Summit Recap: Avoiding Valuation Surprises and Accounting for M&A Transactions

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To our next session, Avoiding Valuation Surprises and Accounting for MA Transactions. And please join me in welcoming PJ Patel, co CEO and Senior Managing Director at Valuation Research Corporation and Brian Bucher, Vice President of Corporate Strategy and M and A at Church and Dwight. Thank you guys so much for joining us. Thank you. First, Gisan, congratulations on putting on a great conference. There's been a lot of good topics on automation, integration, synergies and other matters, so really enjoyed listening in on some of the sessions earlier today. This session is going to focus on valuation. Brian, maybe you can start. What's your background in M and A?

Hey everyone. Good to see everyone. Brian Buchert I run corporate strategy and M and A for Church and Dwight. For those not aware of us, we're like a mini Proctor and Gamble product company. Roughly 20 billion market cap, been around for 176 years. I've been here for almost 16 years now, which is almost is stunning to me actually. I didn't really expect to be here this long, but actually, excuse me, 14 years I lost track. And before that I worked at a private equity firm doing direct investments and prior to that investment banking at Morgan Stanley. So have worked on deals my whole career. And at Church of DWight We've done 16 acquisitions in period of time that I've been here and maybe six or seven very small divestitures over that period of time as well and also work on any the way it's described as anything where money goes out the door, I somehow get involved in it. We don't have a team. It's just me. It's been just me for every day of 14 years. So I have a lot of help and resources in the company. Helping, but no one works for me.

That sounds Good. Brian, I'm P.J. patel. I'm C.O. cEO of valuation research. Despite the advice given on the last panel, I will say that my focus is on valuation and with that I get to see a lot of deals. I've been doing this for about 25 years and have worked on well over a thousand deals in that time period. Working with public companies, private equity firms. One of the interesting things about my job is that I get to see deals all the way through their life cycle. So a lot of times we're working with companies pre deal, we're working with them at the time they do the deal for opening balance sheet purposes and then we're also working with them post deal and we get to see their impairment reviews. And I can share some guidelines that I see in terms of best practices, but also timeframes in terms of integration and things of that sort of. I will say one of the items that we always look at when we're working on deals is is this a good deal? Is it a bad deal? Is it so. So is it somewhere in the middle? And the vast majority of the deals I would say are good deals. I hear all the statistics in terms of acquisitions failing and things of that sort. But quite frankly, in my experience, the vast majority of deals that we see are positive, they work and we see the companies that are doing those deals benefiting in terms of their valuation and margins and things of that. So, Brian, we've been working together, I guess 14 years since you started at Church in Dwight. And you know, over the last few years we've been seeing your deals get bigger and bigger, but we also haven't seen any impairment. So, you know, when you're doing deals, how do you ensure that you're not overpaying, that you don't have an impairment down the road, especially in this environment, can be tricky.

Yeah, having. It's an interesting question, knock on wood. I'll probably jinx myself here. But yes, we have not had to take an impairment yet, but you never know. Obviously for sure, we do a lot of diligence on deals, but we do actually have a conversation interestingly about impairments in the beginning and about pricing and how we're going to structure a deal. And it is a topic that comes up. We do, you know, would we not do a deal because we think there's a higher case of impairment risk? Probably not, but it also leads us not to overpay for deals. You know, we actually go back and we walk away from a lot of things if we feel like it's going to be a hot, crazy deal and we don't want to take an impairment charge someday. And, you know, rightly or wrongly, it's kind of a strategy for us. I've walked away from plenty of things that we really liked. Great brands, great businesses, fantastic. And we just felt like it was a risky proposition and that we didn't want to overpay. And we're pretty. What's the word? There's no emotion. We're very big on being very emotionless about deals. We never get deal fever. No one ever says things like, I really want to own this business. It's always, I'd like to own it at the right price and right structure. If we don't, we move on because our base business is strong. If we don't do deals, it doesn't matter. Quite honestly now, it hurt me and my job, but I don't have any KPIs, I don't have to do any number of deals. It's worked out to kind of be one a year, but that's just pure happenstance. We'll go years without doing a deal.

Got it.

And some years we'll do three or four.

It's interesting for me working with you, I mean, quite frankly, working with your group is a little different than, quite frankly, just about every other group that I work with. And what I would say is that as a valuation specialist, I mean, I focused on fundamental valuation analysis, discounted cash flow analysis, irr, EBITDA multiples. We've heard some of the people today talking about using those kinds of metrics as well, and methods as well. But your math is different a lot of times than that. I think the thing that resonates with me is if you're competing against 20 other firms, they're all using the same math. Your math is oftentimes a little bit different. So maybe you can talk a little bit about that.

