The Complexities of Smaller Deals

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Thank you, Keystone. Pleasure to be here.

Can we kick off with a little bit about your background?

So I have been with JLL for 15 years where I've had a number of different finance leadership roles. Currently, I'm the head of our real estate services corporate development team. And I know you gave a little bit of an explanation of JLL before, but just to add a little bit more color to that, JLL is one of the largest global commercial real estate services and advisory firms with approximately 8 billion in fee revenue and a little less than 100,000 employees globally. We principally provide brokerage, sales advisory, property management and facilities management services. And generally speaking, we're not an owner of real estate. We provide services to property owners and occupiers to manage their real estate needs. So in the context of what I do, I oversee all of the acquisitions globally of other commercial real estate services firms. And over my tenure with Corp Dev, I've overseen over 30 acquisitions.

Some good experience.

Thank you. Yeah, yeah, it's been. It's been a wild ride.

Big and small deals. I love it. I'm curious, given the size and depth of JLL, why as a Fortune 200 company, have you decided to focus on smaller deals?

It's not to say we don't do larger acquisitions. HFF was a $2 billion acquisition and transformative for, for our capital markets business. But real estate, no matter how global a firm you are, no matter how large a firm you are, it's inherently still a local business. What that means is that you have a few goliaths like jll, cbre, Cushman, but it's also very fragmented with smaller regional boutique firms that are just ripe for consolidation. Acquisition of smaller regional boutique firms has been a great way that we've found scale and regional expertise. So it is perhaps a little bit unique to JLL and the real estate services. We certainly make larger acquisitions as well. Like a lot of firms, we're on a digital journey right now, and we have a JLLT group which also focuses more specifically on larger technology acquisitions and investments.

Okay. There's a lot of different reasons why you're looking at these smaller deals, and sounds like part of it is access to innovation. You referred to some different business units and that a reason. Some of this is because they're operating off of different strategies.

We operate within business segments. So we have Market Advisory, we have our Work Dynamics Group Capital Markets and then our JLL Technology Group. Our business globally is segmented into those component parts and each one, of course, yeah, will take a different strategic lens to their acquisitions. What is common most often within Market advisory and oftentimes Work Dynamics and Market advisory would typically encompass. Brokerage was the best example of our market advisory business. That's where you see a lot of local, more regional boutique firms which would be on the smaller side compared to something like H F which is a much larger acquisition for us.

In that instance, you're doing essentially a roll up with the different brokerage houses. Then another area where you're doing those larger deals that could be opening up whole different lines for you completely. On the technology side, what's the driver there? Is that very strategic in terms of what you're buying or is it just general in the space looking for a tech company?

It's very strategic. There's an entire group just dedicated to our technology strategy. Our largest, most recent acquisition there was building engines. It really adds a lot of capabilities in the technology space and allows us to realize a lot of the cross synergies between our core services and then these new capabilities that we're either acquiring, building or investing in.

When you look at the deals, you're approaching how much of that goes through a competitive process versus you're directly sourcing those opportunities.

It's been an interesting mix lately. We've been getting a lot of deals through more of a competitive process. So it's just been a very up until lately been a pretty frothy market. A lot of deals being shopped by investment banks and going through a competitive process. Historically, at least on the services side of things, we've been much more successful, frankly with deals that have not been through a competitive process. There's a number of reasons for that. But yeah, it's certainly the deals we've been looking at the in terms of doing a an initial due diligence review. I'd say the majority as of late have been competitive. Although I would like to see more outside the competitive process.

Let's talk about that. Why? Let's talk pros and cons, starting with the competitive process. Because I'd say I know the pros that they're packaged up. I had one and right away, let me get the teaser, let me get the sim. This is a disclaimer. Just if anybody listening to this podcast, Kevin and I both acknowledge this is not to intend to hurt any feelings of any investment bankers. Him and I both have a number of friends in investment banking and we don't want to hurt anybody. You just want to let them know it's not direct offense, it's just you got to take a few shots in the industry.

I still like you, it's okay.

But yeah, tell me what's the pros and cons of competitive process?

