The Importance of Communication, Due Diligence and Post-Closing Integration

I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. In this episode, Armando Biondi and I explore M and A from the management team's perspective. Armando is co founder and COO for adespresso. He discusses his personal role during the adespresso and hootsuite merger. He shares how a partnership with hootsuite turned into an M and A conversation due to the discovery that both companies cater to the same customer. We discussed the importance of communication, due diligence and post closing integration. Here's more on Armando's background.

So Armando, I know I'm going to get your last name wrong, so maybe if you just want to start off with like a little two minute intro on your background.

Yeah, sure. So the way I allocate time is fundamentally on three things. First and foremost, I'm an operator. So I've been the co founder and COO for Discussor for the last three plus years and it's actually everything that's not business related and operational related goes through me. So the business model, you know, how to scale an organization effectively and how to coordinate on sales and growth and results especially, you know, I've been a big part of that and then I'm also an engine investor and I invested in the last three years in around 45 plus companies. Small checks but you know, as a way to be involved with the ecosystem and help other founders potentially do a good job with their companies. And finally I'm also a guest contributor for VentureBeat, Business Insider, Entrepreneur.com and Fast Company. So this year a little bit less. But last year I was writing more or less like couple guest posts per quarter on where the market was going what in terms of startup industry or the perspective about being a founder on one side and angel investor on the other. So touching on two sides of the industry and the marketplace. So that's more or less it.

Wow, interesting. So I guess I'm really curious about this last exit with adespresso. How did it start? How did the initial M and A talks go?

Yeah, so it was around February last year and essentially we were at a conference together Sastor, which is a very big conference when it comes to the SaaS world in San Francisco and there was hootsuite there, some of their cop dev guys and they reached out to us very very directly saying hey guys, we are thinking about this and we're looking to either partner or acquired a company. And they were very direct and we said, yeah, sure, we know about you guys and we respect you guys. So let's talk about it and let's see if there are the conditions to make an acquisition happen or otherwise. We are more than happy to partner up with you guys. And so that's what ended up happening.

So I think initially you partnered up with them and then it moved into more of an M and A discussion.

That is right.

And I guess when you're going through that M and A discussion, maybe you're discussing some of these initial terms and typically there's some back and forth. I'm curious to know what was your main interest in that negotiating outside of.

Price more than anything was the couple angles. The culture fit was very, very important for us. Also the fact that both companies cater to more or less the same type of customers. And so one of the things that was different for us because of course we had other M and A conversations before. But one thing that was interesting was that there was a natural fit there. There was a natural potential there of going to market as one joint entity instead of two separated companies. And also, of course we were in the position of actually being able to choose which one of the two we preferred and we wanted to go, which is not always the case for founders. That's kind of a luxury sometimes, but we were in that position. And so for us it was mostly a conversation of, hey, do we see more upside in actually joining forces versus going to market window in parallel with just a partnership in place?

So it was a real long term view. You were thinking about post transaction and not just getting to close.

That's right.

Okay. And then from there I'm sure there was a period of negotiating and I know part of that is evaluating other options. Did you go about that? Were you looking at running a process and just soliciting other interested parties?

So yeah, so that's a general advice that you, the vast majority of the founders get. But in our case, so we knew the alternatives pretty well. So other potential acquirers, we weren't there rather already and we knew them already and we had some initial conversation already. So we knew that there was not that much interest there. That's one angle. The second angle is that when looking at other comparable players compared to them, we weren't that much interested as well. So they were actually the best fit for our type of company. And the third thing is that we were profitable and growing and so we didn't have any pressure to sell. And so we did talk with investment bankers and we explored alternatives. We actually had another term sheet, second term sheet. But that was the more interesting conversation from a long term perspective and from a potential perspective and from several angles in our mind.

So things aligned and value seemed there and it felt like this was the best option. So you guys decided to move forward. How did due diligence go?

So the due diligence is a very complicated process and it's very time consuming and it's essentially the vast majority. One third thing which is a typical or it's weird about Ebinase, is that for the vast majority of the founders, it's a once in a lifetime experience. And the reality is that the large majority of the founders never even go through that once. Right. And so the best proxy for that is a funding round. And so like cities A or you know, cities go or later stage round and there is a due diligence there. But the reality is that M and A due diligence is like 10x more thorough that than the one of a funding round. And so essentially you go through everything in the life lifetime of the company. You know, contracts and partnership agreements and employment agreements and convertible notes and price grounds and how the business model works and what's, how the product works and what is the bug list, what's the hiring plan, what are the projection for the and all that kind of stuff. And so it's a very, it's a lot of paperwork and it's a lot of time and it starts fairly slow also because, you know, at least in our case, we weren't 100% decided on the fact that we wanted to actually go through the whole thing. So we started, you know, going through the digits and saying maybe there are enough conditions for us to move forward even if we are not 100% decided just yet. And so let's do it. I started slow, but as you become more and more convinced and as you get closer and closer to the deadlines, it becomes a real effort. And at some point, in our case at least, but I don't think it's much different. In any case, there were like 50 people involved on both sides. And as I was writing is also one of the things that was surprising to us and I think not a lot of founders realize, is that it's a very expensive process. It's like anywhere between 150 and 300, if not 350k just from a legal standpoint.

