or not we're in a bubble period with certain sort of semiconductor stocks right now, given what's happening with process power, underlying AI and the need to push more bits and bytes faster in order to figure out emergent properties for new AI models. But for me it really comes down to simple things. So it's strategy fit, product fit, financial fit, which can be sort of lumped with technology fit, and ultimately cultural fit. If you can't have executives in a room having a, a constructive conversation or over a meal and the chemistry is just not there, rarely is it going to matter that it's the best financial deal ever. Because in this space, hostile takeovers, they don't happen that often. Usually these are friendly to friendly conversations that need to be had. And that's the way that you really sort of uncover whether there's a there there because you can have a hypothesis going in, but most of the times you don't really know what you're buying. That's the whole point of diligence, to get a click deeper than the website, a click deeper than a surface conversation with the CEO or founder, a click deeper than a management presentation, a click deeper than scouring the data room until you're all the way in and thinking about how are the companies practically going to operate on a day to day basis, in sales, in R and D, in finance, in all the functions that kind of make the world go round. From an operations perspective, that's the real stuff. Even though of course I spend a lot of time at PowerPoint and the PowerPoint is good for communicating, but there's an operational element that's much, much deeper than that.

Brings us to our first question. What are the foundational skills you believe every corporate development team member should possess to effectively contribute to M and A activities?

Communication. It's a huge one. I tend to like folks that over communicate a little bit. So junior folks that I've had in the past that show up to one on ones and have their agenda. Here's the things that I need help with or here are the things that I was supposed to deliver and here's the status update on them. Or if we don't have a one on one, there's no natural meeting every couple of days, hey, here is what I'm working on. But I'm stuck here a lot of time. I will proactively say, hey, how can I help you? Or where are you roadblocked? I don't always have time to do that. So communicating back and forth, that's important and that scales with them. Because how you communicate as an analyst is different than how you communicate as a manager versus Director versus VP versus svp. All the levels of communication are a little bit different. And it's just audience. Who's your audience? Is it internal to the group? Is it the executive team? Is the board? Is it shareholders? Each one of those different audiences changes how you would communicate. Without communication skills. It's really hard for me to see how a junior person's gonna scale for a whole host of reasons. The other thing I would say is just basic numeracy. So when I first got into investment banking, many, many managing directors were like, listen, this job ain't hard. It's math errors and typos. Don't have math errors. Don't have typos. The math is tricky because it's not very complicated. We are not deriving black Scholes from scratch. We are not using any differential equations. It's mostly division and subtraction, sometimes multiplication. There's just a lot of it. It can get quite messy if you've got like a hundred row income statement and it's got quarterly detail and natural sort of opex detail and by geography or there's lots of different slices and dices. And particularly if it's a smaller company, maybe their financials are not as clean as a larger company who's had an investment banker sort of groom or sort of look over those materials. Some basic numeracy I think is critical command skills at some point. Because what I'd like to see junior folks grow into is the ability to lead larger teams without my presence. Of course I want to be there, I want to help, I want to support. But the best scenario is where I can get a junior person doing the 80% and I'm doing the 20%, which means that they've got the command of, let's say a due diligence kickoff session where we might have 50 or 100 people on the phone from various different functions and maybe sales, finance, hr, legal, tax, it, marketing, support, professional services, you name it. And each of those functions may have two or three people. We may have some advisors on the call as well. Sort of traffic, copying the flow of information. And diligence is material because there could be a thousand documents that are loaded in a data center or many, many more, depending on the type of deal. Pace of play is important because no seller ever has told me, yeah, you can have an infinite exclusivity period. Just take your time, do all the diligence you want, and just tell us when you can put a bid in. That's not how it works. It needs to be time boxed because they've got a business to go run. And as a result of that, being really efficient in diligence is critical. So those are some of the things that I would say I look for and I think are very helpful in terms of team scaling to someday take my job. Because that's how I look at folks. I hire people based on do I think that they can take my job one day. And if I don't think that, rarely do I make a hire.

That's like a really good perspective to have. I have a note about diplomacy.

Diplomacy, yeah. The role of corporate development is tough because you often don't have a lot of direct line reporting and authority over the people that you're actually wanting to do work. And some people can be very eager. They've done M and A deals before, they know exactly how it works, they're excited to do it, they know it's moving the company forward. Other people may take the point of view that, hey, I have a day job. This is something on top of the work that I already have to get done. And now you're asking me to do this under this really tight timeline. How on earth am I going to get this done? And so there's a lot of resistance there. Diplomacy is being able to figure out, is that somebody you can kind of win over or is it somebody they need to escalate to me, or is it somebody that I need to escalate or do we need to have change management? Because deal to deal, it's great to have consistency where you have the same subject matter, experts or extreme leads in each function. We don't always have that luxury. And so knowing how to be diplomatic about recognizing that, yeah, someone is totally overloaded and this would be the straw that sort of break the back and figuring out a way to either Replace them without them feeling like they've lost an opportunity or without making it seem as though they're not capable. That's not the issue. The issue is how do we do the best thing for the company? And the best thing for the company is to get the best subject matter experts possible in each function every single time. Because you can have a beautiful standard list of 500 questions for all of your diligence work streams. It's the subject matter expert in that function that knows the questions that are not on that list or the questions that are not relevant for that deal and how to perfect that list so that it uncovers the things that the company needs to uncover to identify where to go and focus and spend time. You really can't teach that. So somebody who hasn't got that experience, it can be a bit challenging for them in due diligence. And so those folks, they tend to get propped up a little bit more versus folks that are maybe more old hands, where you're like, they're just gonna crush this. So just let them go, let them do their work, they'll pop up, it'll always be a plus and you don't have to really worry about them. And so like with everything, there's a distribution of talent. And why would due diligence be any different?

So the key skills I picked up are over communicate, know your numbers, take command and balance diplomacy.

Yeah, I think that's it. Most junior corporate people that I've seen at IBM, at Dell, even folks that are in the private equity backed world, all of those things matter a great deal. And it's just in the private equity backed where you may have a little bit more help because you may have analysts and associates from the private equity firm also who are really good at getting through investment committees and do a lot of deals and see more things across the portfolio than you might at a sort of a buy side company or a platform.

You mentioned junior team members. Yeah, your underlings. How do you develop them to possess these skills?

So the first thing is I never call them underlings. I call them minions. No, I'm kidding. The first thing that I really do is I tell people we will do everything that our HR team tells us to do in terms of the annual cadence or the, you know, every six months we're going to do such and such and fill in some forms. What I want to know from you is a couple years from now, what do you want to be doing? What do you want to add to your resume? What is the bullet that you Want to add to your resume that you don't have? Let's talk about that. Let's talk tactically about how do we get you set up to flex that muscle? Maybe that's presenting to an executive team. Some meetings can be quite testy because going into that meeting, there's a radioactive element to the deal or the transaction that is going to lead to some spicy conversations. That is not a great opportunity to put a junior person. Like all the spots are leaving a conversation. It's not going to go well. However, there are things that are more developed where you know, okay, this is more of just a regular update. This junior person has been involved in the transaction and has been doing the work. And it's actually easier for me to let them take the lead than for me to take the lead and communicate basically all their work. Don't get me wrong, most of my job is taking credit for junior people's work. That's how you advance in corporate America. However, I'm also long term greedy. And what that means is I want to do less and less work than I've already done in the past. I've built dozens and dozens of comparable company sets, whether it's transaction precedents or publicly traded companies or discounted cash flow analyses. If there's an analysis that I haven't done, I'd be wildly surprised to hear about it. Fans write in, if you've got something that you think is new and groundbreaking, I want to hear about it. But mostly it's letting junior folks kind of flex muscles that they need to in order to get to that next level. Most people on a daily basis operate on multiple levels. The role that they're at, the role below them, and the role above them. I tell folks, if you want to get the next job, already be doing it. That's the easiest way to get there. That doesn't happen if you don't stop and take a look at what are the kinds of opportunities where they need to flex that muscle a little bit more, get more reps in order to be comfortable and competent in executing on communicating to executives or putting together what I consider to be perfect product, which is no math errors, no typos, that's internally consistent work product. That's really important. It goes back to the numeracy part of the role.

