The Real Work Behind the Close: When Judgment Beats the Checklist

Is your team using AI like Claude or ChatGPT for deal work? Or honestly, have you tried and given up on it? Either way, this one's for you. The problem isn't the AI. Every corp dev team I talk to is already using it somewhere in their workflow. The problem is what happens after. You download the file, upload it to the AI, run the analysis, then go back to your deal platform, and update everything by hand, then do it again for the next document, the next deal. That gap between your AI and where your deals actually live, that's where efficiency dies. That's why Dealroom built the only MCP for buyer-led M&A. Your AI connects directly to Dealroom, reads your live deal data, and writes findings back automatically. No manual sync, no copy paste, just your AI and your deal data finally working together. And let me tell you, I've seen actual customers build some incredible things with this. Highly recommend checking it out. dealroom.net/MCP. Again, that's dealroom.net/MCP. Now back to the episode. I'm Kison Patel and you're listening to M&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&A deals. All right, this one's a little different. I was at Dealmax, and instead of doing one long sit-down, I started grabbing people and asking them for the deal story that they still think about. They delivered. Brent talks about sellers fighting and a partner walking out at close. Sam talks about an aerospace deal where a door blows off an airplane during the process. Instead of panicking, they had to understand what the risk actually was. Steve gets into global employment issues. SPS talks about buying in Europe and realizing very quickly that Europe is not one country. Here's the thing. The checklist matters. The process matters., but at some point the checklist stops answering the question. You need someone who's seen the problem before. And that's the idea behind where we're taking M&A science. Learn from practitioners, run better deals. And when you hit something new, get help from someone who's been there. This is DealMax Field Notes, the real work behind the close. Here's to the deal. Live at DealMax here with Brent Baxter. Brent, can you tell me who you are and what your company does? Sure.

I'm Brent Baxter, and I'm very privileged to be the Chief Executive Officer of the Association for Corporate Growth. So here we are at DealMax.

Our host. What's your most memorable deal?

So for context, I've been the CEO of ACG for just about 3 years now, but I am celebrating my 25 years of membership. So for most of that timeframe, I was a boutique investment banker. So your question about deal is relevant. Spent much of my career doing that. All deals with family-owned businesses have memories. Some of them are great and some of them are a little more complex. When you talk about memorable, might talk about the business partners who had a literal fistfight in the parking lot somewhere along the engagement about valuation and differences in valuation. They came to blows and we got them back together and We were then sitting in the closing room with the buyer, the attorneys, like you used to do it in the old days. And one of the partners got up from the meeting, would cruise to sign the paperwork, got on the elevator, left the building. His other partner was apoplectic, shall we say, and might've used a few bad words. But the attorney on the transaction went out in the parking lot, down the elevator, out in the parking lot, brought the partner back, put him in a separate room. And he signed and his partner signed and the equity investor that was with them signed and we closed the deal. We did not have a post-closing party.

Wait, now this was with the buyers that were having the tension or was it with sellers? On the sellers. And you were representing the sellers?

Yes. Two business partners with a large investor. So the two business partners were not friendly to each other at all.

So they were at a point where it's like, we're not getting along. Probably the best thing to do is sell the business.

So they were forced to sell the business by the third equity investor.

Oh, wow.

But they had some differences in the valuation expectations.

Valuation that eventually turned into a fistfight in the street.

Yes, it did.

Yep.

Yep.

Did you have to help break that up? Was that part of the role?

No, I did not witness it. I was just told about it. There were no visible scars, so I don't know how hard they hit each other.

And then at a point, just negotiations, more points of friction. You got one of the partners walks right out.

Yep.

Bring him back in.

Yep.

Separate. I was going to ask, like, when did things really get hard on that deal?

Somewhere between the beginning through the middle and into the end. So it was always somewhat cantankerous transaction.

What surprised you? Walk me through that moment.

Actually, I was surprised when the one partner walked out at the closing table. I thought by then we had everyone come to a mutual sort of stand down. And they would be ready to just be done, but apparently not.

Do you feel there's any moments that you thought the deal was just completely dead?

In that entire investment banking career, we always worked with family-owned businesses and every deal craters. I always said every deal craters on Friday. They all crater at the same time. So if you have 6 active transactions, 3 of them are going to go bad on some Friday. Generally by early the following week, you get them back together. This particular deal was precarious from start to finish, but had we not had that larger institutional party that wanted out and they didn't quite have voting control, but they did have enough financial power, if you will, that they were able ultimately to compel the deal to close.

There was no unity between the disputing partners.

I would be shocked if they ever spoke a word to each other.

Wow.

This is probably 20 years ago. So it's been a while.

If you had to do that deal again, what would you do differently?

Uh, not. Thank you very much for your interest in our professional services. We might suggest to you—

Was there any early indicators that that was going to be that kind of deal?

No. We were introduced again through these sort of financial partner, and then we met each of the—

Here's these operating partners.

Yeah. We met the operators.

And he didn't tell you, I got these two operating partners are The headache, I want to get out of this.

They gave us a little sense that there was some tension, but they gave us no sense that it was outright hostility. And we were at the operating partners. They were both very bullish on the business. They wanted to sell. They knew they needed to get out of this relationship, but we did not discover the depth of the animosity for a while. But when we discovered it, it was really real.

So once you're in, it's hard to walk away and say, hey, this isn't the right engagement for us.

Yeah. Well, I mean, once you're engaged, the right thing to do is to get to a deal, to a closing.

Get it to the close.