Yeah, absolutely. Obviously price can be an issue in a competitive process. That's not going to be a big surprise. But one aspect outside of price that's always really an issue with us that we need to navigate through is the timing. A competitive process is usually set up with very tight deadlines. And in my opinion those timelines are set up to force you to make a decision, but not necessarily the right decision. We're not an M and a shop like a private equity firm. We have multiple stakeholders that need to be involved. A governance process that is set up for a very specific reason to make sure that we're being very prudent in the decisions that we're making. And I also need to make sure frankly from my end that I'm not unnecessarily pulling in internal resources. All that if different functional teams that need to come together to ultimately execute on a transaction. I need to make sure that I'm not pulling them in prematurely. I can't be the boy that cried wolf and then have them not take me as seriously when I really do have a deal that is going to needs to move fast and we need to push it through to executions. My team handles as much of the pre due diligence as possible. I need to make a very calculated decision in terms of when we accelerate and pull in resources. But the competitive process is just not really set up to to cater to that as much. That can be difficult. Another big problem in my opinion is that the competitive process oftentimes lacks the personal interaction with the principals that I really am looking for. One of JLL's greatest selling points is our culture. And frankly when bankers are in the middle of that process, it's very difficult for either side to get a true sense of the culture. And as I said historically we've been most successful with deal are not through a competitive process. And I would really attribute a lot of that to the personal interaction that we're able to establish and that rapport which is just harder to get to through a competitive process.

These are good. You made me think of one that I've been thinking about through doing all These interviews is. Now, I know you don't directly execute on integration, but how that process impacts your integration planning.

What do you mean by that exactly?

If it throws those timelines off, if you're compressing timelines of a deal in general, then you're essentially compressing a lot of the considerations on all the integration work you're going to do.

Absolutely. And a lot of the pre integration work. Again, the timelines in the competitive process that we've seen are just very rushed. And when integration is so critical, especially for us when we're looking at services deal, where the talent and retaining talent is so important, that integration piece and getting that right is critical. When you're rushed through a process, it just doesn't enable you necessarily to put that level of thought and consideration into it that you otherwise would have been able to. If you could have just slowed it down just a little bit. Make sure you're getting the correct stakeholders together to discuss that.

I got it. It does weave it back into the personal relationships. So the four takeaways, I got one price. If it's competitive, you expect to pay more money timing. Because you have these artificially compressed timelines that force you to make decisions, you're putting less consideration on those decisions. Which means are you making better decision? Well, the formula is more consideration. You tend to make better decisions. I like the example about where you're pulling people in to look at deals, these competitive auction processes, you have a lot lower odds of winning them. So now you become the boy that cried wolf and have so many of these false alarms that you're throwing off and then you don't get as depth of considerations as you would when you have that higher certainty of the deal you brought up. And then the other piece I like, which I think is my big lesson for the past year, is the personal relationship that the more I look back and reflect and think of all the these attributions to making M and A successful so much around that relationship that you had and developed and a lot of these really good deals, it's a whole year in the makings before you make it happen. And that buys that relationship and how you get the other pieces done too.

It's a game of telephone with the banker in the middle, competing priorities and interests there. It just makes it much more difficult.

Agree.

What are the pros on the good side when it's a competitive process? New bankers in the mix. Bankers bring a added level of sophistication and analytics. It's all packaged up very neatly and tightly for you on the flip side, again, they stand in the middle of personal interaction. The other thing too that I didn't necessarily hit on before, but is a function of a competitive process because you're working with bankers and understandably so, their objective is to drive the higher price. I get it. But when you look at the sims that they put forward, more often than not, I'd say almost in every single instance, just completely unrealistic. Pie in the sky growth forecast. It's the classic story of the hockey stick growth and they're right on the precipice of achieving that. We just always need to take a step back from that, basically throw it out the window, to be honest. Then we need to go back to the drawing board, do it all from scratch. Again, you just don't get the unfiltered view really from management. Like I was saying, in more of a personal process, it's going through that investment banker lens. You need to go back to the drawing board. That can just take more time. It can cause more confusion amongst different people internally who are looking at the same materials. That's tough to navigate. Lastly, because we have certain specific considerations, because we're trying to retain talent, we try to structure our deals a certain way to make sure that we are providing the most protections as possible to jll, while also making sure that the target is sharing in the upside. The process that bankers set up and the way that they're incentivized, typically, it just typically is not that conducive to the structure that we feel is most beneficial to both parties.

At the end of the day, we all still sit at the same roundtable and chat. It is an industry problem around inefficiencies. When you look at the role of the banker, even a lot of times consultants and the external legal counsel, it's a highly inefficient process, end to end, and everybody's getting paid pretty well along the way. Nobody's incentivized to do anything about it or drive efficiency. Even that fee model that you pointed out doesn't align with making the deal itself successful. It's aligned to just making as much money as you can, as quick as.