I like that approach where you're just really giving that opportunity for a person to sort of build along to the areas that you've already been there, done that, and that gives them that opportunity to really get comfortable and progress without Throwing them too deep in the shark tank.

Occasionally, if I give a junior person an opportunity and they kind of wobble, I'll just ask them, hey, how did that feel? After? Or I may give them some feedback. When somebody says this, what they mean is that but you answered this. And how you could have answered is this other way. If the opportunity presents occasionally, it's like actually doing a hard course correction in the conversation. So there's no confusion. But part of letting somebody be front and center is letting them be front and center and not undermining them and saying, yeah, yeah, what he or she just said is half right. Let me tell you, the 100% correct answer, that's not really helpful on multiple different levels.

I got a note here about asking the extra question. What does that mean?

Asking the extra question is it's the pursuit of truth. And what I mean by that is you're trying to really get down to why are we doing this? Or what is the point? There are two different environments that I see mostly in Corp Dev. There's learning environments and there's doing environments. In a learning environment, you've got a lot of time. There's no meeting tomorrow at 8am that you have to prepare some materials for, and it has to be perfect because it's going in front of the board. That's a doing environment. In a doing environment, you've got a hard deadline and it's coming up and you don't have time to teach and coach and train and empathize. And asking the extra question in learning environments is helpful to junior people because it saves them time in terms of clarifying what is the ask? What am I trying to accomplish? Or we're all going really fast. Is there an extra piece of information that we actually already have that they're struggling to put the analysis together for because they've got a hole that they are going to have to make some kind of simplifying assumption for. Or maybe the hole is so big that any kind of simplifying assumption would make the analysis garbage. Garbage in, garbage out. Asking the extra question is about saving time both ways for them and for me also from a developmental perspective, as you rise up the ranks, figuring out what is the precise additional question that you need to ask in order to move a meaning forward or get to an decision or to take action. That is a skill that will never go out of style.

As you were describing. I was thinking of other applications, just generally doing diligence. Asking the additional question can make a big difference in some layers.

100%. Because it would be amazing if we had AI bots in corporate development. Our bots ask the seller questions, their bots answer back, and the humans can just go out to lunch. That would be amazing. But I think we're a little bit far away from that. And so until we get there. Given the nuances, the complications with certain businesses, it's hard to anticipate how somebody who's not a subject matter expert and is asking general questions is really going to get to the heart of the matter without asking the extra question, knowing what question that is.

This is good. You got these skills you've identified, you got your approach to developing your team members as they grow in their careers. What about the overall team set up in terms of how you build efficiency, communication, prioritization, all that fun stuff?

It varies wildly. So I've been both a lone wolf sole person in corporate development in that there's nobody else, it's just me. And then I've also been on really big teams where there's 20 people in corporate development. It really comes down to who are your end customers? Your end customers, that is the GM of a business unit or the CEO of a company, who are they in? What's your velocity? Are you doing a deal every few years or are you doing a deal a quarter? Those things dictate how large a team you would need and what kind of support do you have. If you're private equity backed, you're going to have support. So you don't necessarily have to think about new debt financing because you maybe have an ex debt finance person who works at the private equity firm. Their entire job is thinking about leveraged finance, senior loans, mezzanine convertibles, and they've got 10 different relationships across Wall street with money center banks that they can get you rates and terms and prospective credit ratings a lot easier than you could on your own. I think setting up the team is really thinking about what does your end customer need, what's your velocity going to be, and then what do you want to do? Is it only acquisitions and you've got an integration team? Are you going to do venture as well or are you going to do some joint ventures in there or maybe some OEM or partner work in there as well? The scope of complimentary inorganic activity to balance the organic work that gets done dictates the team setup to be successful. Like with most things, in thinking about risk management broadly, you want a little bit of redundancy in the system because humans can miss things. If you're working on a Multi billion dollar transaction with just one human, you're going to overpay somewhere. There's no question you're going to miss something. It's not possible for a non human to know all of those things. How do you set yourself up for success? Is going to be maybe two or three levels of redundancy and someone takes a first crack, someone reviews. Because it's hard for the brain to be both a doer and reviewer of work at the same time. I've tried to get better at this over the course of my career and I still struggle with it. So particularly for junior folks, if you both have to produce something and edit your own work, it's quite hard. And the same thing goes I think with most people. And so it depends which is a wholly unsatisfying answer sometimes to questions. But that is my answer.

It is a big variable. So what you described was the team size which is based around the configuration of the deals you're doing, the velocity. And then you got this other nuance of just your general approach to making sure that you got that level of coverage and that number of reviews from your different SMEs. Fair response on that one. One of the things you mentioned earlier was the emphasis around culture. Yeah, break that down for me because everybody talks about it and I just curious about your perspective of how do you start looking at culture in the deal and assessing the importance of it and how it plays out in integration.

Cultural is so many things, but ultimately to me it means people. The culture at the top dictates the culture at the bottom independent of whether you're on the buy side or the sell side. Culturally, the executive teams and how they interact with each other is indicative of how the teams below them will interact with each other in a management presentation or in a site tour or in some follow up. How the senior people treat the junior people and how the junior people respond to the senior people is telling of the cultural dynamic at that company. Sometimes when I'm talking to a company I may ask two or three people the same question to see if I get different answers about either vision or mission or strategy or something that's sort of macro level that everybody should probably ought to know in order to figure out how consistent is communication messaging. And that's another sort of indicator of culture. And then of course there's simple stuff you can go just look at Glassdoor. What does Glassdoor say about the company? Or the other thing that I've done exactly once in my career is background checks. So there was a company where we were concerned enough about one executive that we actually had a third party background check company do a check on that individual. In retrospect, I am now of the mind that if you think you have to do a background check on an individual at a company you're acquiring, you probably ought not to acquire that company. Or you probably ought to think about making sure that person is not coming along. Because if there's liability coming along, because sometimes where there is smoke, there is fire, you just have to protect yourself at all times because the seller is always going to know more than a buyer in any transaction. That's just how it is. And as a buyer, your role is to really know enough to make an informed decision.

You ever had a deal where the CEO you could tell is not a good culture fit, but the rest of the team may look pretty good? Have you had something like that where you sort of see some pieces you may need to carve out to make the deal work? Or do you just look at it and say, nah, I'm so old and.

Crotchety, I kind of feel that life is too short to deal with situations like that. I feel like if the CEO isn't back able or isn't acquirable, then that business probably ought to be left alone because there's something there. Because it's going to come down to that person. If he or she is not acquirable, all his or her direct reports are likely the same. Now I would say that's for a whole company buyout. If you're talking about the acquisition of just intellectual property, source and object code, or you're talking about buying a piece of ip, that's different because there's not really people coming at that unless it's maybe a few developers that know about that particular kind of ip. But in terms of a whole company buyout, I would say that it would have to be the marginal executive leader that would be left behind in order for a deal to proceed from my perspective. But if it's truly like CEO or COO or CFO or somebody at the top three top five execs, that is that way, that's hard. That'd have to be a really good reason to boot forward with that because I think it's just going to bite you in the end and the bite is going to be bigger than you ever expected and your British are just going to be torn up. It's just not good.

Is it me? Am I too hard headed? Because I'll still look at this deal and I may change the perspective on the valuation and say, hey, I'm going to do a valuation adjustment, but I still want to pursue on this deal. Or this is a problem. I don't know if it's me just growing up with Indian immigrant parents where we're just based on, you get the right price, you get the deal done. Where from your take it sounds like I should run away and not do that deal.