Sort of a follow-on to that, but I remember somewhere in my career, somebody might've been an accounting professional or a lawyer, young person said, "Now, once you get to a letter of intent, what's the hardest part? Is it managing the data rooms and the attorneys and all the technical due diligence?" And I said, "No, it's managing emotions." And with family-owned clients, that is really a critical part of what a great investment banker does is you manage the emotions.

You're dealing with psychology.

Yeah.

You think there should be more therapy training for bankers?

So also funny you say that for 20-some-odd years, we had two different offices. One was directly below the Psychoanalytic Institute of St. Louis, and then the other was directly below a firm called Psychological Associates. So we always felt that we were just sort of an annex of the professional analysts that were nearby.

I love it.

Hey, Brett, I'm having a blast at Dealmax. It's been a great experience meeting a ton of people, high energy. You know, people ask me, why do you go to Dealmax? What's the big point of it? And I don't want to make sure I'm pitching it right because I'm like, there's a core element of matchmaking between bankers and investors, private equity strategics. To really connect on opportunities. Am I saying it right? Is there more than that?

It's a very nuanced event with many different constituencies. As you pointed out, we have not just the private equity and the investment bankers and the corporates, but we have the whole entire M&A support community here— attorneys, accountants, data providers.

You're right. You meet all the vendors, so you build your network up there as well.

So the 3 words I settle on now all the time for ACG is more. Relevant connections. Relevancy is maybe the right word in there because everyone in this room has an ecosystem of deal. I mean, you don't do it anymore on an abacus and a spreadsheet. You're using data rooms, you're using artificial intelligence, you're using accounting advisors, you're using quality of earnings. You're obviously using legal counsel. You buy a company, you're searching for a new CEO, Us creating those more relevant connections among the entire deal community is really our focus at ACG and at this event.

All right. So you quantify how many attendees and how many meetings booked you got this year?

Thank you for that setup question. Appreciate it. This is a record year again of attendance. We're slightly over 3,500 attendees. In a statistic that is just stunning to me, we will have slightly over 26,000 scheduled one-on-one meetings among those 3,500 attendees. And that's only a fraction of the connections that are happening here. That doesn't include all the folks that stop by a sponsor booth or the cocktail parties and so forth. There's probably well over 100,000 one-on-one connections that occur in this property over a few days.

I picked you up walking off the floors.

Yeah, yeah, exactly. Yeah, we just met on the floors. Importantly, to your earlier question, About one-third of this audience is private equity. About one-third of this audience is investment bank, and about one-third of this audience is what we call M&A partners, the support community. Of those 26,000 meetings, about one-third involve private equity, about one-third involve investment bank, and about one-third involve that M&A partner community. So everybody gets a chance at the table to build those more relevant connections.

Yeah, everybody's got a full calendar. Yeah. Brent Baxter, thank you so much for sharing a memorable deal story.

Thank you, Kison Patel, for having me. Appreciate it.

Here's to the deals.

Live at Dealmax, I'm here with Sam Delastine. Sam, can you tell me who you are and what your company does?

I'm the, uh, Vice President of North American M&A Corporate Development for a company called Diploma PLC. Diploma is a $2 billion value-added distributor of basically any type of components you want. We have about a $1.2 billion business that's really focused on electrical components, wire and cable, interconnect solutions, all the way through aerospace fasteners. Another division that's about $900 million, that's all in flow control products. And then we have a third division that's only 10%, 15% of our revenue that's in healthcare products. So the company is very agnostic into what it does, uh, what markets it is, what products it sells, but we consider ourselves a sales organization who can sell anything. And we're just looking for good value-add businesses and helping them lean into that and really achieve the growth that they can do.

Tell me about your most memorable deal.

So at Diploma, we actually just did a deal a few years ago. It was in 2024, early Q1 2024. The company was called Peerless Aerospace Fasteners. It was actually brought to market by Evercore, which is a very well-known, very strong, if not the best investment bank out there. This was a family-owned business, privately held by a single family and a couple of people of management. They sold aerospace fasteners, nuts, bolts, rivets that go on the fuselage of an airplane. And we had a business already at Diploma called Clarendon Specialty Fasteners that had a really good position on aerospace fasteners as well, but they were really only on the interior of the airplane. They're completely different markets. Coming into this job, I didn't necessarily know that, but finding out, it ended up being a really nice opportunity for us to chase. We had had them identified for years. Could never get them to talk to us, could never get them to talk to us. And then in October of '23, I reached out directly to the managing director, CEO, and he said, "I'll take your call," and ends the call with, "You know what? This is a good conversation. We're going to keep talking to you guys. I like this." And 2 months later, get a call from Evercore saying, "Hey, we missed you on this opportunity, but Bill loves your story. Love you to be a part of our process that we're running for this business." I said, That's great. Signed the NDA right around December 10th. A few weeks later, we're in the middle of the process. Indications are just about due, and a door blows off of an Alaska Airlines jet because of a fastener issue.

How'd you come to find out about that? Did you find the news and put two to two together, or did the bankers come out and disclose it?

No, the bankers did not disclose it because really nothing was disclosed for the first month of that.

Yep.