Yeah. The way to describe it is we do do different math. And I'd say we do DCS and IRR simply because you want them and you use them. We actually have created kind of our own proprietary metric that we have studied over. We've worked with kind of. It sounds crazy, but we've worked with statisticians, we looked at public companies, we looked at our history and determined the traditional metrics of valuing businesses don't work. And so I'll take a DCF as an example. Not to be too dismissive of it but I can make you believe anything with the dcf it's just all about the inputs going into it. We're a big cash company. Cash earnings is king. We don't do any games with. We actually don't even really look at EPS on a deal. We don't look at. I've presented to our board for 14 years and we've never once talked about a DCF or irr. It's a completely different metric and it's a cash on asset metric that's a little different than what some of the things that are out there. And we've determined that basically the R squared to Church and DWight stock is like 98 something percent and that's good enough for us. And if we continue, we're just fundamental believers that investors value cash over the mirage of a P and L. I always say the actual income statement is not that it's not real but it's something that can be sort of manipulated to a degree. You can't manipulate the balance sheet or the cash flow statement. And so we are very focused on strong cash generating businesses. And we also have a fundamental belief that having expensive assets is a negative and we prefer asset light type businesses. It works really well for brands in our space. We prefer not to take on plants as an example but we also value things that others might not value as much. I'll give an example is tax shield. To us that's a very valuable component because it's cash. We also are willing to be more conservative you've probably seen than other companies in terms of how we deal with goodwill and put lives on certain businesses that you could argue, you could fight to have indefinite. We tend to be more conservative and because we don't care about EPS now we do as a company because you have to a little bit but when it comes to deals we talk about cash accretion, not EPS accretion. It's in all the press releases and it's on purpose.

Got it. And when you're talking about cash on return on assets, is that all assets? Does that include intangibles or is it more tangible assets?

It does not. It's tangible. I can't get into all the details because it's our secret sauce but broadly speaking it is hard assets. I always laugh because when we're in a process I drive bankers crazy because my first question is always I'll get a book or whatever it is and it never has what I need in it. I will immediately call and say I Need four numbers. These aren't the only four, but they're good enough is I say I need inventory payables, receivables and gross, PP&E, not net. Gross. Gross is real. Net's in accounting. Doesn't mean anything really in the grand scheme of things. Once I get those I can do my math and within hours I can come back and say whether we're interested or not.

Yeah, it's very interesting. And of course we typically see deal models and lots of different assumptions going into determining the purchase price. The synergies are also a key component of that and quite frankly a lot of times that's sort of the factor that's used to bridge between winning and.

Losing in my experience.

So do you do any accretion dilution sort of analysis as you're, you're thinking about, you know, doing it?

Yeah, we do. I mean we do all the traditional stuff. You know, it's dcf, irr, you know, what else do I put in there? I've got, I've had some chart for years on ROIC that just all spits out. But I'll tell you honestly, I don't think I've ever even gotten past page one of a board deck and ever had a single question about any of those metrics. It really is truly our board's also very well versed in this. So it's part of basically training is here's how we think about deals and it's a really important part of our company history. At the end of the day we have 12 power brands, 11 of them acquired in the last 20 years or so. So there's a real deep knowledge now we get a lot of questions about the quality, quality of the business. You know, I get lots of those, but it's never a, you know, this IRR doesn't seem good enough. That's why I always enjoy my conversations with you guys because I have to completely like rethink how I'm going about looking at the business. And it actually leads to some interesting conversations with our controller and the model and what it really looks like. And it's like I have to like become a new person and have a totally different viewpoint. Right, right, right.

A few of the sessions this morning talked about the use of earnouts and quite frankly you all in the past never really used an earn out. But your latest deal is like, what is it? Almost 50% in earn out in terms of potential total consideration and from our standpoint, just a couple of metrics. I mean what we see is in the middle market and below. Probably 50% of the deals that we see have an earn out these days, which is pretty high statistic. And especially the way the market's been over the last four or five years. You really needed that to bridge the gap between buyers and sellers. Have your thoughts been evolving around earnouts?