So here's the thing. Every deal has got its own nuances. And so it's hard for me to generalize because when I do generalize immediately there's going to be a quarter case that disproves my generalization. That's going to happen.

Fair knowledge.

I say that because life is short and because there's so many deals out there to be done and people are so important to getting things done, it's a real challenge to not have that fall into place again unless it's truly an IP buy and you really don't need the people. Which is weird in tech because I think most CTOs will tell you just getting the code in and of itself and having their developers pick it up and run with it. The first thing the developer's gonna wanna do is rebuild the code in the frameworks and language that they like or do a massive number of tweaks. You basically paid for a starter kit to rebuild the thing you just bought. That's not very efficient.

All right, I got to stop looking for these messy deals. Give me best cases. What are the really good deals that you see? Companies with these certain elements, those are the ones you really want to pay attention to and go after.

It starts with recognizing what are the elements that you want to go after. I think about corporate strategy and I think about inorganic strategy below that. And so in the inorganic strategy, I think about corp dev as strategy, sourcing, execution and integration. So on the strategy and sourcing side, what that means is what is the size of the company, what is the growth and profit profile of the company? What is the product portfolio of the company? So what does the management team look like? What are the people based and what are their skill sets? How would that fit overall? How would you tell the story to existing employees at your company? Because they're going to be like, hey, we're acquiring. Who? Why? When? Customers and partners, how do you expand and communicate to them? Why? This is a better together story and it's going to be better for them because either you've got a broader offering or there's going to be an integration that makes the two companies Offering more seamless and that means maybe one less screen pop or one less application to view and then ultimately to the board and investors. Why does this make common sense? I often say that a lot of times if you can't explain it to your grandma or your golden retriever, it's too complicated looking for deals. The explanation in one sentence is pretty clear.

That sounds like the big strategic fit is what it comes down to that hey, this kind of fuels a lot of those ambitions that you have in your long term organic growth and that the story component of it, it's going to make a lot of sense to the employees of your company as well as to the customers. This is the tried and true, not just get a good deal.

Yeah. Hopefully if all those things come true that it becomes a good deal, you.

Get a lot more upside potential because of all the synergy word we like.

To throw around, which I don't pay for. We can talk about synergies but I'm not paying for them because in order to achieve them both of us have to participate. And so how is it fair that I pay 100% for synergies that I have to opinion work for?

That's the market these days. Some people believe for some reason. But yeah, that part we agree on.

That's the entire conversation.

We could do a deal together based on that grounded principle.

Yeah.

So the deal killers the things that I need to look for to run away.

Yeah.

Maybe that culture piece. Because if somebody's C suite and got some big red flags, that could be one. Do we agree on that?

Yeah, I think so. Again, if you feel like you have to do a background check on an executive, then probably your spidey sense or something is intuitively telling you that something may be off.

Complete assholes. I've met them, I've gone on a deal and just first conversation like these guys are complete assholes.

It happens and maybe rightfully so. I've kind of been in that position. I started a company out of MIT and like I was sitting in Hong Kong having carrot soup about selling some of my founder shares and I was not a nice guy. I was telling the counterparty on the other side there's no way I'm selling at $4 per share because this thing is going to go through the roof and I appreciate the interest but no. And so there are some people that can have a rightful sort of emotional attachment to what they have built and what they're going to build and where it's going to go. And they could be right. You just may be catching at a time where they are on a trajectory that they see but you don't, or they believe in but you don't. And they're just a complete mismatch that can happen because a lot of life is timing.

What are the reasons we should run away from deals?

Oh, they are many. One of the things that I've seen pretty consistently in my life is deal heat. So you get emotional, lock in on a deal because you don't have a plan B. And so I always pursuing two assets in a space and taking them right up to the altar before crossing that threshold. So that you don't get emotionally locked into something because it's sort of a slipping down slope where you're willing to overlook yet one more and one more thing. If you don't have a walkaway price, we are willing to pay up to this and not a penny more. That's also a slipping down slope where you can talk yourself into anything. Because valuation is an art and a science. You can go and cherry pick a set of precedents or comps or multiples or whatever to justify almost anything. When I was at ubs, I had one senior banker. I'd go ask him questions about valuation. His first question is always, are you the buyer? Are you the seller? Because his advice is going to be different. Because as the buyer, you're trying to get the lowest price, you're going to skew low on the comps, you're a seller, you're trying to get the highest price, you're going to skew high on the comps and that dictates how you think about valuation. Those are a couple of things that I would do in order to figure out what is the right time to run away from a deal. Because you're going down that slipping down slope because you're emotionally over investing or you don't have a walk away price and you're about to make an irrational decision because you've got a lot of time invested and so there's some cost, not only your time, but the team's time in investing in the asset or due diligence or maybe money spent with third party financial or legal advisors that makes you think that we have to go through with it now, even if it's above our walkaway price. That's not true. That's not how the world works. You can always back away from a deal. Yes, there is rocket science, but in most cases this is not rocket science unless you're actually buying rockets.

We're talking a lot about Mindset like this isn't, hey, here's a list of some gleaming things that you're gonna run across that makes you turn around and run away from the deal. This is more about mindset that there is little things that pop up, the little red flags, gray flags that pop up, and there is probably a threshold that you should turn around and exit out the deal. But this is more about having a mindset that you don't get emotionally bought in, that you can stay disciplined and objective about the value and the tensions you're trying to create to make sure there's a good outcome and not just doing the deal because it's like you're in love with the deal.

Yeah, that's exactly right. It's process like over time you develop systems and processes in order to help you perform a little bit better. Because if you've been around the block a couple of times, maybe you'll remember them. But if you want to build a scalable team, articulate the process to other people, it'll make your process better and it'll help the company not get into harm's way inadvertently. It could come down to asking that extra question, are we at the threshold of our walkaway price or having done diligence? Has our walkaway price changed from before diligence because we had a set of assumptions about revenue trajectory or product velocity or customer concentration or pick your poison. Facts and circumstances change. And so one of the things that has to change with that is what your position is. You can have a relatively hardline position, but having a hard line position in the face of new facts, that's not rational. You have to consider the new facts at every turn. Because in most deals, every week or two, you're going to learn something that's materially new to you that you did not know a week or two before. That should change how you think about that deal.

Teach me how do you cut through the crap? What's your approach to really get in there, get diligence and not waste a lot of time and resources and it's prioritization.

So what I tend to think about is on each deal, what are the two or three work streams where I think the real radioactive waste is? Do I think that there is open source vulnerability in a particular company? Do I think that what they've been talking about from a bookings and pipeline perspective is not true? Do I think that what they're saying about their ability to get from total adjustable market A to total addressable market B, in the next couple of years is true or false and just really go in on those things versus I'll pick on legal, for example, commercial contracts. If it's a larger company and they don't have any customer concentration, the commercial contracts are relatively benign. Could you go and investigate a thousand commercial contracts? Yeah. Is that the best use of time and diligence? No. You can kind of already have a sense of where issues are going to come up. If you don't spend the time trying to prioritize where you think the landmines are and you peanut butter spread evenly diligence, you're doing yourself a disservice because you're going to spend more time and more money and delay the finding that may tell you to stop or go. And you need to get that as soon as possible in order to figure out is this the deal or do I need to revert to my plan B deal? Or maybe it's a price adjustment. But in general, in my entire career I've never wanted to put out a non mining loi and have to walk it back and say you know what, actually we need to reduce the price 20% because we found that this one contract had a typo in it. That's a trivial example. That's not a good example. But you understand the point because there's a level of integrity and trust and you always want to maintain that because that works both ways. A company can sell to you, but they can sell to somebody else. And so how you treat them throughout the process dictates whether or not they're more likely to come to you if they get another offer. If you're not in exclusivity or if you are in exclusivity, the pace of play because you don't want a seller to run the clock out on you by slowing down diligence so that your exclusivity expires and you haven't learned enough in order to really go forward, take whatever the next step is.