So, you know, the, the door flew off. I think everybody in the industry knew it was a fastener issue, but nobody knew, was there a failure on the fastener? Was it improper installation or what it might not have been? And that turned a big problem with the deal into a huge opportunity because we are in the space. We, we know the products, we know where they're going, and we knew right off the bat, or not knew, but had a really high level of confidence This wasn't a fastener problem. On that door, there are dozens of fasteners, and in order for them all to fail simultaneously and cause a blowoff like that, it's almost impossible. So we kind of knew that when it happened, and we were also excited because we knew a lot of the private equity universe who we were competing against wouldn't know that. If we were able to move quickly, we could get there before maybe they had market educated themselves.— or was able to get to the risk tolerance that we were. So that's what we did. We just kind of proceeded down that path. February rolled around and that's when the news came out that the company had just not installed the fasteners at all. So there was no liability to any fastener supplier. The liability was all with the people who did the replacement and the repair work. That ended up being great for us because it quieted a lot of the noise from other bidders in that month that the market was trying to figure it out and really let us build a level of intimacy with the sellers that we were able to use to help, you know, when you get to the tail end of a deal, it helped us get over those final hurdles because we had built a relationship through the challenging times of diligence. And our time with them would've been cut in a tenth if it was still that big, broad, massive private equity process. So it was probably the most interesting deal I've ever worked on, but you just don't plan for door blowing off, but ends up being a great opportunity for us.

The process was still competitive.

In that market, there was private equity-backed companies who, similar to us, they were able to get comfortable with the risk pretty quickly. It definitely knocked down the universe of bidders significantly, but it was a competitive process until the very last moment. We were actually able to win despite not being the highest on value.

You ended up winning at a 5% discount to the highest bidder.

Correct.

And have bank run auction. How does that happen?

It's not something that I'd like to bank my entire career on is getting that to happen. But at Diploma, we pride ourselves for being a very good home for privately held businesses. That's not something that we just say at Diploma. It's something that we believe in throughout the process. That was very compelling to the management team who was staying on, and the management team had been with the ownership group for generations, to be quite honest. And they had some say. About 3 or 4 weeks into the process, they came to the conclusion that they never want to sell the business again, another business again in their life. It's a tiring process. It takes a lot of energy. They were very intrigued by the opportunity to roll over equity into a private equity type vehicle. We convinced them that they could do that with Diploma as well. And they ended up doing that. What really kind of set us apart was We are a kinder, gentler alternative to private equity. And what do I mean by that? Diplom is a company that we don't have a deep bench of people. We only have 25 to 30 people in our corporate group. That includes me, CEO, administrators. Like, we can't send somebody in there to tell you how to run your business. And largely we leave businesses alone. And that was very compelling to the management of this, is they'd been used to running their own business for years, decades, and they didn't all of a sudden want to come in and be middle management in a big multinational conglomerate. We understood that, we listened to them, and we took that into consideration and basically structured it. This is all of our businesses at Diploma. They get to run off independently. Nobody goes to market as Diploma, everybody retains their old brand, but we invest in management as much as anything else. We just had our leadership conference last year. There were 150 people there, 70% of them came to the company through acquisition. It creates a fabulous culture of entrepreneurship. And we try to show that it's not just Sam Delistein sitting there telling you, oh, we let you alone. We keep you off. In Peerless, we had the management call recent acquisitions and I wasn't on the phone. Nobody else from Diploma was on the phone. It was just an entrepreneur talking to an entrepreneur who sold his business to Diploma. That lends itself to trust in the process. And trust in the company. Those were the things that we knew we were short on value. The other bidder put a very compelling offer out there. The other bidder was very focused on value. When they were thinking about value, they think of it as a number. And they thought of the process as whoever can get to the highest number is going to win. Diploma thinks about value as it's the culmination of everything that goes into the deal. There's a value component, but there's— this is their legacy. This is the owner's legacy. They're— they don't want to sell it to somebody who's going to tarnish it. I can sit here and say in a corporate development role with 60 deals on a deal sheet, that it's just business to me. To the people who I'm talking to, it is the farthest thing from business to them. There might be only one thing more personal to them in their life, and that's their family. And if you don't treat it with that type of respect and that kind of kid glove care and make them feel like they're just going to be another financial metric under a portfolio, you're always going to only win on price.

Reputation and trust can make up for a $50 million bid difference.

Huge. It's absolutely massive. To the banker's credit, it was shot by Evercore. Evercore, they're one of the most professional banks out there, very upstanding. And they called us up and said, you guys are short. And they told us how short we were. And at the time it was a jarring deficiency. And they told us, you need to get to this number. You don't have to be a dollar over this number. 'But if you don't get to this number, we're going to go with the other bidder.' There was a discount there, and we knew that. They gave us 2 days to go figure it out, and we came back 2 days later and said, 'We're at the number.' Basically, 'Let's close next week.' And that's how it worked. You mentioned trust, and I forget the exact— reputation, trust. That's not one party has to bring that to the table. Every party involved, from the sellers to the buyers, to the bankers if there's a banker, but I think too, it's really important that the lawyers have it. And that's, that's where you have the most distrust. It's just lawyers being lawyers and we're in an issue right now with that. And, but making sure that you're managing them to maintain a collaborative process instead of a combative process, it's really important. It's like elections. It's all good while everybody's running nice campaigns. And then the second somebody goes dirty, you have to respond in kind, especially at— in our role as the buyer and the appreciation that it's more than just business, we take that to heart and we really focus on that to keep the collaborative nature of a process going. Because once it gets combative, it just devolves into who can say the biggest number.

Where did things like nearly break in this deal? They had an inventory situation, board pressure. What came close to killing it?

Every day there was something different. That's any deal, especially for good businesses. Good businesses are going to have interest and that interest creates tension and that's I guess how bankers make their money. So this deal in particular, there was a lot of inventory that had been written off and how's that impact the business, things like that. But to me, that's just a red herring. Deal professionals, corporate development, that's the biggest value add that they could bring to a deal is to see through the trees for the forest, to figure out what is value impactful and what is not. We had the door blow off. That was an interesting one. And we got over that one. Then there was a bunch of inventory sitting on the books that was written down to zero. They had been selling it in the normal course. It was legitimately written off, but you're looking at a 3-year look back on financials, but they're selling a bunch of inventory at 100% gross margin today because it had been written off 5 years ago. And you're going, is this really repetitive? Is it— especially from somebody who's not as close to the deal. As maybe I would be, it's a private company in the United States of America. Like they're incentivized to help write off inventory to help with their tax bill. It was all legitimate. They did it. And you just have to look at it as to my team, while we have a bunch of zero value inventory, it's going to make our EBIT or our EBIT margins go up. But again, is it sustainable? Are you facing a cliff at the back end? And you just have to make sure that you're planning and protecting against that cliff.