If we had this conversation five years ago, I would say there's no way we're ever doing an earn out. It's too complicated to manage. Sets up some dynamics with the seller that are, that are tenable for us. So historically we have been a buy, integrate, get the synergies, put it in house and we're off and running kind of company. And we started changing that a few years ago and it came in our non consumer business to start in our specialty products division. And it started with something really small. It was one of these maybe 5% of the consideration was in an earn out and it was just to bridge a valuation gap. And we still took over the business and it was a one year thing. It was sort of like it was really simple and easy. So we kind of dipped our toe in the water. Then we did another one that was 25% of the consideration and that one, their whole team was staying and so they kind of could control their own destiny. And it was over a three year period and they used our resources to run the business and that went well. You know, honestly they didn't get to the full earn out but they knew that they didn't and it was all friendly and we actually just paid them a few weeks ago, actually. Then that led to the last one from last year that you're referring to. We've kind of tiptoed up here. We still prefer not to, but this last one was a newish brand that had grown dramatically from 10 million to 180 million in two years. That made us nervous and we were not willing to pay full value upfront for the business. And so we structured it as it was. 475 million upfront and 425 million. Same exact structures we had for the other deal. In fact, just copy and paste the paragraphs. No, Cliff, it's just whatever percentage you get towards a number is what you get. So it's pretty simple. And because of that though, their team ended up kind of continuing to run the brand for us in a tsa. Then I made one of the biggest mistakes I've made in my career so far. We couldn't figure out how to run it or what we were going to do. Eventually raised my hand and said I can do it, I know the guy, I know everything. And that's been a year ongoing here. So it's my side gig is basically running a multi hundred million dollar business for us. That's been a little challenging to say the least. But it's worked out fine. I mean the business is doing very well, doing great in this environment. So luckily when salons are gone, people use female hair removal devices. The brand's called Flawless for anyone out there. Big marketing pitch if anyone wants to take a look at it. 100% year over year because people are home and can't go to the salon and need our products.

It's interesting you mentioned that you're now sort of leading that business. In my experience and again seeing a lot of different deals, it's good to have corporate development involved post deal, you know, part of the integration and even beyond, you know, whereas they might be the 80 pre deal, it's good to be the 20 post deal instead of continuing on as the 80 is my experience.

Yeah, I agree completely at this point. But yeah, I mean I also run every integration all the way till to the end anyway. And so this one was just special because. And it was also relationship driven. Their owner needed to, because he had so much at stake, was actually thrilled when he heard because we had spent so much time together and he felt like we could talk and so he's still kind of running the business. I make all the big decisions, new products, you know, anything to do with day to day marketing, you know, advertising, they're doing it and we meet. You know, it was funny when we first negotiated, when we negotiated the deal we were talking about me going to visit them, you know, once a month, spend the whole day along those lines, be in contact, but mostly go and spend a whole day and just go through the business and within like a week I was getting phone calls every day from the team there and they wanted more involvement and so it ended up being, ended up being a lot more. So now before this I was up there once a week for a day. But the beautiful thing in corporate development as anyone can tell you is honestly in this world where you're working from home, most of what I do is virtual anyway. You know, quite honestly, like it's not as face to face as people think. And so it hasn't been so far that big of a challenge.

One of the items that came up again sort of on an earlier, in an earlier session you've kind of talked about this a little bit. It might be good to hit the topic head on. Does the lack of an impairment, a goodwill impairment, indicate success? Or conversely, if you were to have an impairment, would that lead you down the path of saying, hey, this deal wasn't necessarily successful? Or, again, your math is a little different. So clearly, when you look at your market cap and how it's grown over the years, I'd like to say that these activities have been pretty successful.

