Uncovering Capital Allocation Strategies

Emerson Block, Cardinal Health, Broadcom Toast, Energizer Jam, Treehouse Food, Hora Main there's too many to list.

What do the best corporate development teams.

In the world have in common? They use Deal Room, Add a crappy data room, and Excel trackers. In 2021, Emerson did an $11 billion acquisition on Deal Room. Then this year, a $14 billion platform divestiture to Blackstone. Even with every big bank name involved.

In the deal, they all had to use Deal Room.

Learn why the best in MA combine diligence and integration into one workflow so they can get both diligence and integration done faster. To execute M and A like the best, you have to know how to use Deal Room.

See for yourself@dealroom.net Again, that's dealroom.net let's.

Get to the interview.

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.

Foreign scientists, welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. If you're interested in learning more about how to optimize your M and A practice, or want to get involved with our community of forward thinking M and a practitioners, visit mascience.com and subscribe to our free weekly newsletter for the latest industry trends, insightful content and community events. If you want to keep up with us on the go, head to LinkedIn and follow M and A Science. I'm your host, Kisan Patel, CEO and founder of M A Science. Joining me today is Keith Levy, operating partner at Sonoma Brands. Sonoma Brands, a private equity firm focused on the growth sectors of the consumer economy. Today we're going to talk about uncovering strategies behind capital allocation and the differences between executing deals in a large company versus small companies. Keith, how are you doing today?

Hey, Keystone. I'm doing great.

We are here live in the mountains of Colorado by Keystone. Thanks for taking the time to make this interview happen.

Yeah, no pleasure. Yeah, we're 9,300ft here.

Took me a little while. A little altitude dizziness that you get when you first come out here.

Yeah. So if either of us are losing our breath while we're talking here, there's a reason.

Yeah, there we go.

All right, good.

Can we kick things off a little.

Bit about your background? I guess I'd classify myself today as a semi retired former consumer product goods executive. I spent almost 35 years doing that. A good portion of that time in the beverage alcohol business. Started my career with Gallo, spent about 24 years Anheuser Busch. Did lots of different things there up to and including the cmo which is the head of marketing of pretty large consumer products. Good company. And lived through and actually helped with a lot of the integration of the $53 billion all debt deal in Bev acquiring an Hazard Busch. So that was an interesting part of my career. I left there about three years after the deal where there was some change control provisions that worked in my favor to hang around for a few years, but not more than a few years. When that was done, I found my way to Mars Incorporated. I ran a pet food company for them called Rural Canaan in North America. And then I moved to Chicago to actually merge Mars Chocolate and the Wrigley business, which an acquisition by the Mars family in 2008. I was president of Global Business Development, was basically in charge of incubation, early stage growth, investment and all of M and A for Mars Wrigley, which was the newly formed entity. And today I'm doing some board work through a couple of portfolio companies that we have investments in through Sonoma Brands and I'm an operating partner with Sonoma Brands. And we have three funds there and mostly focused on consumer product goods, but also health and beauty. And we also have some investments in pet and animal pharma business and a human health business in the uk.

What was your favorite role?

That's always a good question. Most people would probably think I would say being the CMO of Anheuser Busch, when you had a billion dollar marketing budget and you could attend any sporting event or music event or sponsor the Rolling Stones, that was definitely a highlight of my career. But I would tell you that running the Royal Canaan pet food business for Mars was probably one of my more cherished roles. And it was just kind of a magic carpet ride. It was a business that should have been grow faster. It was an acquisition in 2003 by the Mars family, but it was a French business. It was still globally headquartered in the south of France. The mistake that the business made was every time they'd open up a new market, including the US they would sort of put a French expat in there. And nothing wrong with that other than the fact that while they knew the roots of the business in France, they didn't really understand the marketplace, the dynamics or the complications that might exist in a place like the United States. When I was hired, it was a Very specific search to make sure that they had an American leader that maybe didn't really matter if they knew the food business because I came in to run the business without any pet food experience. Didn't know Mars had never run a company before. But it was my favorite role because time is about a $200 million business that was growing but wasn't making a lot of money. And they gave me a lot of room to roam, to hire my own team to take some risks, to expand into things like B2C E commerce business we really weren't doing very much of. And we took that $200 million business and turned into about a $700 million business five and a half years later. And it was probably doing low single digit ebitda. By the time I moved on to my next role, Mars, we were generating like mid-20s EBITDA. Everything just sort of worked. I had a great team. I had an opportunity to take risks, to try things, to make some mistakes, to learn and to build something incredible. When you're growing like that, both on the top line and the bottom line, it's just a heck of a lot of fun. That was probably my favorite role.