You're doing 8 to 10 deals a year. For you, it's business. For them, it's everything. How do you keep that in mind when you're deep in the process?

Me personally, one of the biggest missteps in my career is when I crossed the line, when I didn't appreciate that it's more than business to them. And I'm sitting there as a 30-year-old kid who's probably more arrogant than he should have been, telling a business owner how he should run his business and things like that. And I stepped in it and he put me in my place. I'll never forget that conversation and appreciate I'd never want to have it again. But at that point, you have to step back and say, what did I say to make this guy, this gentleman, so mad at me? And then you realize in talking to other people, I called his baby ugly. And you don't call people's babies ugly, especially when you're trying to adopt the baby. Oh, that's a, that's a brutal metaphor, but you get my point. That's really where it came into being for me. Luckily, that was very early in my career. Appreciating that early and putting it into my regular cadence in the process within my companies was really important. It helps us know when to push, because sometimes they need pushed or else the deal will stretch out forever, but also lets you read signs so that you don't push too far because sometimes you push a little too far and you push them off the cliff. It like, you can't get them back. And that's what you want to avoid. The art of it is to be very, very annoying without somebody knowing that you're annoying them. While I'd love to say there was a secret to it, it's just repetition and making mistakes, learning from those mistakes. To me, that's the strength of a deal guy.

Was there anything else that almost killed that deal?

The Peerless one?

Peerless, yeah.

We had the doors blowing off, we had the inventory, the financials were challenging at times. That deal, along with every other deal, if you want to find a reason to kill a deal, you'll find it. And again, the corporate development professional's role is being the go-between between his company and the selling company to make sure that we're making educated decisions, that we're not being emotional, trying to get the emotion out of it because it drives itself towards it. When you find the thing that is actually value impactful or changes the thesis, you have to be strong enough to say, we got to walk away from this one. But like I said, when they're red herrings, you have to be the person in the room, the adult in the room saying, this is still a very good deal. We can deal with these problems. There are dozens of ways to deal with any problem. Just making sure that you're keeping on track. You're not losing people. You're not pushing them over the cliff. It's really important.

Is there anything you would do differently if you did that deal again?

Uh, yeah, I would've got to it before the bankers got to it. That goes with any deal. At the other side of the table is people that there's an advantage to a competitive process. There's an advantage to competitive tension. What we've done and actually taken away and taken away from that opportunity is we're being more aggressive early in processes. We're working on a deal right now and we met with a gentleman, the ownership in June, followed up with them 2 or 3 times. And then in November, find out that they hired an investment banker and you just kind of sit there and you think, "If I would've pushed a little harder, if I would've instead of 2 calls and 2 emails made 6 calls, 'Hey, how are you? Check in, keep you warm.' Could I have kept them out of the banker's hands?" Maybe, but you're never going to be perfect in that endeavor. So what we've taken to at Diploma is when we see kind of a shop deal and whether it's just on the teaser or just on the sim, we will put out a very ambitious offer for the right op. And that's what we're doing now is the bank had come and said, "Yep, we plan on We're planning on going out to a broad auction process, 200 or so people, but we're going to give 5 people fireside chats. There was enough materials beforehand that we could value the company. We showed up with a fireside chat with an offer in hand for what we thought was 2 turns over what maybe in a perfect auction, but less than if the auction took fire. And we just said, okay, we're going to try to take this off the market. And we did. We were able to get exclusivity on that strategy. You'll see companies doing that more often. The reality for us is, is an extra turn worth the risk? I don't think any deal that I've ever done, I've ever said, "This would be a great deal at 9 times, but it's a terrible deal at 10 times." The ones that you say is, "We missed this deal at 9 times and it went at 10 because somebody else took it from us." It's so hard to get a deal to that stage. For the right deals, you have to be more aggressive. You have to bid it to not lose as opposed to bidding it to get the best price you can get. Because if it is that A+ type of deal, you're going to unlock so much value that turn isn't even going to register on the returns profile.

Long time to get to know the business, the owners, get that rapport, gives you more of that confidence.

It does. And it's challenging because again, when you're sitting there and you're saying, I appreciate this is more than just business to you, And then you follow that up, but like, let's hurry up and get this over with. It feels very impersonal. It's a challenging line to walk. The flip side of that is, is you just kind of let it languish out there. We're good businesses. Problem with buying good businesses is that owners don't need to sell. When that is the case, the conversation has to go beyond just pure strategic fit and really start selling the idea of this is the value of the strategic fit. "This is what we can unlock. And by the way, we're sitting here, we're publicly held company, but if you want to roll over equity and enjoy some of that upside, we'll make it work." Peerless was a great concept. The management rolled over, they had about 20%, they rolled over like 5-ish. That deal from the synergies and just from the market, they're going to see a significant return on that investment. It's been one of the best deals, if not the best deal in Diplomas history., and they're sitting there and they get to enjoy that upside. And for people who have that entrepreneurial attitude, they really like that. And it's a really powerful way to unlock value and make sure that everybody's rowing the same way. Creates a lot of camaraderie and a lot of fun.

Dan, thank you so much for taking the time to share this great story.

Oh, my pleasure. Thank you very much for having us.