It's a really interesting question. Lack of impairment doesn't necessarily mean that it was a really good deal, all right? All it means is that it wasn't a bad deal. And that sometimes is fine. Like somebody said before, like, I hate to use the baseball analogies, but hitting a single, it doesn't have to be a home run every time. It's okay to have some singles in there. The second part of the question is actually a really fascinating hypothetical that I actually had with our CEO not too long ago, before this, and I'll actually just give the live example, because it was a real deal, is Clorox, 10 years ago, bought a business called Burt's Bees, which was an excellent business, and we liked it. And it was one of those where we backed off because everyone liked it. And we just knew we weren't going to be aggressive enough to actually ever win it. So we didn't want to waste our time. But we love the business. And Clorox just way overpaid to win. They went up to almost 20 times EBITDA and won the deal. And within two to three years, they took a 250 or $300 million impairment, which was probably what they should have paid. The question was, would you be sad to have that impairment charge on your. It's there forever on your P and L, and you can't ever hide from it. But the business has been very successful for 10 years. It's done well. It just didn't do well enough to justify that kind of a price tag. So it's a tricky question. I would say taking an impairment charge on a small enough deal, that doesn't really impact the company. It wouldn't be the worst thing in the world if that business, if you had projected it was going to grow 15% a year and it only grew 8%. And you said, okay, well, I overpaid a little bit for it. I think it probably wouldn't be the worst thing in the world. But you can't predict those things in the future. If you told me that's what Burt's Bees was going to do for sure, we might have been in there and tried to overpay for it. But that's the game you play is what do you think it's really going to do. And that's where, like you said, you could play games with the dcf. When you're talking about the competition and winning deals, you're absolutely right is you can play games with growth rates. And that's how I always joke that some big global companies have a different spreadsheet than I do. They have a special spreadsheet that they can plug in international growth and other stuff and they can say it's going to grow a lot faster and therefore justify paying a bigger price. That's a challenge sometimes that we might lose those deals. We also win deals and do deals that quite frankly, I think people under appreciate. So we buy random. Our M and A criteria does not involve categories, types of businesses. It's very vague, but it's very specific if that makes any sense. So it's got to fit a certain math criteria where that leads us. We don't care. In fact, I had to go to. It was getting so bad in the company, the randomness, that I basically had to go to our top hundred people in small group meetings to explain what we're doing. Like there was so many questions like what the heck are these people doing? I just couldn't, it was hard to explain one off. So we just decided to kind of explain our strategy to everybody in more detail. And so it leads us into weird directions because we're looking at a different math. Some things to us are a jewel, whereas to others they're not. I think we've won and gotten good prices actually on cheaper prices on some things that are kind of the perceived ugly stepchild in everything that is a diamond in the rough to us.

Got it. You know, one item is talking about sort of the, you know, the timing of integration and can you define success? And I think sometimes, and again we heard it earlier today, it can be difficult to do that. But in my role, just given that I work with companies pre deal, post deal, et cetera, I think we've figured out that the pattern is pretty much the same day. 0, you won the deal, everybody's happy. Right after you do the deal, it's like, oh, what'd we buy? And that probably lasts for about six months and then the work begins and the work continues for a period of two years. And you try to figure out what you have trying to integrate and things of that sort. And where rubber really hits the road, in our opinion is kind of year Three, where at year three you really go, is this a good deal or a bad deal? And if it's a bad deal, that's where we see a lot of companies take an impairment. And our experience has been sort of, it's year three, four and maybe year five where you see those impairments in the first year, of course, we just did the deal, we pay the same price, we do the same deal again, that sort of stuff. And year two, you're in the middle of integrating and working through. Any thoughts on that, Brian? Is that in line with what you see? Do you have any thoughts on that?

It's kind of funny. The real answer is we are pretty darn sure we know what we have day one. It's a plan in place. It's exactly what we're going to do. We know if it's working or not really quickly. I will agree with you though that one of the good things is sometimes, you know, there's other external reasons the business doesn't do as well as you had expected early on. And it's a nice convenient way to kind of delay things a little bit in terms of having to have those discussions too. So the answer is we're really, really detail oriented. And what we bought, who's running it, it's never like, you know, hey, six months in, what do we buy? Like it's integrated within three months, you know, in most cases unless we do one of these structured deals. And so our only now we've actually run into, you know, when you go into year five, you know, to me it's the impairment charge thing gets a little weird once you get past like a certain period of time. Like I actually get it in that three year period where that's where you probably know that it's a disaster or it's a real big problem. We had a situation where we bought a gummy vitamin business that was fantastic for a few years. Great business, had all beat every expectation. Everything was wonderful then by our own village, had nothing to do with the deal, had nothing to do with the acquisition. We owned it. And we made a decision of building a plant because we were running out of capacity. Because business was going so well, we made a choice to build an extension to one of our plants on the east coast to make gummy vitamins. And quite frankly it didn't work out and it became a problem. And so we had a hiccup in the business. In a lot of cases, if you're going through these technical impairment tests every year, you could have looked at it and said, oh boy, this is a problem now. They had a one year hiccup. We ended up talking it through and basically buying our. But it was a lot of conversation to basically buy ourselves the time to fix it. I think we had enough history and reputation that we were going to. So we got that and it's all, everything's back to the way it was and better. But I joke that it's sort of technically. Could you have argued that we should take an impairment charge? Yes, but it would have looked silly.