I mean, did you have any backup in case a deal fell through? Where you could recover some of that expense or are you just out?

No, I mean, we categorized that as like operational expense. If we decide, we said, okay, there are enough conditions for us to move forward. Right now we're not decided 100% just yet, but if we decide to pull it at the last possible moment, we know that there is a cost to that, but it's not from a business standpoint. While 150k or 250k, it's a shit ton of money from business standpoint, a company that's running, generating several millions of dollars in revenue, it's not that critical expense.

So you should be willing to at least consider that investment as part of the transaction.

That's right. And again, our case was a little bit special because we didn't have the pressure to sell. If you do have the pressure to sell because you're running out of money or the company's going nowhere, it's an entirely different conversation.

Of course, one of the biggest pain points during an M and A transaction is on the management team. With all this due diligence requests and things. How do you keep that from distracting you away from the business?

Yeah, that's a challenging thing as well. So there are two distinct moments. The first one where you are trying to protect the management system as much as possible. So you're essentially working as a filter and so nothing is going out of the team and you want to try and do that as long as you can. Because in the moment in which you start sharing the news with the team and you start involving the team on one side, it becomes real. Were more real on the other side. Yeah, you're essentially putting in front of the people like a big event, which is very, very distracting. And so there is a challenge there. There's an actual balance. And so for example, in our case, before sharing the whole thing with the team, it was just me doing the whole like, you know, communication and paperwork and, and taking care of the process. And I was keeping, of course, very updated my co founder, Maximo. But it was like a conscious decision, the one of saying, hey, you take care of the product on the marketing side as we were in the company, as if we weren't having this conversation and I pushed the conversation forward and we see if there are the conditions to make that happen or not. Until the point that you actually need to engage the team and you need to. And at that point becomes more real conversation. And you still want to do that mindful of the time of the people and the distraction that you're putting in front of people, but at some point, it needs to happen.

Okay, so it sounds like you really filtered and minimized as much as you could initially until you really felt like, okay, this is something that everybody else needs to know about.

Yeah, that's right.

What would you say were some of the big challenges when you're going through the rest of the diligence process?

I would say this is probably the.

Biggest one because you have to deal with everything initially.

Yeah. So this is for sure, we know the biggest one. And then another big one is whether or not this is an actual good decision that you're making. And again, if you. If you think about that from a founder's perspective, the reality is that, you know, selling a company is pretty much the biggest sale that any person will ever do in his lifetime. And, you know, for the vast majority of the people, you know, selling a car is a really big thing. Selling a house and even bigger thing, selling a company is like one or two order of magnitudes more than that. And so that's, you know, it's a big, big, big decision. So there are a lot of questions, you know, about, you know. Yeah, is it the best possible thing to do? And again, whether you need to do it or whether, you know, you see the extra potential. But that is a big, big question to answer to.

Yeah. So there's some internal struggles as well.

Yep.

You know, Armando, you mentioned a couple times throughout the deal where you thought the deal was completely dead. Could you tell me a little bit about that? Like, what would be some things that trigger that?

Well, mostly. So it's either communication disconnects and, you know, communication is key. It's really critical on all sides. You know, between founders, between the founders and the team, between the founders and the investors, between the founders and the counterpart. And so the acquiring company and with the lawyers as well, and with the customers as well, at some point, it really is critical. And so for us, at least, you know, I would say one, it was a communication thing. We didn't feel that we were getting the information that we needed to move forward with the conversation. And we actually overcome those challenges by putting those perceptions on the table and talking about them and realizing that there was some misalignment between because of, like, lawyers and stuff. So we ended up moving forward on that side. And the other time was when we didn't think there was a point where, you know, in the negotiation that. Where we weren't there in terms of, you know, the things that we were looking for to make this happen. And again, this goes back to us being in the position of like, being able to choose, but if you can do that, that's the best position to be in as a founder.

So that was more around. You were considering other alternatives or.

No, the alternative was to keep growing the company independently.

Ah, so you were thinking about just reconsidering the transaction altogether?

Yeah, that's right.