Big exercise of prioritization. It's like really thinking through what are the key assumptions you have but also what are the key facts you want to make sure hold up to the test of diligence. And I guess focusing on that early, you try to hit those because you can't exhaust it before you sign the loi and just try and get an example here. Right?

Yeah.

So for me the thing I'm always weary about is the customer contracts because I've looked at deals and all of a sudden find out there's a change of control provision across all of them and it's like, well, how are we supposed to predict the actual contract value knowing that once we do a deal they can easily exit out? How do you look at something like that? Because to me that's a big risk right away I'm trying to figure out. And that lends to predicting churn.

Yep.

Because hey, if we're going to do this deal, we want to make sure the growth is going to stay in that this is a competitor. Maybe there's going to be some churn we're trying to predict. But that's another factor in it. It's how easy it's going to be for them to churn.

Yeah.

How do you factor that in? Is that sort of a big thing you would anchor on as like, hey, we need to really dig into this pre loi or do I get comfortable enough and then pass the buck on to post loi?

So it's gross and net retention. So what does that look like? It's customer tenure. What does that look like? Because all the customers are sub three year tenure, then that's hard. But if you've got some customers who've been around for a decade plus, that's amazing. It's also third party validation. If you're a CEO and you're selling a company to me, the last thing you want me to do is go start directly calling your customers in the middle of diligence. So typically in the last 20% of diligence, some customer calls can be made. And either those could be made directly by the buyer, or I find that sometimes sellers are more comfortable having a third party whose job it is to do customer reference calls to do it without mentioning the buyer's name. So that way it doesn't leak out that buyer X is calling customers of Target Y and that third party can have a script, a set number of customers to call that script and the list of customers provided by the seller can be approved and the actual work product of that third party market research firm can be sent to the seller as well because they can use that to improve their business. And typically these are not big dollars you're not paying unless you're getting one of the big consultancies. You're not going to pay a million bucks for that. You're going to maybe pay 100k. What is that worth relative to getting at some peace of mind that customer contracts or customer happiness or customer retention are where you think they are versus what's up with a website? Because websites are notoriously laggy relative to what's actually happening at a business pre loi I think it's customer concentration isn't more than 20 to 40% because that gets really hard. It's customer tenure longevity because the longer the better, the more likely the customers are to persist. It's simple. Things like NPS or CSAT scores, if they're not even measured, then how do you know how happy your customers are? Step one is if NPS or CSAT scores exist, great, because that means that there is a focus on customers and keeping them happy. If, if NPS and CSAT scores exist and they're good, that's even better. That's a good indicator that things may be going well. So there's a bunch of different ways that you can slice and dice. And then ultimately there may be ways to get some channel checks or some market checks. Because if they're not all direct customers and they're selling through channels, sometimes channel partners can be common. Just talking to channel partners about how is product X or how is this category, Product Z sort of performing in your channel? What is the general feedback? What do customers like? What do customers not like? Is it doing well in North America only? Is it doing well globally? Those are things that you can find out if you've got a network. If you really want to understand customers at a deep level without actually doing direct customer dialogue, which you're not going to do in the first week of diligence, that's just silly.

I like how the direction you took this to understand the customer satisfaction and then better getting a sense of the risks where I don't know if it's me, I'm hanging out with lawyers too much. What are their legal risks that we have for them to get out of this contract? I agree on that. And you probably do get a good sense from the high level metrics. But I'm curious because the customer diligence firm sounds like a really interesting resource to use. But again, they're not going to get comfortability till loi sign to utilize that resource. If they do come back with a bunch of things, do you really use that to come renegotiate price or like what net impact does it actually make if they come back and say, hey, there are some reasons why these customers aren't happy and there's some fundamental flaws with the product.

Yeah. So it depends on the magnitude of the issue. If there is customers at risk that you already know from an integration plan perspective, you have to treat them a little bit differently. You're going to have to have a game plan for either retaining those customers or delivering on the roadmap commitments that those customers were given or figuring out no, that customer is actually going to attrit. Or maybe you need to expand the number of customers that are listed on a disclosure schedule in the deal docs. There's ways to handle it and price is one term, but there are also a bunch of other terms. If you've got a 50 to a 200 page stock purchase agreement or asset purchase agreement, then the purchase price is going to be literally one number in a sea of numbers and words. And so there are other terms that you might have in there as well that could also give you relief. It might not be like for like that you could swap customer weakness for longer indemnification or customer weakness for tighter operating covenants or customer weakness for something else in the spa. But thinking about it as a basket of terms, you can shake the basket. And if you've got weakness, there you go. Try to get strength someplace else to offset the tent.

Your pre Loi tent is going to be pretty small tent in terms of.

The tent of people involved or getting to know. Yeah, typically.

So you got a little 2, 3 person tent pre loi obviously it balloons out. I'm trying to get a sense of again, I just, I feel like there's so much at stake that you really don't want to screw up early. Especially you don't want to do a big price adjustment. And it sounds like we identified those key assumptions and facts. And I want to get a sense of, I know it's just not you, but like who are those key people you bring in? Loi?

Yeah. In all situations, at a minimum, it's CEO, CFO and maybe a few others in executive staff. And eventually it's got to get to the board because the CFO has certain authority, then the CEO has certain authority and then the board has a different authority. Let's say it's 10 million, 100 million and a billion dollars versus who can sign off on a particular M and a transaction. Even if that's formally how it's written, as a courtesy and for good hygiene and communication, you may still want to communicate up even if you don't actually need the board's authority to go and execute a transaction. And so there's a whole host of reasons why it should be kept very small at the early stages is because you don't know does the company even want to sell to you? Because in the market that we're in right now, where the I think the odds of a recession in 2025 are 45% versus the last economic study that I heard. If that turns out to be the case and sellers want to either try to get out right now or wait a couple of years to the other side of the recession where maybe the IPO window opens back up again, then buyer and seller are just too far apart right now. You don't want a whole bunch of people in the know or getting emotionally attached to a deal that's never going to happen anyway and you need some basic level of information. Now fortunately, between Google and LinkedIn and Cap IQ, Factset, Crunchbase, Glassdoor, Pitchbook, there's just tons of different resources out there that you can go and put together a one page company profile in an hour, maybe two depending on how proficient a junior person is. After that you can get a little bit smarter. What I typically do is I will tell a founder or CEO in order for us to get to loi, I don't need you to go out and get a banker. Even though I sometimes do encourage founders to go get a banker because it really will help them. I can't be on buy side and their side at the same time. Even though I'm trying to help them help themselves. I'll tell them, hey, I'm going to send you a list of maybe five to 10 questions and typically it's going to be things like give me some quarterly financials like bookings down to ebitda, maybe get me a customer cube of some type and you can redact it. So I don't need the names of your customers, but maybe I want let's say top X customers representing Y percentage of total revenue based on geography or product SKU or something like that. Customer cube Cap table who owns what? Because you need to know who you're talking to because he who owns the most shares or she who owns the most shares is going to be calling the shots. And if he or she is not in the conversation, why number one and then two, when will they be part of the conversation? Because you need to understand your audience in order to articulate how you're going to approach them. Then I'd also ask for things like a high level product roadmap. What are the things that you thought that you were going to build that is going to get you to the next level and maybe a few other things. But keep it simple. So it's not really a 100 hour request of someone who doesn't know if this is going to get there or not. They don't know if there's going to be a huge distraction. Or they may have an idea that the buyer is earnest but they've had a business to run. And so how do you gate and meter the ask to the buyer moment so that you're not overreaching, so that they feel comfortable that they're taking a step that's going to lead to a specific outcome, a go no go decision or a non binding LOI or a specific kind of meeting to have get them comfortable. Or a dinner. In a 90 minute dinner you can accomplish so much and it's not necessarily getting in a conference room over banker boxes and a lot of data and pulling through thousands of pages. It's like talking about strategy and vision product and where the one plus one equals greater than two conversation could be. And do we believe the same kinds of things or not?