It sounds like it's just very diverse operating experience you're exposed to in that particular role. And it was successful. Read the business well, so I got to tell you, I read the book Dethroning the King, which was all about the takeover by InBev of Anazar Bush. Now I get the other side of the story and obviously I want to be respectful because I know it's sort of probably an interesting situation for you to be part of. From your perspective, how'd that go down? I like the book because it gives you so much of this. It was actually one of our former podcast interviewees, Tim Wentworth is one that recommended the book. You get the boardroom action back and forth and that was like really cool to see the whole decision making process, all the alternatives they saw. What is it Modelo that we're looking to acquire to make the company bigger, too big to get acquired by imbev and then they end up just taking the offer and which sort of disbanded a lot of things in terms of legacy that they built there. What was that like from your perspective? You were there firsthand.

Yeah, front row seat, man. It was crazy because I remember being in Chicago at one of our ad agencies and was there with some of my team and everyone's blackberries. Everybody had blackberries at the time, were starting to go off and sort of report from the financial Times that there's an unsolicited hostile takeover, if you will, of Anheuser Bush. And like, we're like, what? And so as none of us had any knowledge that this was happening, and I'm an officer of company, so I think I'd know something. But we're all caught off guard. What's funny, Dethroning the King, I would say as a book, is actually a pretty good book. It doesn't get it all right. Most books don't. But they got quite a bit of it right in terms of just some of the antics in the boardroom. The timing of it, if you recall, was 2008. So what was happening then? The whole financial world was collapsing. And here comes some guys that are willing to make a giant bet and borrow $53 billion to buy Anheuser Busch. What was crazy about that was that the Bush family been involved, like four generations of Bush family were running the business since the late 1800s. And most people would've thought that it was owned by the Bush family or the Bush family had this massive ownership stake. Quite frankly, they didn't really have that much ownership. It was in single digits. There was no poison pill. There was no way to prevent a legitimate offer coming in. You know, we had a $50 stock price was flat. It would hover a little bit above a little bit of blow. But it was happening for two years like that. And so here comes during difficult economic times, Somebody puts a $70 per share offer on the table is pretty significant acquisition premium. So as a board, you have to take that seriously. But there were ways, if they really wanted to avoid being acquired or taken over. The Modelo deal was one of them. We own 51% of Modelo at the time. We had a deal to buy the other 49% and the handshake deal. And I recall that the Fernandez family, which was the owners of Modela, were celebrating. They're just elated that this was going to happen. It was a pretty big deal for them as a family. And then the board squashed it. I couldn't even tell you why they did that, other than the fact that maybe they thought some level of director liability if they didn't take this bird in hand, if you will, and they would have to spend a lot of money to acquire the other half of Model, and would that actually give the shareholders the same level of return and how long would it take to get that? So that's one. We also had a deal. It was never really put forth, but we brought it. We meaning the management team of Anheuser Busch, which I was part of, brought it to the board, just said we could acquire Monster because we were at the time the North American distributor for Monster. But either of those deals, because the amount of debt that would layer on, would have put the AB deal out of reach for InBev. It was a crazy time, Kisan. The other thing was, I remember, like, when that was all going on, when this. I forget her last name, but Julie something. She was a reporter for the Financial Times. She called me at home one night. This is when the InBev deal hadn't even been completely closed yet. And she said, hey, my name is Julie so and so. I'm writing a book about the takeover, Anheuser Busch. I'm doing a lot of research, and your name keeps coming up as someone I should talk to. And I said, look, I think it's interesting you're writing this book. I said, but number one, this deal isn't even closed yet. And number two, I'm an officer of the company, so I can't talk to you. And then secondly, someday my book's going to be a hell of a lot better than yours, which I've never written, but that's sort of how we entered the conversation. But I did read the book, ended up seeing her at a university presentation. I was on the board of the business school of Webster University at one point. She came there to speak and we had a conversation. So it was fun to reminisce about that time.

What's one thing the book got wrong?