Cheers to the deal. Let me jump in for a second. This is exactly why just follow the process is not enough. Cross-border employment, EOR, entity setup, work councils, local council, cultural issues. You can read about this stuff, but when you're live in a deal, the real question is not, what does an article say? The question is, who do I call? And that's what a Certified Advisor on Demand is for. M&A Science connects buy-side teams with buyer-led M&A Certified Advisors matched by function, region, sector, and deal stage. Hourly, no retainer. When you hit something you haven't seen before, talk to someone who has. mascience.com. Live at DealMax. I'm here with Steve Hoffman. Steve, can you tell me who you are and what your company does?

Absolutely. So my name's Steve Hoffman, as you accurately pointed out. I'm from the Boston area. I work for a company called Venture Employer Solutions. And I'm the Vice President of Global Partnerships, and we seek to work with organizations that are really going after the same clients as we are. We are many different businesses. We've grown quite a bit since our inception since 2004. As an organization, we've made 105 acquisitions in the past 8 years. Everything has been in the HR space. Most of it's domestic, and then recently we've been expanding global. As an organization, our core business, our largest, most well-established business is PEO. With that, we've done a lot of other things in the US space. We do ASO, domestic payroll, we do global recruitment. We also do now employer of record. So we have that service offered in over 160 countries. We do contractor payroll, anyone, anywhere in any currency, as long as it's not sanctioned by the US government. We also do offshoring or nearshoring. We have a division where we have over 35,000 employees strewn across 23 different countries. So for those companies that are looking to scale rapidly, that don't want the full commitment of hiring an employee in these very turbulent times, this is a great solution. And you also save a lot of money by hiring these folks. We have a huge footprint in Latin America for this service, as well as the Philippines, India, and a few countries in Africa. For us, we're looking at helping companies scale rapidly through our payroll solutions and through offshoring or nearshoring. We also love to help those companies that are doing divestitures, acquisitions, carve-outs. We work with private equity firms to support those transactions. I've been doing this a while and I look at a successful transaction from my standpoint is getting those employees from the selling firm successfully transferred to the acquiring firm without breaking any employment laws.

What's your most memorable deal?

My most memorable deal, the year was 2021, and I heard about this really cool company that I've known for a number of years. They're in, I guess you could say, the music business, and they were a private equity firm that was doing a carve-out. They wound up with a subsidiary that had roughly 125 employees strewn across 22 countries. Without a solution like Employer of Record, It sounds like a nightmare. Just for your audience, I'm assuming some are familiar and some aren't. So just explain what EOR is. Employer of Record. A provider of these services is an organization that has entities throughout the world, either directly owned themselves or through a partnership, purely for the purposes of employing individuals on another organization's behalf. Should they not want to set up an entity in that particular country for any number of reasons, it could be cost, it could just be efficiency. It could just be they want to be there temporarily, what have you. The employer record provider will provide those employees with actual legal employment. They will do onboarding and offboarding, stay in accordance with those local labor laws so the actual employer won't have to worry about learning those foreign labor laws, will provide them payroll, tax reporting, benefits according to that country. It just helps companies scale rapidly, whether you want to be there long-term or short-term. If you're dealing with a small headcount, EOR is a very good solution. And at any point in time, you can decide to switch over to an entity. So in the case of this particular deal, it was one of those hurry up and wait situations. Hey, we've got this great deal. It's going to close.

Great.

Next month? No. Maybe 2 months. Wait 2 months. Wait 3 months. 4 months. Boss is saying, Steve, where is this deal? Is it going to happen? You keep waiting, keep waiting. 14 months go by. They finally close the deal and I nearly forgot about it. I said, "Oh my goodness." So here we are. I had to pull in a partner firm because at this time, my employer at that time was relatively new. We didn't have all the solutions that my organization has today. We couldn't set up the entities. There were some situations where we needed to set up the entities. There's some situations where EOR is not appropriate because they were dealing with some C-level executives. You can't use EOR when you're hiring somebody at a C-level because then you run into something called permanent establishment risk. What is that? Basically, if you look at the employer of record model, it doesn't account for corporate taxes. It only accounts for social taxes or income taxes. So if you've got an executive making decisions, making a lot of money for the corporation, that country where that CEO is, they're not making any revenue off that corporation. So that's why you have to essentially establish that entity. Now, there were probably some accountants out there saying, Steve, you're not an accountant. You shouldn't explain that in such a manner. But Generally speaking, that's how I understand it. So a little caveat there. So what made this deal so complicated is because there are some instances where EOR worked, there's some instances where it didn't work and where it didn't work, you had to establish an entity. At that time, I did not have the tools in-house to establish those entities. So I had to get a partner that would do that. Another layer of complexity. You have to make sure when you're doing these deals, especially in Western European countries and countries like Brazil, where they have very rich benefits and strong CBAs, collective bargaining agreements, you at the very least need to make sure that the acquiring firm has at least the same level of employee benefits as what they had before. Otherwise, you're going to be in breach of that CBA and you could get sued. And what added a huge layer of complexity to this is the private equity firm that shall remain nameless, had a deal prior with a company that did employer of record and said, "Hey, you can just transfer all these deals to us. We'll close this deal in a month and it'll be super easy." That particular firm, EOR provider that shall remain nameless, they didn't pay attention to those CBAs. That whole transaction, although it went through very quickly, they lost a lot of money in that deal because they did not pay attention to the benefits and they got sued like crazy. What made this deal so complex is I could not deal directly with a private equity firm. They said, "No way, no how." How am I ever dealing with another EOR company because of this awful experience? And what companies need to realize is that EOR is still a relatively new business. And this was prior to 2020, I'm positive. There was still a lot of kinks to be worked out. But now that EOR's been around for 15 years and you work with companies that have a lot of stake in it and focus a lot of compliance, it's changed. So my message to your audience is if you've had a bad experience with an EOR provider in the past, Not all are created the same and give them another shot and do your due diligence and find those ones that do have that eye for HR compliance. So what made it challenging is I had to go through an intermediary to deal with a private equity firm because they just had such a bad experience. And the fact that we're talking about— it wound up being about 12 countries where you had to do the EUR and then the rest had to set up entities for whatever reason, but not being able to deal directly with the end buyer. Because of their bad experience, not with our particular firm, but with a competitor firm. That's what made it challenging. And the fact also that we were ready to close 13, 14 months ago, and then we ended up having to wait, but then it finally came through. It was a pretty wild deal as far as I'm concerned, but I love the global side.