Do you continue that? I feel like early in the deal process you do a lot of that. You do the wining dining, get to know each other, get comfortability and trust. But then as you continue their process, does that approach still I take it, apply well as you start meeting other leaders and so forth or I think.

That'S in the honeymoon phase, that's in the first 20%. And then you get to a phase where it's going to be naturally contentious because seller wants highest price, buyer wants lowest price. And in that contention there's going to be some puts and takes, there's going to be some back and forth on terms of the LOI or in terms of the stock purchase agreement or asset purchase agreement. And in those moments it's hard to sit down and have a cordial meal and not have the deliberations of the deal not taint the appetite over some rubber chicken that you're eating. I think in the first 20% of the dance I think that works well. And then at the very end, at the closing dinner, I think it works well again there. But there will be the messy middle in which it will be more standoffish type communication. But it still has to be good rapport back and forth. It's just not going to be as chummy.

Had those meetings over coffee.

Yeah.

This deal expands out and we start building these key assumptions and really our deal thesis and it gets more detailed. LOI gets signed, you're a diligence kickoff. You can tell you're a good communicator. Run me through it.

So these days we do them mostly virtually because people are distributed more so than they've ever been. Back in IBM days we'd go to the Learning center at IBM, which is this massive property that has an amphitheater in it too. Imagine being in a movie theater and somebody's down in front saying, this is what we're going to talk about today. And you've got the entire movie theater full. That's really old school. Due diligence kickoffs these days, all virtual. It's kind of working with the team, to be very precise. Here is why you're invited to this due diligence kickoff. Here's what we're going to talk about, here's the timeline, here's what we're going to expect from you. Here's the next steps, here's where certain information is that we already have or it's going to be stored. And so it's very basic information in terms of who, where, when, what, so that you don't waste people's time. You need your diligence team to be as effective as possible and not worrying about administribut so they can spend their brainpower working on delving deeper from a subject matter, expertise, perspective into the hr, it, finance, legal, whatever the hot button issue could be. And I think a due diligence kickoff session is about an hour. It's great to have someone from leadership kick it off and say the why. I can do that and have done that, but I love speaking to other people. I love getting other people involved. Not because I can't do it, because I want accountability. I'm always looking for accountability because I consider it a failure if I have to pick up someone's work and do it for them. Either I failed to figure out why they couldn't do it, or I've picked the wrong person to be on the diligence team, or I didn't support them in a way that kind of made them feel that they could be out front and center asking the right questions with their counterpart. And so I try to guard against that because that just never goes well.

That sounds pretty straightforward in terms of setting the expectations and then you're setting the expectations for reporting and findings. Any other little nuanced details? Do you have formats or templates you expect them to deliver on?

Yes, you know, it's PowerPoints and spreadsheets. I've looked at lots of different AI technologies that can maybe automate some of the diligence process. And there's of course there's deal rooms and there's other tools that you can use in order to sort of collect data. But a lot of it is just trying to be thoughtful, thoughtful and crisp in terms of what do people really need to know. And then if it's a particularly authority solution or situation or issue, I may also beta test it. So before we get on a call with a hundred people, pick two people from work streams that you know are going to be impactful with subject matter experts in those work streams that have been through multiple deals before, been there, done there, got the T shirt and say hey, this is what we're going to plan to use for due diligence kickoff. What in here to you is confusing or what in here could be clearer to you or what do you think the team might benefit from that we added to this. So that way, just like in software, you're beta testing something before you're releasing it for general availability to the entire diligence team so that you're more likely than not to have it. Land minimize questions, minimize frustration, maximize efficiency. And we're going that way. This is why this is when get on board.

You ever run across accountability issues? Because we mentioned the conflict of the day to day responsibilities versus I got some extra homework to do.

Yeah, all the time. All the time. What it comes down to is figuring out a way to support that person, ideally in advance of any hard deadline. The exclusion exclusivity or the expiration of exclusivity or a board meeting coming up because somebody might just get sick or they may have a family medical emergency. Life happens. It's not always just somebody can't do their job. I've had people that have, I won't talk about their particular personal situation, but you wouldn't wish it on their worst enemy. And that is, it has nothing to do with their ability to do their job. It's just they got taken off the field and so you have to figure out a way to work with their boss or work with their peer or work with somebody else in that function in order to do some quick knowledge share, sort of restart or pivot in that function so that you can keep doing the diligence. It's just you've got somebody who goes to need to take care of their life in a meaningful way. And I'm pretty hard nosed but like I also have to be empathetic to life happens. And we're not curing cancer here. You're playing the long game. So you've got to be sensitive to the fact that you may need that person again, that relationship again. And if you treat them as though they're a widget that kind of fell off the machine and they should have Just kept on plugging through. You will probably never get their best ever again and you deserve not to.

Such an interesting dynamic of just the function of corporate development. It's just so unique compared to all the other functions and organization in that it is the extreme case of cross functional that it's dependent on all the different functions and working with them. So I think that's treating that as your team and how you support them. What are crazy surprises you've come across because you got to come across some things in diligence or integration. And I want to hear some stories.

That background check story, it was someone who was involved with some rather shady real estate dealings. And at the time I was uneasy. Getting a third party to do a background check is not because of the expense of the background check, it's just the fact that we thought we had to do one. So that's not good. Or speaking truth to power and telling a general manager who runs a billion dollar P and L that the deal that he's trying to do is a dumb deal, right? It's not a dumb deal because of anyone. It's because we figured out that the deal was so sensitive to this particular element in the financial model that the returns swung wildly with just a little poke on that one term that we just didn't realize until we're maybe a few weeks in and moving forward with that deal probably would have been career suicide for that GM figuring out how to speak truth to power without being Dr. No or Mr. Negative. That was really valuable because sometimes those can be career ending conversations because people can have a lot of political power and so, oh, such and such in Corp Dev killed that deal because of this, that and the other and it can get misconstrued. That could end your upward trajectory at a company. So that's not good. I had a call today with a CEO who I think he's a good guy, but he calls me and he tells me at the end of our conversation, oh, and by the way, I've got three written offers, so I'm not sure you guys are going to be able to keep up with the pace of play here. Why didn't you start with that? We spent 30 minutes talking about the business and where he is now relative to where he was a year ago and how our companies could come together. But the reality is, typically at large publicly traded companies, you cannot respond to something within a week and say we're putting non body loi out to you in a week. And mostly I just. If that's your pace Then I'm out. And it's not because I don't like you. It's not because I don't like the technology. It's just the reality of we're going to scramble the jets and get board members who could be literally anywhere on the planet like on a 30 minute or 60 minute call for a deal they've never heard of because you've got an emergency. No, that's not how we're going to do things. That's why I like to sort of work with executive teams and product development teams in order to figure out proactively what do we want to do next, how do we develop a plan A and plan B. How do we methodically go after those things because that puts us a little bit more in control and we're not trying to catch up with fire drills because I've worn asbestos enough in my career and I don't like it.

Surprises come in all shapes and sizes. I like hearing them. I don't know any M and A books that you'll learn about that from. Teach me some meat of negotiating and doing these deals. What have you learned? There's a good courting the relationship and then there's just pure how do you structure the deal right to get it done?