It was somewhat unfair towards August Bush IV in some respects. I was close with August Bush iv. I was executive assistant for a while. I came up in his generation, if you will. And he surrounded himself with a team that he thought was going to be his team as he took over the business. I found August always to be a very smart guy, very driven guy. Look, he had his shortcomings, his human frailties, like we all do, but I think he just had this sort of party boy reputation, always sort of underneath the thumb of his father. And that wasn't completely true. But it was easy for a reporter or anybody to write a book, to sensationalize that, because that's what sells books, number one. And number two, that's sort of what's out in the public eye. But I can tell you from somebody who worked alongside him for many years, there's a different side of him. And someday I hope that story gets told and it's full value, because people tend to want to talk about the bad stuff and not so much the good stuff.

I totally agree. Just reading the book because they did clearly distinct the character in that regard. The strategy for M and A, when you're over there, when we talked a little bit about this, it seemed like the company was very focused on organic initiatives and doing stock repurchases. And instead of looking at more of these inorganic M and A activities, can you tell me what was the drivers or perspective behind that?

Whether you're a public company or a private company, you sort of look at your free cash flow as a resource to do something with to create either better earnings or stronger growth. Through the eyes of the leaders at Anheuser Busch and the board, they looked at the free cash flow in terms of the number one priority was to basically invest in capital projects in our breweries that would essentially eliminate high cost labor with low cost capital and create strong ROI over a period of time just because you were tampering down your investment in SG&A. So that was number one, by the way, those investments were quite good and I think they paid off almost every single one of them. And we had a pretty stringent process to look at what we were going to invest in and why we were going to do that, what we hope to get out of it. Second was share repurchase. Just buying back your shares so you can amplify your epsilon. That is a more of a tactic than actual real growth if you ask me. But we tended to want to invest more behind those types of things because you go to these consumer conferences like Cagney, you make promises, hey, we're going to deliver 12% EPS. And so how do you do that? One way to do that, to amplify your EPS is buy back your shares. So that was the second use of cash and then I'd say third and a distant third, quite frankly was making acquisitions. So made some acquisitions, not like we didn't make any. We bought Harbin in China. We had bought half of Modelo back in the early 90s. But nothing was really transformational. It didn't really set us up to be a global company. We were 80 plus percent, if my memory serves me correct, of our earnings stream was all coming out of Anheuser Busch Incorporated, the beer company in North America. If you really look at it, you could point to that capital allocation strategy as a reason why we got acquired. You've got this great brand called Budweiser and Bud Light. You've been a household name for over 100 years, but yet you're pretty Much concentrated in United States, North America. You're fat and happy. You've got seven private jets and a couple of helicopters. And it wasn't a lot of fiscal discipline around it. It's a very strong earnings machine. Alcohol is very profitable. When I Left there in 2011, we had pushed our EBITDA margins up till I think it was 47%. So that's kind of unheard of when you think about consumer packaged goods. I'm only saying that because when you think about some of the lavish expenses, you could do that because you had so much margin to work with. And as long as you were delivering growth and you're delivering profitability, people didn't care so much about flight operations or the condo in Napa Valley or the complex at the Lake of the Ozarks. So it came with, at least in that era anyway. So the big quote unquote corporate perks.

They require or be acquired. Yeah, so like they get looked at as a target of, hey, there's a lot of operational efficiencies you can drive by cutting out these expenses.

When we went through that exercise, we even hired Goldman Sachs as a defense partner when InBev was coming at us. And some of the things that we looked at doing was all the things that they would do when they acquired. Maybe sell some jets, maybe sell some subsidiaries, maybe tamper down your gna. Maybe you go through a very rigorous SKU rationalization. There's a whole host of things that you actually did after we were acquired, which we could have done on our own. I think acquire or be acquired. Again, back to the free cash flow allocation strategy in my mind was flawed. Maybe you prioritize global M and A as your number one. Number two, you invest in hurdle rate of return capital projects in your breweries to take out that high cost labor with low cost capital. And then maybe number three is share repurchase to drive ups. And it wasn't really that way.

They had seven jets.

Yeah, there weren't cheap ones either. They're like falcons, you know, like 30 to 40 million dollars airplanes and 21 full time pilots. Yeah.

What do you do with all those jets and who's flying them?