A year later, Brian, I was on the FASB roundtable for their project on goodwill and intangibles and your comment there was I think very much in line with sort of my views and my experience is that prior to year five maybe it's probably a bad deal if you've got an impairment, but after year five it kind of becomes more corporate goodwill. It's management decision making. Like you said on building a factory. What's the next product line? What's the next thing in the company's life cycle as opposed to the acquisition that was done?

You bring up actually an interesting point when you talk about Chin Gentle to Church and Dwight. So this is the DCF problem as well is when you're going out 10 years. I mean it's a joke, like no one knows what's going to happen in 10 years and then you're putting a terminal value on it. I mean it's just crazy. There's no way to know. We do a model that goes out but our view is you really can only know what's going to happen for a few years anyway. Like, and then it's your choices, like what new products are you going to do, what R and D work. Like, you know, I don't know what it's going to look like in five years. Like I have a feeling, gut feeling of a bare minimum, but there's no way I know what business is really going to look like. So that's where our math looks at history. It actually looks at what a business really is today and what it does, honestly, it keeps us away from these sort of hot startup, fast growing businesses that don't make any money. And there's a whole lot of them in our space. And you notice we buy things like water pick, big business, owns a category, makes a lot of money. It's every one of them. You show me a business that has a 35% EBITDA margin, I'll probably like it and don't care where it is because it tells you that Consumers love the business and willing to pay a lot for it. Yeah, the whole 5 7. Doing an impairment test seven years out after you bought an acquisition based off of a DCF model you did. It doesn't make any sense to me.

Maybe just one additional follow up question in that area around the accounting, around doing MA deals. Do you really care in terms of how the purchase price allocation looks with the split between customers and the brand and things of that sort? I mean, typically you're acquiring companies that are pretty brand heavy and so does that come up as part of your discussions at all? I know that this might be more for people on the accounting side more than for you, but any thoughts around that?

Yeah, like I said, we're pretty conservative in general about how we look at that area and are more willing to kind of be aggressive conservatively in that regard. So we don't have a lot of conversations about it. Actually the only time it ever comes up is the buyer, sometimes a very real desire have things bucketed in different ways, then all of a sudden it's having to relook at things. But we just follow the rule, you know, we don't really try to get aggressive anywhere, we just follow what the rules are. And like I said, I've only had a couple times where I've had a seller actually ask to be more aggressive in where you bucket things for their own. I think it was tax reasons or something along those lines. So not really I'm involved and we talk about it and ask the questions. I sit in the room with you guys and we go through it, but because we're not an EPS driven company, it doesn't matter as much.

Got it, got it. Why don't we fast forward to the current environment and one of the things that I do is Intralinks has a really great good deal flow predictor and I'm always looking at that to see what the tea leaves are is activity picking up, slowing down. But even in their latest estimate it was highly uncertain. And so what do you see? Are there deals out there? Are you getting books and that sort of stuff?

There is activity. It's different activity though, and not as much. I mean, to be honest, right away, call it March, everything just kind of shut down completely. But we're a few months in now and what I'm seeing is either at large multinationals doing small divestitures, usually in international small countries that are very specific to that country. Right now you're seeing a lot of, I'll call it Covid businesses were benefited by Covid in a way. And so especially in our consumer space, everyone's home, everyone's buying lots of stuff. So it's been a crazy time for us just even supplying. But I'm starting to get the call. Businesses and supplements of that nature are all way up and so you get some people trying to take advantage of the near term surge. So I'm getting a couple of those no auctions right now that I can think of like real ones where it's like, hey, I'm going to throw a book out to a bunch of people. There's a couple of very target. This is what I think is going to happen more throughout the year is it's going to be very difficult to manage a complex process with lots of bidders. What I'm seeing right now literally is an inquiry of hey, would you be interested? Let's answer yes. Let's do some quick, really important, high level diligence items that are the really big ones. We'll do that quickly, just one on one and have a quick purchase price discussion and if we can meet the minds, then let's try to do a deal. I'm getting that because we're a experienced buyer with lots of capital and lots of ability to execute. And so I've definitely gotten a couple of those now. It doesn't mean we're going to do them and it likely might not. The deal flow is slower. But I just got another one international one the other day of a small brand that we had looked at in the past and went to a private equity firm and asking, hey, are you still interested in it? Do you want to engage? And so that happens a fair amount. I joke that I looked at Waterpik for 10 years three different times and it went to three different owners. It finally hit the metric that we finally the dynamic of the business changed to being way more water flossers. And I just called the PE firm up and we actually ended up just doing a one on one deal. Painful one on one deal, but it was still a one on one.