You can, as much money as possible into the pockets of the owners. And if we're not being careful about retaining that leadership, if it's a services firm, there's a lot of talent. Typically that talent that has made that company so successful is at the top. And if we're just writing a huge check and giving it to them on day one and they Walk. We've lost a ton of the value we had underwritten and hoped for. We typically structure our deals with a deferred component as well as an earnout component. Bankers, they don't love that in their deals. They're driving a competitive process. And typically that process drives towards the maximum amount of upfront possible, which, yeah, is difficult for us to get comfortable with and rationalize.

A lot of times it's disconnected from what actually makes a deal successful. Makes a deal successful is the value that's realized. Post transaction, did that company you bought for $100 million grow to be a $500 million business, or does it tank and get an impairment of 80 million? There's a big thing that swings from one direction, another, that all depend on how well the deal gets executed, and that should be the top priority, but it isn't. It could be purely financially focused because that's where the incentive is, but not so much of the actual execution that it takes Post close to deliver the value in the deal. All the good integration considerations. Are there any cons that you can think of on doing a proprietary deal?

Proprietary deals, smaller deals, I think that they are harder in a lot of respects as well. For one, there's typically a lot of education that goes with those. I'm somewhat conflating smaller deals and proprietary deals because that's typically the case. There's a lot of education that goes on. These are smaller shops. Typically. This is probably their first time selling a business or even being tangentially involved in the sale of a company. So you got to explain that process to them, and you got to make sure that they're comfortable in understanding that you're leading them along in the process and being as open and transparent as possible. A lot of times, too, because they're smaller, their books may not be as clean as you would like them to be. And that's what an investment bank a lot of times will do, is come in and package things very nicely and do more of an audit. But a lot of times you're looking at companies where they may not even be audited. Sometimes they manage their financials off of Excel. So it's incumbent upon my team to filter through that information and make sure that we're getting to the correct financial analysis to start with the correct baseline. There can also be a lot of emotion involved. There's emotion involved in every deal, whether it's big or small, frankly. But I think with smaller deals, proprietary deals, there's perhaps more emotion. Smaller, they may know every single employee at that firm, if they're a good cultural alignment, they should be invested in what's best for those employees as well. That can certainly be elevated as you get closer to signing and close those emotions. And then retention, you're buying a company because of the talent a lot of times in these situations and if the equity structure is not aligned with that talent, you need to do a thorough job of understanding what kind of retention package do you need to set aside for other members that's going to be dilutive to the purchase price that goes to the owners, but it's ultimately a critical part of our value proposition and how we're getting comfortable with the overall valuation to begin with. So that's something we can struggle with. And then lastly, valuation and deal structure, on smaller deals, a miss or a mistake on underwriting can sometimes loom larger. So we need to be extra thorough and diligent. And then deal structure, when we have specific reasons why we structure deals the way that we do. And that is something that is much more important and critical on smaller deals. And if it's a proprietary deal, we have an easier time explaining that to them. And so that's why I tend to see more success there.

Okay, we'll get to the pros here. You got a good number of cons because there's more education. If it's someone that's not as familiar with the process, they can be more unorganized, which gives you more work to do. Emotional management, dealing with the other principal directly and then building out your retention, which I think you gotta do. Either way, the valuation coming to terms and agreement there, as well as the deal structure.

The main pro is if it's proprietary, I can get it done.

No telephones in the middle.

We don't have the game of telephone, the biggest pro, which outweighs any of these cons, frankly, because all these cons are just. That's what I'm paid to do, right, Is to work through these issues. But the biggest pro is that I can develop a personal relationship with those owners, with those principals. I actually heard it said on your podcast, asked Kisan by another interviewer. Companies aren't bought, they're sold. It's ultimately the decision of the owner where they want to go. And I think there's tremendous benefit in going to a strategic, tremendous benefit in going to jll again, largely because of our culture and all of the upside and potential we bring to elevate careers across that target's platform. And that just doesn't always come through as much in a Competitive process. So. So I'll take all of these cons for just that pro. Right. Just the ability to actually develop that relationship and have the greatest likelihood of success all the way around.

With the relationship part, I think you're onto it because you have that quality of a relationship. And what I'm getting to is I feel like there is a distinct difference between buying a business through an auction versus that proprietary that you're hitting it right on. It starts with that relationship and then expands out to hey, shit comes up, we're going to work through this a lot easier because we just had that relationship we figured out and that give take there and how you're going to come together and work together for the years to come. Just curious how that impacts it. Where you have that relationship front on to get the deal done, to where you don't to these things that expand and actually become more valuable activities.