Well, the Bush family, they're all aviators. They flew jets, helicopters, all that stuff since they were young and they loved it. A corporate jet used properly can be a tool. Like when I was the head of sales before I was a CMO, we had close to 800 distributors around the country. I could get on a jet and three or four different distributors in a Few different states in a day and be home for dinner. Can't do that on a commercial airline. I don't know. I always felt particularly on the sales side, there's a human element to being with people. Breaking bread with them at dinner, meeting their sales team, maybe giving them some inspiration around sharing what we were thinking about at the corporate level. And a corporate jet can be quite effective tool. Do you need seven of them? Big question mark. Secondly, the way we used them wasn't all that efficiently. Sometimes we'd have me and my assistant be on an 18 person jet and it could stay in a town for a couple of days and then come home. So there's better ways to use it, but they're sort of out of fashion as you know these days.

And you're lucky to have one jet in a public company.

I didn't fly commercial for business for probably about a decade and it was pretty nice way to travel.

I got a piggy bank. I'm saving up to buy a jet. Yeah, a lot of people know that.

Hopefully this helps contribute to that piggy bank.

Maybe you're listening. You want to contribute towards my jet? Please reach out. I have my little jet fun M.

And A on the tail.

Well, the dream is to put a podcast studio on the jet.

Yeah. Oh, there you go.

Hey, you need a ride? I got you talk. Why don't we do a.

We can come to you.

An interview. Exactly. We'll get there one day. Interviews like this get people's attention. The run with Anheuser Busch, it ultimately led to the takeover. But you mentioned you're part of the integration. What was that like?

I have to describe it in two almost very extreme opposite feelings. One was that when we were acquired there were only a handful of executives are asked to stay on and help bring these two companies together and drive some success. A lot of my friends were asked to leave. I was firing a lot of my friends that I've worked with for 20 plus years. And in some respects, when you go through a big M and a transaction like that, particularly as the head of marketing, you're cutting marketing budgets, you're cutting everything you can get your hands on. And at times you're not maybe as proud of the work that you were doing currently versus what you were doing before when you had unlimited budgets. I understood what it was. It was painful because I felt like in some respects I was tearing down company I helped build for over 20 years. I was kissing some of my friends goodbye. And then I'm left to try and figure out how to create value with some of my colleagues who were asked to stay long as well. That was tough. Now, what was fascinating about it was, look, you're sitting there trying to bring together two $50 billion companies. I mean, who gets an opportunity to do that? And I'm sitting at a table like this probably once a month with titans of M and A, Jorge Lehman, Marcel Talas, Beto Sikapura, the 3G guys. Basically, those are the three guys that. Just listening to them and seeing their tactics about how we just create value and do it in quick fashion was pretty remarkable to be part of. At times. I was like, what am I doing sitting at this table with a guy who's got a $10 billion net worth, $5 billion net worth? Even the poorest guy there had a $3 billion net worth at the time, probably much greater. Now. That part of it was fascinating. If you think about a playbook for it, perfect timing, again, everybody's scared. And the Warren Buffett saying, when people are scared, you buy. And when people are more enthusiastic, be scared. They were just fearless and went in there and the playbook was basically this. It was like, okay, you borrow $53 billion. Got to pay that back. You got to pay that back as quickly as you possibly can. But while you're doing that, if you can do things to expand your margins, price, cost, and you can try and expand your cash flow to the extent that you can tell people, hey, look, payment terms used to be 30 days. Now they're 180 days. We did all those things. If you expand your margins in a public world, you pay down your debt in a timely fashion, hopefully ahead of expectations, and you maintain your multiple to the stock market. We were a public company and your stock price goes up. It just has to look. We were bought for 73 bucks a share in November of 2008. That time there's a new co created in Belgium. I think the shares at that time were issued at €10. I want to say, four to five years later, those same €10 shares were worth €100. If you execute that playbook the way I described it, which we did, that's the result. That was remarkable. To be part of it was hard. It was a lot of emotions around that because I'm living in St. Louis and I'm a relatively public figure. And it was a very unpopular acquisition because think about the. You can just almost picture the headlines. American icon bought by foreign entity. What's that going to do the St. Louis community? And this has been a Staple on an icon for over 100 years and yeah, lots of different things about it. Hard, interesting, great learning experience and incredibly successful. When you really look at the numbers.

The playbook was cut expenses, increase prices.