So if you had to do that deal again, what would you do differently?

I'd probably pull in a different partner because I feel like they wound up taking more business than I wanted because If you're partnering, if you do EOR and you're partnering with a firm that does entity setup, their natural inclination is to recommend setting up entities as opposed to EOR. But because of the dynamic where they wouldn't deal with an EOR company directly, I had to work through them. And as much as I love these people and this person, individual, very good friend of mine, very good at what they do, they didn't always have the best interests in my heart for this deal. So I probably would have talked to somebody else who— I guess I also wasn't ready because the deal took so long. When it finally came back to fruition, I was like, what? It was kind of like waking me up from a dead sleep and I should have been more ready and been more on the same page. An example would be like specifically, I can hear this person saying, EOR is not legal in Spain, which is technically true. It's also not legal to go 65 miles an hour in a 60 zone, but everybody does it, but they go faster. And the fact of the matter is every EOR provider has an EOR service in Spain, even though it's not recognized by their government, but they're doing it. And they're not saying it's— they're just saying, we just don't really recognize it, but it works. In that instance, they wound up doing an actual entity, but they should have done an EOR.

Does that make sense? Yeah, it's like complicated, but you got to work with the right EOR vendor if you're doing something multi-entity.

And most of them have gotten a lot better, to be perfectly honest. Even the one that was in the weeds with that one, we're talking the Wild West before 2000. And really what put EOR on the map was the pandemic. Everybody had to work remotely, they needed a quick solution, EOR was there.

What's one thing you'd tell someone doing this deal tomorrow?

"Call me.

Let's talk. I've been there. It's not my first rodeo." You want to deal with somebody that has seen this and gone through this from soup to nuts, but you can pull it all together. If you're dealing with a SaaS company in this space, it's awfully difficult because there's so many nuances there. And if you get those companies that are SaaS only, they want you to deal with software, but M&A, especially when you go global, is so complicated. You need to talk through it.. And if you're having to deal with a chatbot or you can't get in touch with people when you want to get in touch with them, where you need the information, you want a personal relationship where you have somebody that owns it, that will follow through for you on the information that you need to pull this deal together.

I appreciate it, Steve. Thanks for taking the time to share a story. Here's to the deal. Here live at DealMax with John Stringer and Matt Nelson from SPS Commerce. Hey gentlemen. Can we kick things off? Tell me a little bit about your roles at SPS Commerce.

Thanks, Kison Patel. Matt and I work together now, what, 6 years, Matt? I've been at SPS for 15, leading corp dev. Matt and I are a 2-person team, our corp dev team, and I really do the deal origination, sourcing, relationship management focus all the way up to— Matt gets really involved when we really sink our teeth into a deal and we're trying to start doing modeling and the diligence process, coordinating all that, that really ends up kind of landing in Matt's purview. And then we both sort of team up all the way through close with a little bit left over on integration. Matt's more so than me, but less so, uh, than some other corp dev teams, I suppose. We don't go deep on integration.

Tell me about your most memorable deal.

Probably one of the more challenging ones we've done is a European tuck-in acquisition. Prior to that, we had been very focused on tuck-ins, I would say, but more domestic, very straightforward, founder-led, slam dunk deals, easy, or quick close, execute, integrate wasn't even really a thing. It's easy. This European deal really stretched our limits, I would say, and brought us to a different area than we had been before. We first off had never done anything international of that nature. This was a publicly traded company in Europe. So that was different too, with regulatory approvals that we needed to get to execute on the deal, as well as just cultural differences. Europe isn't just one country.

Yeah.

Can you say what country is based out of?

I was based out of the Netherlands, but they had presence in Germany, France. They have people in Spain.

I want to say they had a couple of employees.

So what was the driver? Why'd you want this deal?

For us, they had e-invoicing capabilities, which is a set of capabilities that we felt like we really needed to get into to further our service providing, especially in Europe, as those are mandated requirements in various countries of Europe. For us, that was essential to not only expanding our portfolio in Europe, but also our presence in Europe, I would say, having offices and people and being able to service our customer base in Europe.

We had some existing employees and some business there, a decent amount, but this really helped scale us up. Get us real presence in office, customer support.

Yeah. Prior, it was like really a sales office. And now we have a business. We truly have a business in Europe because of that.

Yep.

And if you think about some of the support capabilities that help us drive to a 24/7, carrying another set of time zones was really important. There are a lot of really strategic reasons to do this deal beyond just the product capabilities, in my opinion.

Right.

Product capabilities and geography expansion. Yep. What did your diligence picture look like going in?

We took our playbook that we thought worked. We knew there was going to be some nuances with Europe, but that's where things started. Oh wait, data residency. And we were talking about these things before, but really trying to figure it out.