It's worth stating that I believe JLL believes in total transparency and honesty that goes in all aspects of business. But in particular I take that to heart with acquisitions and leading that process. When I go to explain the process to a target, I'm going to explain it from start to finish. This is what it's going to take. This is the lift it's going to take. Do you have the resources available in order to pull together this type of information, get it to us in a timely way and, and work with us? I'll be in the trenches with you to help navigate this, but this is what it's going to take. These are the general methods that we've used to come to evaluation. I'm not going to open up the book entirely and say here's the model. You tell me if it looks good, but it's an open conversation about this is the way that we value your business. This is the adjusted EBITDA that we've come to and these are the adjustments that we feel are reasonable and why and coming to that alignment and then from there establishing that level of trust from the outset really carries through the rest of the transaction in my opinion. Because you're right, you are going to come across numerous issues as you move through the process. Process. I've never worked on a deal where I could say that was an easy deal. There are no easy deals. They all come with some level of complexity, some last minute curveball. And if you've established that level of trust from the beginning, you're going to have a lot more success working through those issues later on as well.

Yeah, those are really valid points Aside from the competition, are smaller deals easier than larger deals?

I kind of already hit on those. That's where I said that I was conflating proprietary deals and small deals because I do think they're correlated to a certain extent. You're not going to get a large deal, typically that is proprietary. If you're going to be buying a $2 billion company, I would be shocked if bankers weren't involved there somehow. So a lot of times the larger deals are just inherently through a competitive process. So I was conflating the two a little bit there.

But you had a really good point here of that relationship that you build and how it frames how smooth the deal could potentially go. Have you ever had an issue where that was the root problem was the relationship with the other side and just things got bumpier and didn't work out or.

Culture is always a really difficult thing to assess. It is that intangible that is probably the most important. But it's intangible and sometimes it comes down to a little bit more of a gut feel. And that's not to say if there are any bumps in the road, it should be a red flag. It shouldn't. Like I said before, these deals are inherently emotional. These people have put their blood, sweat and tears into building a business. Sometimes it's a family business. So there's a family connection there and you need to be sensitive to that. There's going to be the bumps in the road. I'm happy to say that I've had very few, if any deals fall apart on that basis because a lot of the ones that I get done are done in that spirit. You can't always understand everything. There's certainly been deals or post. You're like, okay, this acting a little bit different than I. They perhaps did during the negotiations. Again, that's why you try to structure deals so that incentives are appropriately aligned. Because you can't understand and protect for everything. All you can do is your best to put the protections in place that'll help mitigate it.

What's more fun, working on competitive deals or proprietary deals?

In my opinion, proprietary deals, because those are the ones that I had the most success in and I enjoy more of the direct person to person interaction there. Some of my best friends are bankers, so I love having a beer with them and hanging out. But in terms of the deal process, let me put it this way, I don't think that there is much that I couldn't explain to a target in the way of process, et cetera. So I can Help shepherd them along in that regard, I think I can develop more of that rapport with them, more of that transparency. That's what's fun to me. Personal interaction, getting to know people, getting to know their motivations. At the end of the day, those interests and likes mine are well aligned with actually getting a deal done. Win, win.

I think it's glory. Like you look back at your deals you've done, it's the proprietary deals that are the best. They're always the best story.

I have too many competitive deals where I have slaved over a sim, gone through the process, gone back and forth, only to lose to a private equity firm that puts forward the maximum upfront with an upside. It's hard to compete against that. But if you're able to look a target into the whites of their eyes and make a connection with him or her, say, this is why you should come to jll. This is what we think your company is worth and why. And we think it's fair. We're not looking for discount bargain deal here. We want to pay you fair value for your company. But these are the reasons why we think it's fair. And this is the upside you get by coming to a place like jll. I need to be able to look someone in the face typically to do that.

I agree there's a lot there. Just that story alone. Well, you had the bad story about losing the deal in auction, but even if you won the deal in auction, it's still not as good of a story as building the relationship and that whole journey together. Just there's a lot. There's a lot of how well you put the deal together because you put way more consideration into it. That lends to a better story, better deal.

Absolutely, absolutely. It's just a better deal at the end of the day usually, which is a better story.

When you buy a company, you get a 5x10x return. Those are great stories. Can you tell me about working with the founders? Like, how do you approach educating them?