I'd like to say that it's a super secret, impossible art to learn. It's just not. I think most sellers have a number in mind and sometimes talk to a CEO and he's I personally need to take 5 million and put that into my retirement because I need to set up my family as part of a trust and some stuff that he's been thinking about working on. And maybe he's had a couple X's, they've not gone well. But he's got a number and that number, you divide that by the percentage of equity he owns and that's the purchase price that he needs to get. And that may have nothing to do with multiples or what other companies are actually valued revenue or EBITDA multiples in his space. It's just that's his or her number or it could be, particularly if it's a private equity backed business. So you know that cash on cash returns for private equity tends to be in the two to three times multiple of money area. I think that's true for most of the big PE firms that have raised anywhere between one to $20 billion funds. You can figure out how much equity they've put in, multiply that by two or two and a half times, three times and figure out what the debt is, and you can arrive at enterprise value. Of course, there's also multiples. I think at the country club, if a CEO is talking about the deal that he or she did, they want to be able to say, yeah, and I got five times, or I got 10 times revenue, or I got 10 times, or I got 15 times EBITDA, knowing that others in their sector are getting those kinds of deals done, and so they may have a multiple that they're trying to hit. Ultimately, there's a part of me that doesn't really care what their valuation is. I only care as a buyer what it's worth to us. And what it's worth to us is more dictated by what we think is fair value, where we think we can take it, how we think we can use our go to market to get it into the wild faster, where we think there might be dis. Synergy. So you mentioned those customer contracts. Are there going to be customers that atrophy away as a result of us being announced as the buyer on the deal? That's a reality. And it's having those conversations in a way that leaves some room, but is also very firm. I can be a nice guy until I'm not. And when I'm not, I'm very direct. Your business isn't worth more than. I don't think we can take another step here. I think this conversation has gone as far as it can go. I don't think we have anything else to talk about. Those phrases are going to come up probably at some point in a conversation, and occasionally I'll use emotion as a tactic, but mostly I'm getting more settled in my ways and sort of like taking the Jordan fadeaway jumper versus trying to thunder dunk down the lane. I just have a bit of a different style now, and so I just try to tell CEOs and founders very crisply. So. Yesterday there was a Singaporean founder who was like, yeah, we've got a tech solution and we're thinking about selling. So that's why I reached out and in 10 minutes we had a conversation. I told him why it wouldn't be a fit and specifically where I thought he could spend his time that would be more efficient for him because I don't want to spin up a bunch of people on our side. If he's trying to sell his business, he needs to get on about that very quickly. It's really about being efficient. And I think over time people will respect that because time is the only thing that we can't manufacture. And we can't buy.

What's the biggest bid ask spread you've had to overcome?

That's a tricky question because sometimes you don't overcome the bid ask spread in general. I think if bid ask spreads are more than about 20%, you don't overcome them. If somebody's saying their business is worth a billion and you think it's worth a half a billion, you're done. Now, it may be that there's a way that you can get an earn out where you can say, okay, we can do 400 upfront, we can do another 300 over three years. That gets you to 700, which is not your billion, but we're getting a bit closer. Could that work? Maybe. But still, that's about a 30% difference. Right.

So I was trying to get at like, what are your approaches to overcome it? Yeah, earn out seems to be like the de facto.

Yeah. And I hate earnouts. Earnouts are problematic for so many people.

Actually done them say the exact same thing. They hate earnouts.

Yeah, because you're basically setting yourself up for litigation. The seller will not really control his or her destiny after they are acquired and their ability to execute. Anyway, back to your original question. How do you overcome large bid ask spreads? If it can be overcome, it's having a conversation about what is the basis for your valuation early. Are you looking at multiples? Do you have a number that you need to hit? If those things are rational, then you can actually have a conversation. But if they're unwilling to share their valuation approach, or if they're unwilling to share that, maybe this particular person on the board has an approach that they're not willing to share to you, then you're done. Because unless you're a hyperscaler and you've got 100 billion in cash on the books right now, why would you overpay for something knowingly? I've never been in a position where I've had to overcome bid ask spreads of more than 20, maybe 30%. And beyond that, there's some fundamental disconnect in the belief in the future. The founder belief in the future or the CEO belief in the future and the buyer belief in the future are fundamentally different pictures, and there's no way to make them converge. In those situations, you want to part friends in order to be able to have a conversation a year from now. Because if the buyer's version of the future turns out to be true, you don't want to have torched that CEO and founder and told him you're the dumbest person I've ever talked to. I don't ever want to see you again because life is too short for that.

That's a good point. There is like a timing element, too. And all those factors that you mentioned get me reflecting on my own situation where it's like we're growing really well, like 60% year over year. We got a great, strong future ahead. That's why we hold to this high valuation expectation. The relationship part, you mentioned that you're pretty straightforward on this stuff.

Yeah.

It sounds like you're just right at it. If we got interest, this is where we see an opportunity. Talk to me about the relationship piece, because I feel like this is a stage I'm at. I'm pipeline building right now, and that's part of it. And sometimes it's just, you know, you got something, you see it there. Do I build a cadence to check in every six months? Is there something I should be doing? More of the wining and dining?

Yeah.

What's your magic on the approach for building the relationships that's going to ultimately get these deals?

It's not very magical. I use LinkedIn a lot.

I love LinkedIn.

So I was in India last week And I had three meetings that I set up based on LinkedIn friends that I'd never met. Well, they're LinkedIn friends now. People that I had never met in life before that I met at a coffee shop in the CEO's office. And one was this amazing peanut butter chocolate milkshake, which was a revelation in and of itself. Just spend the extra time when you're in a town. So I'll be in New York in, I don't know, three or four weeks. And so when I'm in New York, I'll just spend time making sure that, hey, probably next week or so, I'll start sending out DMs or emails to CEOs and founders that maybe I haven't ever met in person yet, but are in the New York metro area and say, hey, do you have 20 minutes to catch coffee? Because I see I'm going to be five blocks from your office on the 21st, for example, and I think that goes a long way. The other thing I think is important is I also, at least a couple of times a year, try to get the trade shows because not for the content, which can be amazing, but because there may be a dozen CEOs descending on that conference and I can catch coffees with half of them because their calendar hasn't filled up and we're at the same place at the same time. We can, over a cup of coffee, share. This is what we do, this is what they do. I can maybe talk to them about our process and kind of what that looks like. I can talk to them about what their concerns and motivation are and I can just be very transparent with them and based on that, hopefully leave them with a favorable impression. Because ultimately on the buy side, where you're trying to get to is you want to be the buyer of choice. When a CEO or founders thinks that they are about to sell, maybe they've hired an investment banker, maybe they've not. They give you a call or they say, hey, can we chat? Can we have a conversation? And if you're in that position, that's fantastic. I got wind that there was the company in our space. There's a banker that's floating around who's saying, hey, such and such made to come to market. I've already sat down with one of the founders in Vegas at one of our trade shows. I know him and I know his situation and I know how he thinks and I know why I think he might choose to sell. I will develop at least a surface level relationship before the banker is sending me a one page teaser and saying I could be amongst 50 competitors for this particular asset. And that puts me in a slightly differentiated position because you just DM the CEO directly now, that is up until the point there's an actual process where the information channels have to be more through the banker directly. That's how I think about relationship development. And so when I first came into this sector that I'm in right now, I probably added at least a couple hundred CEOs founders on LinkedIn in the first month of hire. And since then it's just very consistent. I know that there's a ton that I don't know, but in terms of large companies that I don't know, that's a much smaller percentage. Now.

Is that how we got connected?

I think so, initially, yeah.

I'm big on doing that, sending those connections. We found a lot of our podcast speakers. I know we get a bunch of inbound which we rarely ever take, but most of ours always outbound through LinkedIn. Yeah, and I like how you take that approach with founder ultimate goal, buyer of choice when the situations arises. And then you mentioned this direct approach at LinkedIn, connecting with the CEO founders, meeting them as you travel, then the trade show component where there's likely going to be a lot of founders CEOs in that space there. Does this still apply on the corporate side. And I don't know if this is something you look at where you're looking at the business lines of some of these other strategics and exploring opportunities to potentially carve out or pick up a business line from a competitor.