Well, look, I think probably a lot of people in the room here wouldn't complain about more proprietary deals.

Honestly, the vast majority of the deals that we've done have been effectively either one on one type deals or long standing relationships. Like we actually don't really participate in these hot auctions or we'll go all the way up to a management meeting and then we have the real conversation. It's kind of like do we want to dive in and spend months and everyone's time or not. And that's the big meeting. That's kind of like the gut check. Like, all right, do we really like this business? And then B, are we really going to win it or can we win it? So flawless. The last one we did was A pure. They called me. Honestly, the guy just knew us locally in New Jersey and went up to meet with them. Never forget. I went down to the parking lot and called our CEO and I said, I found our next deal. And he literally was like, where are you? He had no idea where I was. And I'm like, I'm in a parking lot in Wayne, New Jersey. We ended up doing it.

Have you seen any changes in valuation? Again, we haven't seen a whole lot of deals over the last three months, call it, but I would say from our side, we are seeing a few more proprietary deals than what we've seen in the past. And the multiples, using, let's say EBITDA as a metric, the multiples do seem to be maybe one turn, maybe even two turns lower than we saw in the past.

I don't know yet. I mean, honestly, it still comes down to the business and how good it is. And Covid, not Covid. It's really good. Businesses will still be valued highly and ones that did well in this environment still will be. The one area I think will be beneficial a little bit is I think the private equity competition and ability to pay is going to be helpful in that. I think the days of aggressive leverage is going to be a little harder because we don't like to overpay. We actually end up in that sort of. It's kind of like I want to pay just a little bit more than private equity can. And so as long as they can't pay as much, then it's a better situation for us. But I haven't seen it yet. And honestly, we don't like things that are stressed. We wouldn't be interested in it. So we're only going to be interested in businesses that have actually done well during this environment and those, I will say if you're an owner though, private equity or even individual, what we're seeing last year, to be honest, was a lot of these really fast growing startups going out and seeing if somebody would just be stupid and pay a fortune for it was sort of one of these like. And they get bankers all ginned up that, hey, if you can get somebody to pay us this ridiculous multiple, then yeah, sure, we'll sell. Those are kind of a waste of time to a degree. I Mean, they might get it, who knows? But we're really careful about not participating in things like that. That should be helpful because I don't think those are going to be. I don't think you're going to see those. I think you're going to see people deciding, hey, I want to sell. Or my view also is I think this has woken up a lot of entrepreneurs who might be struggling right now and might be struggling with operations or people and saying, you know what, A, this is tough, B, what if there's a wave two here? Or C, I hate to say it, the world, not just us, but everywhere in the world, we have set a precedent that if something, it doesn't have to be Covid, it could be anything new out there, that everything shuts down, the world shuts down effectively in order to clear this out. And that's the precedent that's been set. And not arguing whether it's good or bad. It's just, if you're an owner of a small business, it could scare you enough to say, hey, I'm selling and getting out now. And that'd be very good for us.

As we're doing valuations in this space, it's gotten more complicated, I would say. So we're doing the traditional discounted cash flow analysis and market multiples and things of that sort. But no, we're using multiple scenarios. You hear all the discussions out there around what kind of recovery we're going to have. Is it a V, is it a U, is it a W, is it no recovery? Is it an L? Or the Nike swoosh kind of recovery? So I'd say that doing valuations has become more complicated. The other thing that we're seeing is kind of a calibration approach. So because valuations are so uncertain, maybe today, okay, let's go back to what was the business worth as of 1231? And then maybe adjusting that for how prices have changed. Now, having said all of that, the dow's at almost 27,000. And so you kind of look at that and it's very different at 27 than 18. So any thoughts on that?