Cut expenses, increase price, expand EBITDA margins. And by doing those types of things, that was a successful financial model to increase the stock price.

Bye bye Jets.

Bye bye jets. Yeah, they were all gone by the time I left. I think they had one left again. I want to say probably, I don't know what the exact numbers are keys on but it was probably something like 25% of the workforce was eliminated. There's just a lot of things that you just sort of take for granted. They'll always be there, whether it's people, process, budgets, things. And those are all put under the microscope and called into question. Even the famous Budweiser Clydesdale's. At one point I remember people saying hey, we have 110 Clydesdale's. Reading.

Talk about the Clydesdale.

Maybe we should get rid of those. Like no.

So anyway, that was a company asset.

The Clydesdale company is a company asset. It's also a brand asset. When you think about it marketing speak. Think about things like dms. It's a distinctive memory structure. I see the Clydesdales, I think of Budweiser, I see the Nike Swoosh. I think of Nike, I see this fruit and I think of Apple Computer. Those are things that take many years to develop and burn into the consumers minds. And so the extent you can keep them, you always want to. But when you borrow $53 billion you turn over every rock including the Clydesdale's rock brand asset.

I learned a good marketing thing today. I like it. Then from there you went to Mars. I know you operated the pet food company that you mentioned but you worked on this kind bar deal.

Yeah, I had this great run going on with the Royal Canaan business. And like most things in my life, when things are going smoothly and perfectly, I have to create chaos in it somehow. The company said, look, we're merging Mars Chocolate and the Wrigley business. We know that you've been through big M and A integrations. We also are trying to build a executive team that can bring these companies together and create even more value. But what we really like to talk to you about is creating sort of a new business development agenda that would create, I guess I would call it like almost a portfolio of the future. So if you think about Mars has amazing brands. Who wouldn't love to have M and M, Snickers and Skittles and just some of the Orbit Extra, the gum assets. But if you take a closer look at those brands, they're all kind of off trend in today's world. They're loaded with sugar and fat, ingredients you can't pronounce, and artificial colors. When I came in, there was really to sort of write a thesis, build a small team, and think about, okay, what could the Mars Wrigley portfolio of the future look like? One of the things we started thinking about was just people's snacking habits. What do they eat? When do they eat them? Use occasions and products that they might choose to fit those use occasions. And so one of the use occasions I thought hard about was this sort of snacking and what I would call filled bar product to fill that snacking occasion. Filled bars, things like Twix or Snickers. The way I was seeing it was like, okay, maybe you've had a full day of work. You hop in your car, you're on your way home, you go to the service station to put some gas in, and while you're doing it, like, I'm kind of hungry. Maybe I'll run in there. Fifteen years ago, you run to the candy counter and you grab a Snickers bar. You don't even think about it. But now, in today's world, people are maybe still going inside for that snacking opportunity, but now they're turning over the package to read the ingredient panel. And so instead of a Snickers bar, maybe they're buying a Kind bar or a Clif bar or a Larabar or something like that that had at least a perceived healthier alternative to the Snickers bar. So we ended up looking at that particular sector, and Kind came up as an opportunity where we could engage in a conversation about potentially acquiring them at the same time. Remember Peter Rahal, who was the CEO at the time of rxbar, also came up for sale? I started looking at both of them because I thought we were so far behind in this agenda, we needed multiple acquisitions to really begin to shape this, what I call portfolio of the future. So I remember talking to one of the Mars family, and they're like, we have Kinebar and you have Rxbar. Which one you want to do? I think we should do both of them. Well, you have to pick one, obviously. We picked Kyne. It was a much bigger business, much more developed business. Kellogg ended up acquiring rx for about 400 million. I can't give you the exact numbers of the Kind deal, but let's just say it was a multibillion dollar deal. Kind of bought in stages. We basically bought a minority share of the first tranche and then three years later, the agreement was to buy the remainder of the business. And Daniel Lubitsky is an incredible founder. He's kind of a serial entrepreneur. Kind wasn't his first venture, but that was the one that really became successful for him. We wanted him to stay on at least as a partner in the business, at least for the first few years, for sure. And then I think he's still relatively involved with Mars. But that was a great acquisition because it filled a need. It began to expand the portfolio in a direction that needed to go. I think my only regret was that we felt like we needed to do a lot more deals like that during my tenure there. And they've done some deals in the, call it snacking arena, but none as big as Kind. Probably nothing that I would consider to be transformational.