In our space there are businesses that will separate. Knowing that CEO or that GM who runs that business is important because that's not very dissimilar from a CEO of an independent standalone company. It's a very similar dynamic except for in the case of a corporate carve out, maybe you have a transition services agreement for G and A functions that needs to come along with it because it's been quasi absorbed into the larger parent years back. So it's a little different from a deal mechanics perspective, but from a relationship perspective it's the exact same. The only thing that may be a little bit different in approaching divestitures is sometimes the CFO or corp dev may be a better first call because the CFO will care about the additional capital that's coming into the company to fund other projects. And the corp dev person is probably the person who's been charged with go build an analysis to either wind this thing down or divest it and figure out which one of those is the better. If it turns out that the divest case trumps the wind down case, then there will actually be a sell site process on that particular part of the business. And if you've developed a relationship there, you get to participate.

So there's a little more complexities, but there's more folks involved. That gives you more opportunities to drive at that business case, whether it's directly working with that GM or going to the CFO Corp dev understand that they may have some strategy in flight that they're looking at. They're winding down or moving the business out. Yeah, more angles to tap into because the company's larger.

And so think about the CFO and the corp dev function in that situation as the owner of the business which might not have a board formally because it's a division of a larger company. And I think of the GM or president or business unit leader of that business as critical because that person's got direct reports and very much functions like a CEO or like a VP or an EVP that would be brought into a buyer. It's very similar on a number of levels. It's just being a little bit more sensitive to the fact that the transition services, the GNA functions, the corporate support that's been provided to that entity is a diligence work stream in and of itself. Because what ERP are the financials run on and can we get an instance of that? Is there a separate instance of Salesforce for the pipeline that they're building or is it commingled with the parent Salesforce instance? Are all employees run on an HR information system at the corporate level or is there a separate HRIs at the subsidiary level? Probably not. So those are the kinds of business and IT applications that support the business that someone has got to have. Because it would be amazing if at closing you could snap your fingers and get all employees onto all your new systems. But that's typically not how it works. And from a business continuity perspective, change is hard. You might want to allow some time for transition because you're never going to be able to diligence everything in a TSA or a transition service agreement. In my experience. It's not necessarily an afterthought, but it is not the first thing you start negotiating with a carve out. It's the last quarter of the discussion that you really have to get into that. Because if you can't get the terms and conditions on the sort of the main asset, then the TSA is not the tail that's going to wag the dog. You're not going to do a deal because you get a sweetheart TSA deal, but you get a terrible overall deal on the platform you're trying to buy. That's not how it works.

I think I'm learning you had some good carve out experience.

Yeah, that much. Larger companies that were multi billion dollars and growing single digit revenue percentages. You have to think about carve outs part of the overall portfolio because you can redeploy that capital into things that are growing faster. Investors can make their own capital allocation choices, but inside of a corporate you can do the same. And why hang on to effectively dead money where you can take that and flip it into something more valuable? This is not the case. But if Nvidia had a sunglasses business, why on earth wouldn't they sell that to go and set up a new wafer? Fab I don't know what the value of a sunglasses business would be at Nvidia, but you get the point. There's clearly a capital allocation to new chipsets that would probably be more economic.

This is going to be our next podcast topic. When we do the sequel to this interview, we'll do it all about carve out what we'll see. Let's see how many people ping Andrew on LinkedIn and tell him we should do A sequel after they listen to this. Especially if you could prove that you've gotten this far in the interview. Definitely buyer led M and A. I've been riffing about it, put a little framework out there and it's been my reflection in how corporate development teams mature and their process just becomes more and more oriented on the buy side. And I was just curious on your take from your experience, what does a sense of that maturity look like for you?

That's all I do. That's my entire career. You know. I'm a recovering investment banker. I've got great love and respect for investment bankers at both bold brackets and boutiques. However, there's almost never been a time in my career where I've gotten a inbound from an investment banker and I said oh my God, this is the deal I've been waiting for my entire career. Maybe I'm the only one, but I've been really unlucky in that regard. Mostly I've had to work with various management teams in order to figure out what do we want to go do that could pull the roadmap in from something that we could deliver in two years of version 1.0. That's sort of a version 2.0 that we could start selling right now. Or what new geography don't we have that we could get into? So I just come back from India and I've spent time in Brazil and Israel and I've got an appreciation for what it takes to be on the ground, speak the language, know the locals, have multi year relationships. That's hard to do from the US in a lot of instances. It's not about the frequent flyer miles. You just can't be in enough places enough times if you don't have somebody who's local or if it's private equity backed and you're trying to get that three times cash on cash return. From a private equity perspective, part of that is multiple arbitrage. Let's say a private equity firm buys in at 10 times EBITDA, but they can go and add a quarter billion dollars worth of enterprise value by buying tuck ins at 5 times EBITDA and integrating them into the business. I'll use integration with a lowercase I versus a capital I. So long as you have at least four to eight quarters of trailing pro forma financials so that the whole co business looks better. Then maybe you can sell the whole thing at nine or 10 times. That can work. Unless maybe I'm on the other side and I ask you the purchase prices of each of your assets and I poke into the integration and figure out that you haven't integrated anything. And maybe I pay you five times for those things. Maybe I walk away because I'm not the buyer for you. But you find somebody who's not me who's willing to do that for you.

I want to be on your team. I don't want to do a deal on the other side of the table with you.

Buyer led M and E is really all I've done here at 5 9, at Dell, at IBM, for OmniTRAX, which is downtown. It's backed by Vista, since bought by a sister portfolio company. And it's really about working. Usually what I've done is I work with CEO, CFO or some of the leadership team and I try to figure out where are we going? Who do you want to keep tabs on? Who do you like? Sometimes I walk into a situation the CEO already knows. I know every company in the space. I've been in the space for 30 years. You're not going to find a new company for me to go acquire. Great. Who's on your short list? So those are maybe the five CEOs that I say, hey, I'm in your town, can we get together? No agenda, but I'd like to tell you about me, what I do and what we do and where we could go together. But we're not having this conversation. But we couldn't have this conversation. If you want to have this conversation, it's something like that or it's maybe a, hey, our executive team is getting together for a retreat or getting together for this particular conference and I'd love to put you in a room with our CEO if you're open to it and if you're around. Because I think we've had good conversations and I think you guys would have good conversations. If that continues, then maybe something good could come out for both of us. It's no more complicated than that. It's just being efficient and trying to be as thoughtful as possible. And so for the junior people, what that looks like is prep work, I would like to think. I've never put a buy side CEO in a position where he or she had to go into a meeting not really understanding the minimum about the target without at least some kind of briefing, one page company profile, understanding of financials scuttle that we hear in the industry, maybe joint customers that we have that are overlapping, maybe the hot button that the CEO has maybe even stalls on valuation even though they might not even have that conversation at the outset or basic background or points of commonality, whether that's schools or companies or where people grew up. That's the kind of glue stuff that I think can make 20 minute coffees pretty impactful. One of the most disrespectful things that can be done is if a CEO walks into a meeting as though nobody knows who they are. I think you torture relationship faster than anything when there's been just a lackadaisical effort put at the prep work. Why even have the meeting if you're going to set the relationship back versus advance it?

Can you be buyer led in an auction?

Yes, and that's why I participate in few auctions. In an auction process, obviously you have to keep pace of play with the process letter that the sell side banker has sent. To the extent that you have interest, to the extent that it makes sense. I would say that in a lot of situations, if there's strategic fit, product fit, technical fit, financial fit, cultural fit, valuation fit, it's the product and technical that tends to need to be sorted out. And so what it can look from the buy side is co opting the standard management presentation. Okay. The banker, particularly the analyst and the associate, maybe the VP has spent a lot of time putting together beautiful looking slides. There's 50 pages. Absolutely. They should want the management team to present those slides and we want to hear it. I don't want to hear all 50 pages. I want to understand you, the executive team, I want to understand where you're going and then we'll read the rest. And then what we may want to do is assert from a product and technical perspective, we want the management presentation to focus 80% on that. After we get through the 20% of who you are, why you're here, where you're going, without reading page by page, all 50 pages in the management presentation, which grinds my gears. What I tend to do is I get with the bankers in advance and say I know that this is your typical process. Here's the three point or five point agenda that we would like to go through. How can we collaborate? So it's a good use of our team's time because we want to get to a position to be a bidder in your process. We don't want to be a no bid, but if you restrain us to only asking this subset of questions, we may not collect enough information to become a bid and we don't want to waste your time. And so if you're not willing to work with us on this, then unfortunately we may be out and that's going to be different if it's a publicly traded company versus a private company because in a public company we've got a lot more disclosure. And so I'd handle that conversation differently, but it's really just working with the other side to set the expectation.