Gotcha. Okay, so throughout this process, what did you find surprising? I'm sure there's a few things, but what would you say were the most surprising or unexpected things for you?

Yeah, a bunch of things. So the cost of the whole thing, it was a surprise to me and was like, yeah, it was totally a surprise. But I understood aftergot the deal why that's the case, because it really is like a super complicated and lengthy process. The other thing was how critical communication was throughout the whole thing and the amount of people that work on a transaction like that. Yeah. And another one more thing was realizing how at some point it becomes like a gigantic trust exercise on both sides. Because we are talking actually on all sides, because from the acquiring company, you're talking of tens and tens of millions or hundreds and hundreds of millions of dollars. On the founder side, you are giving away something on which you worked very hard, work days and weekends, sweating tears for several years. On the team side, it's a big change. And people are concerned about what's going to happen to their employment positions or to the company, or to the culture of the company, or how their job is going to change. And then on the investor side, if they don't have the confidence on the founder, one of the question is, am I being screwed over? Or if there is not enough communication there, people are concerned about how are things going. And so it is a big trust exercise as a bottom line at the end of the day.

So it was a lot more expensive than you thought, a lot more people involved. And this trust factor was basically all around the transaction.

That's right.

One thing mentioned on this particular transaction, you didn't work with a bank. Looking back, would you think that would have made a difference?

No.

Okay, why is that?

Because again, we knew the market, we knew the potential acquirers. We were pretty confident that this was the best outcome in terms of potential type of company amount of the transaction. Again, everybody was very happy about it, and we were not in a position to have to sell. And so, you know, the forcing function that an investment banker usually creates by having like, alternatives, we had that alternative already. We did not have to actually sell the Company because if we wanted to, you know, we were still fast growing company, profitable company, highest cash in the bank ever, highest revenue per month ever. It was really about the opportunity of doing more interesting things together in our case. And again, it's not maybe the average case, but in our case that was. There was the story that makes sense.

So the nature of the transaction, sort of the extending strategy and view beyond the transaction. You know, you're not doing an auction process so that some of those factors come in play. Would you think a banker would have helped negotiate a little better terms or.

The reality is that I don't think so. We did spoke with a few bankers. I don't think so.

Okay. Yeah, not advocating for bankers, just kind of curious on your perspective over there. I guess I'm curious to know too. This process is pretty taxing. How would you personally describe how consuming the process was for you personally?

It was all consuming, like night and day, like 16 hours per day, weekend included.

Wow. For how long?

For three months.

Wow.

And that was the due diligence only before. And then before that there was some negotiations, but there were like lower intensity. There was some pressure or tension. Maybe not pressure, but tension there. Because of course, potentially it's a big conversation, but it's not real yet. And you are kind of entertaining the thoughts, but not really before actually going into the due diligence. But when you start the due diligence, it becomes really intense.

Did you take a vacation afterwards?

No, but we closed just before Christmas. So there was natural, like the holiday season.

When do you guys start talking about integration?

Integration in terms of partnership integration, in.

Terms of post closing. Merger integration.

Post closing. So yeah, that was fairly down the road. It was like a few weeks before finalizing the close. But again, our case was a fairly uncommon one because in our case, and as you know, we published afterwards, the main decision was to keep, you know, the. The company functioning as an independent business unit within the broader organization. And so that was the decision right there.

I see. So if I were to ask you post closing if you were involved in integration, was there much of a process after closing?

We are still running the company. I mean, we're still running the group as an independent business unit. And so me and Massimo, my co founder, we are in charge of pretty much all things and we report directly to the VP of product, which is in the exact team. And that's going to be the framework for at least this year, maybe more we'll say about that. But yeah, so this was essentially the main decision driving all the following steps.

Now did they integrate accounting or HR or any functions at all?

We are integrating some functions. We're integrating so accounting, hr. Yes, some support success. Also the main scope is and the main goal is what makes sense from an operational standpoint, from a customer standpoint. And part of the reason for the acquisition was for us joining courses with them is the fact that we have a strong expertise and background on a domain that's more and more critical and in which hoodstate is a broader organization, didn't have that, that strong domain and expertise. And so that, you know, being that reason or being that part of the reason, it makes sense, you know, to have that kind of approach. And then of course there are some operational things and also some product things that are happening. But the main driver is what makes sense for the customer. And one other thing that was super interesting for us was that hootsuite has a more mature company, has a more like a very structured enterprise angle. So they have a lot of just footprint, footprint in the world when it comes to social media management. But on top of that, because they have like 15 million social profiles connected to Hootsuite. But on top of that they also have you know, very strong and well functioning enterprise Salesforce and enterprise product. And so we were at that intersection, that moment in time where we have been like growing extremely fast for two years. And we were right about at the time where we were thinking about developing ourselves like a Salesforce enterprise product. Enterprise Salesforce. And so by tapping into that added expertise, the idea is to be able for the joint entities to be able to accelerate the go to market on the enterprise side as well. And so to further dominate the market in terms of social organic plus social paid, putting together, you know, the hoodsuite experience and expertise with lspoise.