I'm in the camp that any of these that end up at the same place it was before are just wrong. Like any vw, whatever you want to call it, like, well, things get much better. Sure. But, you know, I guess the. I think the Nike swoosh might be the closer one where it just gradually gets better, but doesn't get to 100%. Does it get to 75? Maybe something like that. At the end of the day, people's behavior is going to be changed in the future and is going to hit certain industries that will come back in a big way but never where they were before. And I think you'll get a subset of people who'll be afraid to go out anywhere, do anything and that'll hurt the economy going forward. Now I do think things will get better and I think a vaccine will change people's obviously change people's behavior, but not completely and not everyone. And so honestly I see the market and kind of think to myself, boy, people are not really paying attention to the long term recession issues here. It's almost like, okay, everything's going to open up and be back, but we're in for a long term recession. The hospitality industry isn't coming back to where it was. Bars and restaurants aren't coming back. They'll come back to some degree, but many will fail because people won't be going out. You'll have a lingering hit on the economy. I'm in the. Listen, will unemployment end up? It doesn't go to three and a half again, does it end up at 7, 8%? That's kind of like the new normal. That's bad. Like that's a really bad number. Like I know it's terrible today, but if you look long term, that's a recession and that's what we're gearing up for. I mean we're a basic consumer product company selling laundry detergent, toothpaste, cat litter and we're deep into recession planning right now going okay, next year people are going to have less money. Okay, what's that going to impact US tax sizes, $ sizes. So I won't get into all of our details, but that's really our thinking right now is this is going to be bad and we need to be prepared for it.

Do you have any tips or thoughts, concluding thoughts before we get on to some of the questions?

The thing that's interesting is we haven't experienced it yet is the actual act of kind of doing a deal and how you depends on the deal and how you're going to execute environment is something that is going to be pretty interesting. We're like everybody else in the middle of the conversation about what's the office going to look like, who's going back, how many people, who's essential, who's not. You know, it's an open ended question. I think somebody like us would struggle with a complex business in multi countries, multi site or where you have to rely on a Management team. That's my really interesting piece of this is if you're buying a brand, integrating in easy, we can do that. But this flawless deal that we did last year, we would never do today like that required 10 visits, getting comfortable with each other, getting comfortable with the management team. And that wouldn't happen on Zoom Calls. We wouldn't spend that kind of money or have a $425 million earn out on Zoom Calls. So I'm personally anxious to get back to the office. I miss my office in a big way.

A lot of us do.

I really, really miss my office. In fact, I think I was lobbying our CEO the other day and I joked with him and I said, am I on the first wave to be an essential employee back in the office? And he just laughed. And I was like, no, I'm really serious. I have an 11, 8 and 4 year old at home. I want out.

I have a few thoughts. Number one is valuation on these deals is really critical. You just can't overcome paying too much, in my opinion. And I've seen it with your deals over the years, they're solid deals. And the proof is in the pudding. What you've paid. And part B of that. What I would say is being different isn't bad. Your math is just a little different than everybody else's. And I think what that means is sometimes you say no to deals that people think might be in your sweet spot. On the other hand, you end up doing deals that sometimes are surprising. But again, the proof has sort of been in the pudding.

Yeah, it's very true. I mean, it's funny, after we did our last deal, I have a sheet that has all the metrics for every deal, everything traditional. And he asked to see it updated and he literally called me and he said, you have an Excel problem. You must have some issue with your Excel because the last three deals all have the same EBITDA multiple. And I looked and I thought maybe I did. So I went in and looked and no, it was literally the most random thing. But it wasn't random. It was very telling because it showed we look at every deal the same way. And I had no clue. I didn't even know what the EBITDA multiples were on the deals. And they just, because of the way we value things, ended up being about the same. So we're very consistent. And that was like the ultimate proof that, my God, we didn't even notice it. And they were literally to the point, the same.

One other point I'll mention, and again, this doesn't necessarily apply to you or Church and Dwight because you're not necessarily doing IRRs to support the deal, maybe to help us, but not necessarily to determine whether you're doing the deal or not. Is what we have seen is that the deal IRR and the company's discount rate have really converged in the past. What it used to be is let's say if your company WAC was 8%, you do deals, not Church and Dwight, but others would do deals at 12, 13, 14, 15%. The deal model is inherently incremental, whereas business get operated fully loaded with corporate overhead and things of that sort. And so as we've seen that difference between the IRR and the WACC diminish, I think what we've also seen is that there's no cushion and there's a higher likelihood of impairment. Anyways, I point that out as just kind of an interesting point. Brian, there's a couple of questions here for you.

Firewall.

By not focusing on startups, do you miss innovation? How do you come up with innovative?