Yeah, communicate with the banker is what's.

Important to you in an auction process. If we have to be at an.

Auction, otherwise avoid the auction altogether.

Yeah. The other thing I did when I first got to this job is I ended up here. There's 40 bankers that spend time in our space or say they spend time in our space. It would be the rare banker that I've never heard of that's bringing an asset to 5, 9 for example. And more likely than not, that would be a banker in a geography that we maybe don't do business in or who is maybe in a different space that's bringing an asset that's not right down the fairway for us in the CX marketplace. So that's how I think about it. But bankers are people too, need to treat them with care and respect. We try to do a good job at answering the mail. So if somebody sends a teaser across, do my level best to try and respond at least a got it or will review within three business days. Three business days is generally my sla. In corp dev, if you can't respond to something in three business days, something's gone wrong.

We both work in tech. The future of Corp dev the next five, 10 years. Obviously a lot of emerging technology. What's your view?

As I talk to people, I know that people are using ChatGPT and other LLM tools for summaries. ChatGPT, give me a summary of 10 companies in the high end art deco chair space, for example. And so maybe that's Noel and Herman Miller and Steelcase. I don't know furniture, but these are the only names that can come to the top of mind. But you could do that in tech. So whether that's in semiconductors or in cybersecurity or in horizontal SaaS, you could absolutely do that. And you could say now do that again for private companies. Now do that again for companies on the eastern half of the us now do that again for companies that have been founded after 2000. So you can continue to slice and dice and make ChatGPT friendlier and friendlier to the point where you get down to a list of, let's say five, 10 or 20 companies that are kind of like in a universe. And back in the day you'd send some analysts to Google and Capital IQ and to your old deal files and say go build this list for me in Excel and then create one page company profiles, which you may still do. It's just if it's 5am on a Saturday and you woke up because you just have got nothing better to do for some strange reason, and you want to compile a list of targets that you want to spend a little bit of time with over a cup of coffee, you can literally do that on your phone. So that's one relatively simple example. The other thing that will start to get automated a little bit more is some of the communication back and forth. Because a lot of the communication back and forth is very manual. And that can be good because in my experience you need one to one communications conduits early in diligence and you need many to many conduits later in diligence. And that's because you need the teams not to tear each other apart a little bit because they don't really know each other and they don't know what ground rules have been set from the executive team on down, that needs to filter down a little bit. The ability to tighten up some of that communication by using some tools and summaries is helpful. And also with diligence calls themselves recording calls, it's almost standard. It's the odd legal call that's talking about a really thorny issue where no one wants recording to be used as litigation fodder. So that particular call is not recorded. But a lot of times, particularly if it's a technical call, if it's a finance call, or if it's an IT call, and for whatever reason you've got people all across the planet and they're literally sleeping at the time that the other half the planet is having the call. You want the recording so they can figure out what's next. Or because let's say in HR you have three people in HR that are working on this, but over time you may have 30 people in HR that are working on this because you may need to support, offer letters or management buyout incentives or you need to figure out equity. And those are slightly different team members then having that information or at least call summaries from the initial calls, I think that'll be helpful. I see technology improving communications because communications is where deal breaks down. Deals break down all the time. Because who is it, Mark Twain, who's saying that the problem with communication is believing that it's actually occurred or something similar to that? I think that's Very true. On a lot of deals. If you can figure out a way to enable technology to help people communicate better and more efficiently, I think that saves a lot of time and heartache. I'm looking forward to that in the future.

That's the right thing for review in terms of the key element is the people relationship part. And if AI can help do that better, focus better on it.

Yeah, I think so. Because that's one of the things that I think is just really never going to go away. Using AI to do the more monotonous things so that human creativity and brain power can be spent on the things that change deal to deal. That's where it's at. I don't want AI negotiating for me because I think of what happens in the stock market with auto trading. If there's no circuit breaker, you could get to some weird outcomes in terms of purchase price. If you had, let's say an adversarial seller, buyer bot going at it from a multi parameter negotiation on revenue growth and profitability and customer count and like all these things that do go into the mix. No, let's just talk about summarizing calls. Let's talk about summarizing company profiles. Let's talk about automating some of the work that analysts do in terms of putting together PowerPoint. To this day I fail to have a good AI tool that auto builds PowerPoints. There are things out there that we've been trying and looking at, but because most of corporate America, Amazon expected speaks in PowerPoint, it would be a tremendous boon to have something that automates at least some of the basics of PowerPoint construction. Because a lot of time goes into that. Because if you're in a 30 minute meeting and you're with people that make a lot of money, sometimes I'll calculate how much it costs per call. If you take the hourly wage of 10 people that are very senior at a company, you could be spending $10,000 on that call in terms of their time. If you are not making sure that is the most efficient use of that call, it's a waste. It's not our waste. Trying to be as efficient as humanly possible would be great. The person who creates a PowerPoint autopilot or a PowerPoint copilot that actually works and doesn't just put out kitten pictures, they're going to make a lot of money.

I'm pretty optimistic. That's in the zero to three year window.

Yeah, I hope so.

There's some emerging stuff. I've seen the team play around with not quite to the level you're describing, but in that direction.

Good.

Andrew, what's the craziest thing you've seen in M and A?

So, sadly, there was a point in time where there was a person that I had to let go in investment banking. It just so happened that she was female, and so I've never experienced a person in actual tears being let go. It just turned into a scene and I sort of had to extricate myself. I wish her well, and I think she's doing well. The only other time that's happened wasn't in the deal business is I was running a sales team and one of my sellers was fabricating calls in Salesforce and so I had to walk him out the door. So it's usually people related and it's usually something that's related to someone either coming or going. It usually it's going and that's where the craziest things tend to happen. But at this stage, not much surprises me.

That's like a whole theme we could have stories on for anybody that's managed people. The exits can be tough and dramatic and crazy.

Yeah. It's people's livelihoods, so you can't take it lightly. And you've got to be sensitive and empathetic and understand where they're coming from and meet them where they are. And it can just be sometimes a little bit shocking to get out of the mechanics of just sort of doing the job and just having to take a step back and realize, oh, this is not about the job. This is about the human. And putting the human first. Sounds silly and sounds trite, but it just doesn't always get done. It doesn't always get done because there's earnings pressure, there's revenue pressure, there's performance pressure. There's all these pressures that kind of come into play. And sometimes the human element falls to the bottom.

That's the theme of this podcast. Don't forget the human element. Be nice to everybody.

Yeah.

Andrew, thank you so much for taking the time with me. This has been a great conversation and I'm glad we got to go. A lot of time off script. Two thirds of this interview is off the outline. So outstanding you went with it. So that's what I tend to do. Both the punches here.

Happy to do it. Thanks for having me on.

Fellow M and A scientists, if you listen this far, you are a true M and A scientist. Love to hear from you. Welcome. The ideas topic ideas and the criticism. That's how I actually get better at doing this. Reach out to me on LinkedIn. Blow up Andrew. Let's get Andrew back on. If Andrew gets 100 plus people reaching out, we'll get him back on for a sequel.

Cool.

Let's make that happen. Till next time. Here's to the deal.

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