If we look at as large of an enterprise Mars is, and this kind was large transaction playing on the future. We're purely looking strategic, that this is a place we want to be in the future versus a discipline around irr.

Yeah, it was both. There's kind of layers. First is it is kind fit a strategic need? It does. Based on what I just told you in terms of, hey, we're losing snacking occasions to other types of products. We can either let those go to other competitive offerings or we can build one or buy one ourselves. Decided to buy that one. That's one. The next layer is okay now, is it going to deliver solid irr? At the time, I really don't know what Mars hurdle rates are now. But at that time, without being super specific, it was in the low teens. Had to deliver at least a threshold of that before a clear sort of the second layer. And then of course, the third layer is how are you going to create value? What are you going to do? Big company like Mars, we bought a lot of nuts. We had Snickers, we had peanut M&MS. Kindbars, basically nuts and fruits and things like that. We thought we could put our procurement scale and leverage to bring value to buying better. That's one thing you think about. The other thing is, okay, Kyne at the time was pretty much a North American business. It had a center of gravity in the us A little bit of Canadian business, tiny bit of business, I think in the UK. We did business at the time in almost 200 countries. So think about the opportunity to expand that globally. And we thought it was a good brand. That's the other thing you think about. Another layer is can that brand travel if it's successful in the us, or maybe I'm making an acquisition in uk. Can the UK brand travel to the us? Can the US brand travel to the UK and beyond? You think about all those different layers. But now certainly if it has a strategic fit, great, you cross that threshold. But if it doesn't deliver the irr, the project's killed doesn't go any further. There's a lot of discipline around that, at least in the Mars environment.

I just feel like it's hard when you talk about some of those things. And here's all these synergies that you're betting on. How predictable can you actually be on those things? And I'm in the tech world and you're buying this piece of technology, hoping it's going to increase revenue because you're going to cross sell it to all your customer base. You're very hypothetical about determining what that projected IRR is going to be or if you even think about it as irr. That's what I was curious about. But I guess there is a discipline around it. There is a model that they're really looking at.

No, for sure. Even when you're getting ready to do a deal like that, you're still making a lot of assumptions that are going to have to deliver to create that irr. Quite frankly, you want to do a deal, you're going to create the most optimistic case you can for the board to get behind it. So oftentimes maybe we went out a little too far out on a limb, let's say, to say, hey, we could expand to X amount of countries in the first three years. We could deliver 10 margin points through procurement, we could expand distribution through our salesforce and that would increase X amount of top line. And those are all best case scenarios. And if they don't deliver, then yeah, you destroy the economics or the IRI that you promised. And I think that happens a lot in the big strategic world. CEOs find something they want a new shiny toy, they create a really optimistic case, they do the deal, and then three years later the board's going, hey, none of this stuff is actually delivered, at least in the timetable you told me. So I think CEOs are more cautious these days, having stubbed their toes and maybe not having transformational value creation that they promised the boards based on capital allocation of the company's money.

What was integration like with this company? I imagine it being different.

Mars was actually quite thoughtful about it now you got to remember Mars is a private company, so they can have a lot more patience. They can do a lot of things that maybe you couldn't or wouldn't do in a public world because you're under such a microscope every 13 weeks with analysts and everybody else. But Mars had the luxury of saying, hey, look, we're a private company. We really don't have to answer to anybody, so we're going to do this our way. And I thought they were very thoughtful. Whenever they make an acquisition. I mentioned that I ran the royal Canaan business and that was an acquisition in 2003, literally for almost 10 years. The Mars family said, leave these guys alone. We bought this business because it filled a very unique niche. It's delivering something scientifically in terms of nutrition for cats and dogs that our other large pet product portfolio isn't delivering. So let's not go in there and marzify this thing and think we know the business better than they do. So they were really thoughtful about it and they just wanted those teams in those businesses to continue on uninterrupted and bring in this incremental value that the business didn't have. Now, after a period of time, some of that wears off a little bit and they go, okay, we need to be more efficient. We need to maybe combine systems when you make acquisitions like that. At rural Canada, we were using like Microsoft Dynamics while the rest of Mars was using SAP inefficiency there. There were probably different benefit schemes. There were different maybe sales tactics, different marketing philosophies, needed to bring all that in and leverage the scale of of Mars Inc. To really create the value. But again, they were patient. They didn't do it day one. Sometimes they didn't even do it until year 10. But it was important that people recognize that you bought this company because we don't know everything and maybe we don't know how to do this better than everybody else. So let's learn from them. Let's bring them into our ecosystem and see what kind of synergies we can create by not necessarily showing them how much we know, but learning from them and maybe just siphoning off some of the things that they know better than we do.