Yeah. So you know, in our space. Yeah. I'll give Waterpik as an example. Or even Flawless like innovation comes in every size. In fact, you could argue sometimes the bigger businesses actually have more innovation. Quite honestly they have more capability to do it organizationally and you're actually picking up a lot more. It really depends, you know a lot, a lot of the startups we're seeing in the space and this is consumer really have innovation. Like they're really new business concepts. So I'll give an example. Like very popular business right now is on a sales growth basis is like a hims, which is the online, you can buy prescriptions online. And people ask me all the time why would you guys be interested in that? And I always say there's nothing to it, it's just all it is value added, private label at the end of the day. So innovation comes in different forms. We get innovation sometimes through different areas. We actually do a very aggressive job with R and D and licensing and working with entrepreneurs. Where we license in technology, it comes in different forms, doesn't have to come to acquisition. Honestly the two most innovative businesses we bought were Flawless and Waterpik devices with really strong engineering and constant innovation. I'd argue they're startups, you know, at the end of the day. And so you are getting it, it's just a different type.

Yeah, yeah. Another question is relating to the accounting treatment of contingent consideration. And you know, is that sort of an important part of you Know the process there. And maybe I'll just add, I mean when you have contingent consideration, if the individual is staying employed, it becomes an expense as opposed to if they're no longer employed, then it becomes consideration itself.

It's always driven by transaction and value and gaps and what makes the most sense to both sides. The accounting treatment, though, it's funny you actually brought this up because this morning I met our new controller who just started for our retiring controller. We were actually joking about this because he's stepping into this $425 million contingent payment and we were having a good laugh about the fun we're going to have with that. It comes up. But again, we even look at fluctuations on an earn out as a P and L impact has nothing to do with cash. And so we don't sweat it that much because you can talk it away as an accounting treatment. We've had swings up and down and no analyst or anyone has actually really cared all that much because it comes back to being a cash company. So we think about, we know about. We knew this one in particular was going to be a potential bigger swinger either direction. But we just said the business is the business. If the business does well, great, we'll deal with it. If it doesn't do as well, that's why we paid a low price for it. That's why we went into it with. I want the initial payment to be a low price in case things go sideways. And part of that discussion was to quite frankly minimize any impairment. So buy it really cheap. If it works out great, we'll pay you. And if it doesn't, we've kind of insulated ourselves from those kind of discussions.

Last question, Brian. It's kind of a follow up to this. Do you only do revenue or EBITDA based earnings or do you do others?

It's a funny question. So we've only done net, it's called net sales for us and we've only done sales. It's been an ongoing discussion. I will say it really depends on the level of which you need to do work with them and your control over certain P and L. We want more control over the P and L. We want to be in control of operations and some areas that we really want to integrate anyway. So we've avoided doing any kind of an EBITDA number because it's really complicated. We've just decided that you maybe if we had a totally independent business and they were completely had full control over the P and L, but I don't think we'd ever do that. So for now it's been all net sales and it's worked out three of them. It's worked out pretty well, I'll say. We did one other one that had very aggressive net sales targets and had a, we did that one differently and that one had a, like a base. You had to get to a certain level to get anything. And we did that on purpose for a lot of reasons. But it was kind of a listen, yeah, if you get those ridiculous projections, fine, I'll pay you. Congratulations. But in our mind we weren't exactly valuing, I don't think we put any value on the earn out because we knew what the model was likely going to be and so we gave them a carrot that if things went great you can get more money.

It's interesting again, given the number of deals we see with earnouts that revenue and EBITDA are probably the two most common. You know, in the life sciences space we see all kinds of, you know, phase one, phase two, phase three sort of thing. And I will say one time I had a client where the earn out was if you acquire one of our competitors that are located in France, there was a payment that was to be made and of course at the time, you know, our clients said, the buyers said no, there's a zero probability of that happening. And quite frankly like three or four months later they acquired that company. So those kinds of situations, you might as well throw a dart, right? What's the value of something like that?

Well, I will tell you, it wasn't an earnout per se, but we have done things like technology wise where there's like an upfront payment and then there's contingency payments based on, if you get certain claims that you can make on a product, we'll pay you X amount. If it's lower claims that don't give us that much benefit, then you don't get anything. And so we've done that where it said if you can get us a superiority claim that's better than the competition and your technology gets that, we'll give you a big number. If it's the same then it's worthless and we've spent low amount of money to take a chance. So I didn't count that because we weren't acquiring anything. But we will do creative things like that as well.

Well Brian, thank you so much for your time.

Pleasure to meet everyone.

Anybody has any follow up questions, feel free to reach out to Brian or myself. I think you can connect with us on LinkedIn as well. Thanks.

Great. No problem.

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