I can shepherd them and guide them along in the process. I've been asked by them sometimes, do I need to get a banker involved? This won't surprise you, but my answer is no, you don't need a banker involved. What I do tell them is you absolutely need a lawyer. I think a good lawyer is worth their weight in gold, frankly. I can provide a lot of the same guidance that a banker would be able to provide them in terms of the process, but I'm not a lawyer. And navigating the legalese in documents can be quite complicated and overwhelming. That's where a lot of deal fatigue can come in as well. But if you have a good lawyer by your side, that can really help tremendously.

Question about the lawyers. So the expectation. There's obviously pure legal work, but then there's negotiating commercial terms. And I'm curious, because if you don't have a banker, there's obviously some guidance around that, the negotiation part. But have you seen them be able to pick up some of that aspect of negotiating the commercial terms or sort of weigh in on it or where do you draw the line in working with the lawyer?

I can only speak from my own personal experience on working with the lawyers on my side of the house. My interaction with legal is they are very much partners and strategic thinkers when it comes to the deal, the commercial terms, et cetera. I have a very good relationship with our counsel and I'll oftentimes give him a ring just to think through something, just to talk through certain complexities and incentives that are being created in a deal by wording it a certain way in the agreement. I can only assume, again, if you're getting a good lawyer, that's what they should be doing. And on the sell side, if you're getting a good lawyer, they should be there as someone to help you navigate the complexities of not just this word means this, but also this is what's in your best interest. This is a term that you should be willing to give on because there's a back and forth here and there's a number of different deal points that need to be worked through. In short, lawyers do do help on those commercial terms. At least I think the good ones do. And JLL is good ones.

That sounds fair. That blends back to why you should have a good attorney. Knows your space. Worked on similar size shape deals. Probably your best bet. Yeah. What's the next biggest challenge around educating these founders? You went through the bankers, make sure they get a good lawyer. Anything else?

There's a lot of education that goes on outside of the deal and how it's structured and why beyond that, there's a lot of education of just jll, the company as a whole. How would we come together? What does integr like? How can we realize the most value together? What is the organization that they're going into? How will they possibly help to shape that, to mold that? Those are all things which a lot of founders find very intriguing and interesting. There's education that needs to go with that. Now I bring in other partners in order to really help facilitate those conversations. It's not me alone. We're a big organization and I frankly can't be an expert on every single business line in an organization, nor should I be the one that necessarily speaks for them. I bring in the correct sponsors to a deal to have those conversations and instill the confidence that is needed going forward. And of course I can answer questions for them as well. But I think it does far more value coming from the other leaders that they're going to be working with after the deal's done than it does coming from me.

When do those two leaders get connected? Because it sounds like like you're coming in with very few people up until loi almost immediately.

Frankly, I am very hesitant and likely won't really push forward with a deal to the point of negotiating any sort of terms, whether they be high level or more specific without a deal sponsor, someone within the business sponsoring it. So it's almost immediate and a lot of times it is the business itself that that's bringing the target to me. They have the relationship again going back to the fact that real estate is very much a regional business. At the end of the day that means that it's a lot of regional relationships. Sometimes it's some buddies that grew up together, then one buddy wants to sell his business and the other buddy works at jll. That's how the connection gets made. And then I'm brought in to help shepherd the deal along. It's from the outset regardless on negotiating.

These deals valuations, I was thinking that would be one of the harder reasons.

Yeah, certainly educating them on the valuation. I guess that goes to me hand in hand with the deal structure as well. Just the transparency in the education process of this is what the process is going to look like just in terms of timing. This is the methods with which we use to value a firm. I say this repeatedly and this oftentimes requires some education. But we don't use multiples to value firms terms. We use a very traditional discounted cash flow analysis and very thoughtful review of what our expectations are for the forecast. And the multiple is just an output. The multiple is a function of what that analysis yields as a multiple of EBITDA and what the revenue multiple is typically a function of what that margin percentage is. A higher margin percentage, business is going to get a higher revenue multiple as a result. I need to do a lot of education on that typically because one of the big pitfalls of coming into a negotiation or target is they hear multiples being thrown out there from Various colleagues that they've spoken to or another friend who sold their business. And you just can't value a business like that. You need to look under the hood. Every business is different. Understand their business model, economic environment, how it's structured is all going to influence the growth forecast for that business. And that in turn is going to impact the valuation.

How do you negotiate these deals?