So really seeing that synergy there with some of those key functions on the enterprise sales that they already have existing.

Yep.

Interesting. Are you tied in pretty well with some type of earnout agreement? I mean are you incentivized to stay with the team for a while?

Yeah, we. So we have, part of our agreement is not there is no earn out there, but we, we do have a retention package.

Okay. So they're keeping you interested and motivated to see the transition through and continue growth.

That's right.

For maybe how long?

Three years. And on our side as well, part of the reason again the big motivation was to we love what we do. We have been loving that for like three years. That didn't change. So part of the motivation was let's play in a bigger, you know, playground with more resources and let's see, you know, what we can do together. So for us, part of the motivation was to work together, to do things together in the market by putting together two things that make a lot of sense, that talk to the same customers with a very similar go to market strategy and see where we can go.

So you have this growth opportunity and.

At the same time you care about.

What you built and want to preserve that.

That is right.

Armando, what would you go back and do different about what? Just the transaction in general.

It's weird to say, but I'm actually. I don't know if I would change anything. Let me think.

Maybe kicked a lawyer here and there.

I'm pretty happy. I mean, it was a stressful process and very time consuming and intense, but it was an awesome learning experience as well. From a professional standpoint. Yeah, it really wouldn't change anything.

You got too much of the founder mentality where everything's a lesson and you take it for what it is.

Maybe. Maybe.

Well, let me ask you this. What advice would you give to corp dev teams that are in their shoes pursuing an acquisition with a company like yours?

Huh? That's a good question. Maybe understand what really motivates the founders or like, take time to do that exercise. Because once you understand the motivation, you can understand or you can explain or you can see more clearly a lot of the behavior. And we were very straightforward in telling what was motivating us. And again, that goes back to the point where communication is key and critical on pretty much every angle. But that may not be the case for everyone right off the bat. So if that's not clear, one of the critical things is again, understanding what motivates the founder to make sure that you're doing something that set up the success on all sides. Because at the end of the day, when you do a transaction like this or a transaction that you expect hope it would be beneficial and successful for the acquiring company, there are a lot of moving pieces there as well. And so again, motivation of the founders is. I would say it's critical to understand that.

Yeah, it's almost like a level of empathy with the company acquiring. What would you say is the craziest shit you've seen throughout the transaction?

The amount of paperwork that we had to sign.

How many signatures did that total?

Up to a couple hundred. I don't even know that.

Wow. Yeah. That's a lot.

Yeah.

Maybe you wish you had one of those stamps. Signature stamp.

Yeah. And the other thing, which goes back to the trust point, is that you read the paperwork most of the times, but sometimes you don't even have time to do that because the deadline is too close. And even when you actually read the paperwork, you know, you realize that you're understanding the legal implication of that, like somewhere between 5 and 15% or maybe 20%, which is a kind of a scary thought. So you have, you know, going back to the trust point, you really have to trust your lawyers and you really do. You really have to have a good alignment there, because that's a reality. You know, there is too much paperwork and you try to keep up and read all of it, you will not always be able to do so. And even when you will do it, you won't understand the legal implication of a big part of the actual thing because you're not a lawyer. It's not your job. Right.

And so having a good lawyer you can trust is important.

Yeah. And usually good lawyers are expensive. But that's okay, you know, because if they're doing their job well, you're going to be happier and more protected down the road.

That's great. Those are all the questions I had. I don't know if there's anything else you wanted to add.

No, I mean, that's more or less the high level. And so we actually wrote a big, long post about it, which is, you know, anatomy of an M and A. It's on our blog. And so, you know, if people are curious to know more about that, that's always a good resource.

Hey, Armando, thank you again for the time and really appreciate this.

Enjoy and have a great evening.

Thanks for tuning in to M and A Science. We hope this podcast provided valuable insights. If you have interesting MA stories or suggestions to share, reach out to me. You can find my email in the show notes as well as any links or tools mentioned in the podcast. Join us next time when we uncover more perspectives to successful MA transactions. This podcast was brought to you by Day One. Day One takes an agile approach to the management of the entire MA lifecycle process. We develop strategies to drive innovation to create the highest return on MA transactions. Day One can work with you to implement custom solutions for your most complex problems. Visit ondayone.com to learn more.