I think all of a sudden it goes from, geez, our lawyers that we use in the US are helpful, but we need some lawyers from Europe too. We need local Netherlands expertise presence. To help us go through some of these more geographical or country-based things or jurisdiction-based things that we aren't experts in and our lawyers here aren't experts in. But thankfully our lawyers here were able to introduce us to people in Europe that could really help execute the deal.

And as Matt said, Europe's not one country. So you also learn, which people say this even as we were going in, but it's a country-by-country thing. So we were in the Netherlands, we're doing the deal in the Netherlands, but We find the France office and there's local laws and no Netherlands lawyer is going to opine on what we should do in France. So we got to get a French lawyer then. And, uh, so it's a lot of the labor laws and the different things you're— there's not one expert on Europe. They're all different countries and all different experts. So you kind of have to tap each of them individually.

You just really had to get comfortable being uncomfortable in a way, you know, 100% and just learn what are the areas we need to be comfortable closing on with this deal and handling after close, because you still have a close timeline. It was still a competitive process and you still had to adhere to it, but you need to know what's open after close that you have to nail down to minimize your integration risk and your overall business risk.

So this was a competitive process, right?

Yeah.

Yeah. Oh, wow. So you got to try to do all that, meet timelines, I mean, we got exclusivity at some point, but it was a lot of the work.

Yeah. We're, you know, you're, you're trying to move quickly. It's a public deal, so you can't, it's a public company. So it's small traded, you know, kind of microcap, but it's still, there's other considerations there. It's not a private company. So you're trying to move quickly just to not have an exposure too long.

What made the deal hard? It sounded like you had a lot of questions related to the local jurisdiction nuances that you weren't able to get answered.

Part of it was just, it's not even that large of a company, but they let their US office kind of run on its own and they had oversight, but they didn't really know answers. So we'd get answers to questions that you'd find out after close, those weren't the right answers. And when the people were probably finally brought into the tent, they'd share what was really happening. And this happens in all deals to some extent. It just felt a little stranger because it was totally different countries, totally different business units. And we found out we didn't really know as nearly what we thought we knew, or a lot of it was just wrong. So you had to kind of figure it out after you got in there and through it.

There's also a language aspect to this too. We were buying a company out of the Netherlands. A lot of documents were in Dutch and just working through that, right? They knew English, but you had translation errors between the documents or between discussions and as well as cultural differences that you're trying to push through.

I was going to ask you like, what surprised you in the deal? Documents on, uh, Language.

I remember one of the first documents we got uploaded, I pinged you and I was like, this is in Dutch. Yeah. Do you know Dutch?

Turns out no, no, no, nobody on our team.

I mean, I think John speaks Dutch half the time, but what other surprises you encounter on this deal?

The work council thing was new to me. And honestly, just having— is there a work council? They'd say no. And then we kind of hear, well, they probably do have one. And so this whole idea of what Why is this work council even in existence? If it is there, that's a brand new concept to us. We didn't have any clue. So figuring out that was unique.

Say cultural, just in general, how cultures work together too. You're far away. Yeah. They value in-person presence. How do you do that? This is COVID too. You're still dealing with restrictions and how you go about closing a deal across an ocean and with restrictions in place and different cultural working norms. It's just a challenge altogether of how you work through that and how you build a relationship while executing a deal.

What threw you off about that? Like this concept of work-life balance, or—

What do you mean by work-life balance concept? Like working different hours and stuff, or what are you talking about?

I'm just saying, when you say like the getting through the cultural differences—

Oh, which sort of cultural differences?

Oh, I was just saying they value in-person. We couldn't necessarily do in-person as much as you would love to do across an ocean.

Well, I mean, You hit on something though that we did have that.

Yeah.

We had this other thing though. Yes. That's where I was going to go. Hey, all of a sudden we're on the phone. So and so's going to take a vacation for 3 weeks. Like, oh yeah, but he'll be accessible, right? We're working. He's the, you know, whatever position that's important. No, no, he, he's going offline. This is what we do in Europe. We take 3-week vacations. We'd figured it out, but that was a bit of an eye-opener is I don't feel like people in the US would say that, hey, I know I'm selling my company, but I'm going to go ahead and step offline for 3 weeks. And that was a cultural difference.

I think it's understandable. Yeah.

I'm jealous. Maybe I'm a little jealous.

Yeah.

Can I join?

Translation of documents, work council, cultural differences.

It's all things when you say it, it sounds minor, but when you're in it and every little task, every little minuscule thing makes such a big difference when you're trying to close a deal, especially when your history is slam dunk deals. We had no complexity really to our deals.

Prior to that, how'd you think through integration with all these things?

We said that's somebody else's problem. So we didn't worry.

I'm kidding.

Just like a classic salesperson.

Who's that?

Sarah?

Who else works?

Yeah. Sarah works on integration.

That's Sarah's problem.

Yeah. Poor Sarah.

Yeah.

Shout out to Sarah.

Yeah. Sarah, you're amazing.

You're going to be the next interview.

Yeah. She'll give you the postmortem. Yeah.

She'll tell you the truth that she did all the work.

What the Deal guys screwed up.

Let me tell you. Exactly.

Totally.

It's a challenge. You don't know what you don't know, and you try to go in with your best foot forward and pick your key individuals that are going to help lead the deal from on-site in Europe. And working through is challenging, and it was definitely— probably we weren't as involved, to our point, but it had its bumps. But I feel like that initial year was very challenging. But now when we really look, it's been a wildly successful deal in what it's done for us in Europe.