It starts with again, the education, explaining to them how we came up with the valuation. That's usually for me at least this is my preferred method of negotiating a deal. I should say come to them with transparency in terms of this is the value we see in the business. Tell them we don't expect a response now, digest it, come back with any questions you have. But ultimately the other party needs to be engaged in the back and forth there. You need to understand where they are and that serves as a bookend. But before I even go too far down into the numbers, because that's just a back and forth and a trade off between what's going to get them comfortable, what's going to get us comfortable from a deal structure and outlining all of the different role points and why they're important for us, which ones could we potentially give on and which ones we couldn't. And it becomes a little bit of a game theory there. The other thing which is a little bit more intangible, which I think is really important, is what are the other value drivers for them, what's important to them? Obviously price is important, that's kind of a given. But the other things that are important are potentially removing the administrative burden that has just been such a drag on them for so long. So can you focus on that a little bit more and make that more of a selling point? The long term vision and opportunity for their employees, explaining to them how much opportunity there is within JLL. And frankly, I am living proof of that. 15 years working my way up into different roles, different levels of responsibility and being challenged at every step of the way, highlighting that to them, just larger strategic vision for the company. Do they have a real passion behind what they're doing? And therefore joining a firm that helps accelerate that vision, how important is that to them? If you get too focused on just the numbers, it can just become very robotic and you may end up giving on more things than you really need to because you haven't spent enough time understanding all of the different pain points for the seller, not just price and focusing on those as well.

It sounds like it's almost if I spend more time with the other It'll will benefit me on the other side.

Absolutely. Yeah. Spend the time developing those relationships and it'll pay big dividends in multiple ways.

How do I correlate that with my effort on my financial offer where I feel like I got a really strong alignment on the vision and they're potentially empowered that way that I could cut my offer in half. And is there some kind of way to balance that when you. Is that like a gut feel or is there an actual calculation there?

We're not looking to drive some huge discounted valuation.

You aren't, but I am. That's what I'm trying to do here. I think when you hit a certain size of balance sheet, then you tend to want to balance it out for the long run. But when you're a really hungry, scrappy startup, then you're trying to squeeze everything you can and blow it out. Yeah.

You want to maximize it. Yeah. You need to have a realistic discussion in terms of 20 times EBITDA. That's just not going to work. Right. You just need to level set your expectations here, maybe for providing them some educational materials on what the market is doing. Again, we don't value based on multiples, but multiples do serve a good purpose in terms of making sure that you're within the guardrails, helping them understand this is ultimately a fair value at the end of the day and maybe to segue into something else that I know that we wanted to talk about. Kisan, the earnouts do provide and it's something we utilize a lot, but it provides that additional upside to help bridge the valuation gap. Gap, give them additional upside, something that they can share in with that strategic vision. But earnouts typically are a way that we ultimately bridge the valuation gap.

Let's role play that out. Say we got the 20x EBITDA expectation and you're at 10x EBITDA expectation. How do you like start conceptualizing using the earn out or fixing it in when making an offer?

First off, those multiples are crazy to begin with, but we can roll with the.

We're being very optimistic. Like we're talking might be a couple decades out.

That's very optimistic.

All right, so now we're doing a AI. What's the regenerative AI? We're in the buzziest thing right now.

Okay. So we're throwing out some good buzzwords here. So the value, the multiple sticking up.

AI, slap AI in there, multiply it goes up.

Sure. Technology enabled all of that good stuff. So here's the way that I typically approach it there's a value that we are very comfortable with paying guaranteed and that needs to be based off of some very reasonable and achievable growth target. I can't take some hockey stick crazy growth forecast and base what I want to pay as a guaranteed value off of that. And guaranteed value for me can be in the form of upfront and deferred, typically deferring. Part of that guaranteed connect is a bit of a retention mechanism which again as I said is very important to us. So the way that we structure that is important. So first establishing how I arrived at what that guaranteed value is. And then it typically turns to a conversation of but what if it grows at a 30% CAGR? Fair point. I think frankly we're probably enabling that to a large extent or bringing a lot of synergies that help to drive that forward. But here's what we'd be willing to share in that upside if you did achieve that 30% kegger growth. And frankly we expect to see a little bit more of a return in that scenario as well. We're not giving away 100% of that value. We should see a higher return in that upside as well. But the seller will also be very happy with seeing more dollars in their pocke achieving a higher overall multiple than they would have if we just used the baseline level of growth expectation. It again comes down to education and walking them and shepherding them through that. A lot of times they will have a number in their mind. And typically we just need to paint the picture that you can get there. But there's going to need to be some contingency behind that. And here are all the reasons why we think you can do it because we're going to really accelerate your platform. And here's the, here's how we're going to help you throw gasoline on the fire, so to speak. And they can get comfortable with that being very much a reality.

So let's say $200 million business is expectation and we think it's a hundred million. I understand where they feel they're at and understand why in those parameters. So you can at least know exactly where you gotta be. But when you're thinking through adding the earnout in, I'm still stuck on how do you supplement your current offer. Is it, hey, we're going to be able to add those accelerators in and then use that to justify increasing our price or is it showing them more on the outcome? They're going to be able to get that value, but it's going to be Tied to these accelerators More the latter. You're increasing the total value, but it's all total value means total with those accelerators. I get it. So then there's a whole down the road view that you got to do because it's not the upfront cash that you're getting so you are giving it to them. It's just it's all factored out over a period of time. And that's where you're increasing your offer ultimately.

Exactly right. Even in a competitive process, when we put forward an indication of interest, we'll put in that indication of interest. Here is the maximum value that we think for your firm, but we think that X percentage of it will be guaranteed and X percentage of it will be subject to an earn out. Another thing with being transparent and honest here is that that upside is not going to be based off of some insane growth forecast. Going back to the crazy hockey stick growth numbers that we get from investment bankers. We don't want to put forward some insane value and say that yeah, but 90% of it's going to be subject to it to an earn out because it's just aspirational. We'd rather put forward an upside, if you will, an earnout target which we feel is achievable. Because if it isn't achievable, then the target can quickly get out of the money, if you will. And then they're no longer motivated by the earnout. You don't want that either. You want it to be an achievable target where they are appropriately incentivized to continue to push towards that growth number. And if you make the number too large, it's just A, frankly I don't feel like it's honest, but B, it doesn't appropriately line incentives in my opinion.

Yeah, it's interesting. It's like a whole art to get really good at structuring these earnouts so that they work and don't lead to a big fight.

Easier said than done.

What reasons people fight about? Is it the same stuff or is it different every time?

Earnouts are really tricky and frankly we utilize them quite a bit and I think we've been pretty successful in doing so. A few things make them difficult. For one, the timing of them can be tricky. I think that both sides, frankly in a lot of cases want a shorter earn out. The buyers oftentimes want a shorter earn out because earnouts can be an impediment to integration. They can slow down integration. Focus isn't necessarily where you want them to Be there's less flexibility as the buyer to move the pieces around and structure it in a way that you feel will maximize value. So there's that. And obviously the seller wants their money as soon as possible, so that's one thing. But typically, if it's a longer earn out, you are able to bridge a larger valuation gap. So there's a tricky balance there. The other thing is that whatever KPIs you're putting out there to measure and earn out, you need to make sure that they're measurable. For one, be careful about throwing out KPIs and targets, which maybe I can measure that, I'm not sure. We'll figure it out. And then you're in a situation where there's just a lack of clarity in terms of how that's being measured or what the numbers are that are coming in. So make them easily trackable, such as revenue and EBITDA being two of the most common measures. But with EBITDA too, you got to be careful because there are a lot of expenses which may be out of the seller's control, which ultimately get added to a P and L post acquisition. We're very careful. But if we're going to use EBITDA as a measure for the earn out, it's not really EBITDA at the end of the day. It's an adjusted margin for purposes of the earn out, if you will. That strips out a lot of expenses that we don't think are something that the target can manage. We want to avoid that dispute as much as they do.

That's a lot. You're making me scared of these earn outs now.

You know, when you do enough of them and you do them right, you really see the benefit of using them. We've had a lot of successful earnouts where they've really been pushed to achieve that growth. They've received the full payout and we feel great giving it to them. If they're hitting that earn out and you structure the KPIs in such a way, you're not going to get into a dispute. And there's been lessons learned along the way. We've structured deals where there was a dispute because we did include more expenses ultimately that the target argued were not within their control and it led to a dispute. But we've learned our lessons there and have found more success as a result going forward.

What are the things you could do to make earn out successful?