It's really helped. One other thing on that note is we assigned a leader for the US operations and then a leader for kind of the bulk of the operations in Europe. And I think that worked okay, but it was interesting to kind of peel that off in integration and say, let's just try to report this up. They found a lot more interdependencies than we thought and that we were told. That was an approach we took and there wasn't enough activity in the different other countries. So it was really Netherlands, and the US. France had 8 people, Germany had 4. So there was, you know, kind of sparse around, but it wasn't enough to assign different leaders for that. But sometimes those were the hardest, the French operations, like, what are we doing down here? And we had to get to them, meet them, hungry group of people ready to go and trying to figure out like, how do we manage this? I think we put them in a new office. I can't remember, but just learning all those differences.

Yeah. Differences in the e-invoicing requirements across the country. Some were far along in the pro— I think Germany was far along in the process where France was early in the process.

Well, and expertise that we bought was probably more Netherlands-focused with some capabilities elsewhere, but that was another— yeah, it's different countries have different e-invoicing and you got to figure each of them out, which I think we're beginning to now, but that was a, it was a learning.

Was there anything that almost killed the deal?

I mean, there was a bunch of like MAC clauses and things. This was our first deal that signed with delayed close. And so we were negotiating things we hadn't really negotiated. I don't think any of them were as fierce, really killing them.

Tax assets.

I feel like that was, oh yeah, that was, that was, yes.

It was like, is this in the deal or not?

I remember the tax folks came back and said, you might have a, I remember it was, I'm going to make up a crazy number, but it was a crazy number, $100 million tax exposure.. And I remember thinking, this business is— how did you— I think I had to have a call on a weekend with the tax people going, how did you get to this? And when we really got to the bottom of it, it's like, that $100 million is a 1 in a billion chance that that would happen. That's ridiculous that we're even— knock it off. You know, you kind of— these are external advisors. And it was really, it was like a couple million dollars. And even the sellers were saying, what are you talking about? They got their tax people, our tax people sorted through it. In my head, I'm like, I know this can't be right. It just can't be right. There's no way.

When you really boil down to the true facts of it, there's no way that was the exposure.

It was more than the business almost generated in its lifetime. It was so crazy. It was like, this is ridiculous. But so that part, it, I remember I knew it wasn't going to kill it, but I remember saying, do not flag this to our CFO because this is not real. Stop this discussion. Let's get on a call.

And we got to the bottom of it, but What's the one thing you tell a practitioner running their first European deal? 1, 2, 3, whatever.

Build your bench. Who are your advisors going to be?

Your external bench.

Yeah. Who is going to help you? What relationships do you have, or how can you build relationships to provide you expertise and guidance through it? Yeah. Because you don't know what you don't know, but you need that on-the-ground presence to help you through it.

Don't underestimate local expertise, and it could be several local expertises. If you're buying truly pan-European presence, you need to have expertise available in all the different countries you're going into.

Not only will they help you, advise you through the process of executing, but we had some relatively minor things after close. You always do with escrows and different things that you have to close out after the fact, that having them be part of it, they can help you carry that all the way through final full-out execution. So even if you think you can get to the final part on your own, it's nice to have them for any issues that pop up.

Well, and I'd say too, don't get overly scared away by either A, what we're saying, but also local council, US, US council, in-house, external. Sometimes they can tell you a lot of boogeymen that yeah, some are real, but I just remember like I think it was data residency, the stuff that's in the Netherlands. You can't take any of their email information and put it in our corporate system because that sits in the US. And so it just started feeling like, well, how do you ever do a deal that how we'd have to have a separate email system? Turned out that was not true. People build up things a little bit more. I'd say again, it's very difficult to get in there and learn locally what really has to happen. And again, I just did the test. Well then how does anyone do a deal in Europe if we have to do all these gymnastics? It didn't make sense to me and it wasn't true, but there's a basis for reality in it. They just, it ends up getting a little bit—

Yeah.

Certain parts of that were true, but there's ways that you work through that and work as a corporate, as a global corp. Yes.

Yes.

You mentioned the team's now exceeding targets. What finally clicked?

Some of it is just gelling culturally and really going about how we like to do things. We pivoted how they were doing things. And that's always going to cause a short-term blip on performance. It was probably underperforming a little. We had changes in leadership. I think we just settled a lot of that down. We really got our go-to-market playbook over there with the leadership team that understood it, that was behind it to start executing. And I think now we're seeing the results. We're seeing them beat and exceed plans that we had for them before.

Truly operates as our European wing versus SPS Europe. SPSE invoicing, they're the same thing.

Yeah.

Where initially until you integrate, it's hard to operate as one where now we've worked through a lot of those items and truly can operate as one company, which cuts down on animosity and just differences and allows for seamless execution.

Here's another tip I'd say that has helped with exceeding targets, but it may be back to your tip thing to get over there. Matt mentioned the in-person. Get over there, the finance teams, the back office team, sales teams, of course, but get some leadership over there to say, hey, welcome aboard. Just because they're a 10-hour plane ride or whatever, don't ignore them and don't wait 2 more months because you didn't have a Europe trip planned. That in-person thing is valued maybe more than some of the US type of operations. So doing that sooner rather than later is a good thing.

For all departments, not just one department, to your point, you need to integrate the entire business. Yeah, not just send one exec over, right? Give a little speech and come back. Everybody needs to go over and integrate.

Yeah, this is awesome. I appreciate you gentlemen taking time and sharing a memorable deal story. Here's to the deal. Deals get complicated, they always do. The best teams don't pretend they know everything, they get the right person in the room. That's what we're building with Certified Advisor on Demand. If you're running into something unusual on a deal, reach out to M&A Science, mascience.com. Here's to the deal. Thank you for taking the time to explore the world of M&A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M&A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kison, K-I-S-O-N, @mascience.com, or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com. Here's to the deal. Views and opinions expressed on M&A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.