Yeah, it's the inverse of what I just said. It's avoiding those things that make them Difficult just being really thoughtful about what those KPRs are they aligning incentives but you don't want incentives to be misaligned. Maybe a good example of this is that if you're acquiring a target and you want the leader of that business, you want him or her to take on a bigger leadership role that's beyond just the scope of what their business is that we're acquiring. They are going to be the lead for the entire Midwest for example. Then you can't just structure an earn out that is on just their small piece of the business. A, you may not even be able to track it that way but B you don't want them to take the be solely focused on just the numbers that they impact impact their earnout and not the bigger picture and the growth of the entire Midwest market. Well, oftentimes what we'll do in that case is a combined earn out where we're combining our legacy business with their business and then putting together growth threshold based off of that so that they're frankly indifferent in terms of where the revenue is coming from. They're incentivized to grow it in either place because it's all going to add to their earnout contribution metrics.

Yeah, that's actually a good way to think about it. Make sure that you look at the.

Whole picture and don't make them overly complex. Gosh, I've seen some crazy math written around earnouts. The simpler you can keep them that ultimately align incentives appropriately and you're avoiding silly things that could be disputed like expenses that are completely out of their control. Then you could really have a successful earn out as a result.

How's retention with the smaller companies? Is it easier, harder than bigger deals?

I don't know if it's easier or harder. At the end of the day it's similar type of mechanisms. I would maybe say that it's more to a certain extent I just put a little bit more weight in it when it's a smaller company because typically if it's a smaller company the talent is going to be a little bit more concentrated. They're probably going to have a smaller bench of talent, someone that can step in and take up the leadership mantle. The consequences of having the principal leave that is driving the bulk of the business. In a smaller deal it's going to impact a big or small deal. But in a smaller deal it just may be less of an engine where the impact to the value could be much more significant. Just take us on a heightened focus for me on smaller deals.

Yeah, it is. They're different. I guess there's a way to look at it. It's not an apples to apples comparison. Are there any specific specific best practices you lean on to retain people?

Yeah, again, I'm going to put money to the side here because that's the low hanging fruit. Obvious one is making sure that you're identifying the correct pool and setting an appropriate carat of dollars aside for that. If they aren't equity holders, that is first off, make them feel very included in the new culture or make them comfortable that it's not going to be an immediate disruption to the culture that they hold dear. It's just that it's going to be different. And here are all the reasons why JLL culture is great and helping them understand the benefits of that. You don't want them to feel like they're on an island. You want to make them feel included and a part of the team. And that starts with a very clear integration plan and working closely with your HR team to set up kickoff meetings, day one, having a huddle with the newly acquired team, getting them in a room and giving all the JLL presentations and I mean all of that goes a long way. So that's important. You got. You need to start off on the right foot, emphasizing the opportunity for growth. I've hit on that a couple times already. But when you're at a smaller a company that's just maybe focused in one specific area of commercial real estate, there's a lot fewer avenues for growth. JLL has just so many different opportunities, so many different paths you can go internally. And I think that's just incredibly exciting to most individuals that, that come on board with us via an acquisition. Lastly, at the risk of stating the obvious here, don't screw up payroll and benefits. That's numero uno on any integration checklist and we've always done a great job of that. I've certainly heard horror stories in the industry of that not going well on day one. Talk about a way to start off on the bad foot.

Yeah, it sounds like a lot of this is related to hr. It's like you're essentially onboarding all these people, making sure they're a really good experience and get them off to the right start.

Yeah, absolutely.

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

This has happened on a couple deals, actually working with the target who maybe has some legal background, background and think that they're best suited to represent themselves. It's never a good idea if you're a lawyer representing yourself. You're just. You're not getting as much as you'd like to think. So the best advice you need that more impartial third party where they want.

To represent themselves all the way. Yeah.

All the way through. And one or two deals like that.

Yeah, it's crazy.

They're like, how hard could it be? They're not even necessarily an M and A lawyer, but they just think it's all transferable skills.

That's a terrible analogy. But it's like worse than a duo.

Yeah, right. Yeah. It's not a good idea.

Way more just collateral damage value there.

Yeah. Get an independent third party legal counsel.

Anybody, like at that point, Uncle Bill, he could do it.

Sometimes it hasn't been them who their legal counsel. It's been a couple other deals, frankly, where he used that exact example. My brother in law or my brother is a lawyer. Do they do M and A law? No, he's a divorce attorney. But I really think that I could just save the money and use him. Him. And I'm like, please give that a second thought. You want someone with an expertise here in M and A. You'd be surprised how often that comes up.

That's crazy, though. Yeah. Kevin, thank you so much. This has been a good conversation and I appreciate you helping me become a better M and A scientist here.

Yeah, no, my pleasure, Kisan. Thank you for having me.

Hey, those of you still with us, till next time, here's to the deal.

Foreign.

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