Preserve the secret sauce versus capture synergies as fast as possible.

Yeah, great sound bite.

Strike the right balance.

I agree. Wrigley. I talked about me going up there to merge the Mars Wrigley business together. Again, that was an acquisition.08. I didn't move up there until 2017. So very patient acquisition and why was that the case? For the first time, there was a pretty, well, maybe not the first time, but at least at this scale, a significant amount of debt taken on to buy Wrigley. And there was still some debt remaining on the books with Berkshire Hathaway and Warren Buffett. So in order to truly merge those businesses and capture the synergies, we needed to buy him out. We bought him out in the fall of 2016, which enabled the business to bring those together more carefully. Wrigley was a fascinating, again, family company. Bill Wrigley Jr. Was running the business. I think when they bought it, what was cool about that business was thinking back to what we were talking about, strategic fit. Mars didn't really have a very significant presence in China and Wrigley did. When Mars bought the Wrigley business, all of a sudden you had a north of a billion dollar profitable business in China that wasn't controlled by the Chinese government, which is a unicorn, if you will. You've heard of them, you've just never seen them. That was cool. And even when we were merging the Mars and Wrigley businesses together, one of the things I was looking at was like, wow, this is interesting, because in China, Wrigley had had over a million points of sale. So like a million retail accounts where they're selling gum and our chocolate business had something like, I want to say like 250,000. So if you can merge those businesses together, theoretically you say, well, I should at least be able to double my chocolate business because I've got access to the Wrigley distribution system. Now, that's a little bit of a flawed argument because China, depending on what part of the country you're talking about, can be very hot. And maybe in certain retail accounts, chocolate isn't going to be going to sit on the shelves shelf stable, it's going to melt. So again, you can't say, okay, Wrigley's in a million accounts, so we need to have chocolate business in a million accounts. Theoretically, you could maybe double it, maybe triple of it. And so that was part of some of the things we thought about when we were bringing the businesses together.

Interesting. It's interesting. They waited so long and it seemed like the debt was the bottleneck.

There was the debt and there was again, just this kind of patient approach. Let's not go in there too quickly and change the using your word, secret sauce, maybe absorb some of that secret sauce. At the time when they decided to bring those companies fully together, gum was starting to stall out a little bit. People weren't chewing gum as much. I haven't thought about it. When I went over to work there, I'm like, oh wow. I used to chew a lot of gum and I don't anymore. I'm not really sure why. That's some of the things I was working on too. It's like, well, maybe we can put something in gum. It'll make people want to chew it. Whether that would be caffeine. We had a caffeinated gum at one point. It was called Lert. Maybe you could put vitamins in there. What else could you do? That was maybe a motivation to say, well, gum used to occasions volume, maybe even profitability is starting to stall out a little bit. How do we maybe use the leverage and the scale of Mars Inc. To stimulate that and bring those businesses together? So it was an interesting time and I like working on challenging projects and that certainly was one when I look back at my career, another opportunity to learn, another opportunity to do and maybe another opportunity to create value along the way and then sharing that value.

Then you supposedly retired.

Yeah, 2019. I was traveling all over the world. I was going to Russia a few times a year, China, Dubai, uk, Switzerland, looking for high end chocolate companies, looking for maybe snacking opportunities. And I just felt like the family didn't want to move as fast as I did. And maybe in some respects there were some places where I was pushing too hard. It just made sense when we were bringing those businesses together. We were looking for something like, I want to say, just shy of half a billion dollars in cost synergies. And I'm like, hey, I'm a high paid guy, maybe we can work something out. And so it just made sense for I'd been doing this for more than three decades, I've been traveling all over the world and I have an agenda that I believe in. And I can't get other people to at least move at the same pace I want to move at. Then maybe it's time we part ways. So I did key sign. When you leave a business or you make a change, you call the people that you've been doing business with and say, hey, I'm leaving, and call so and so if you want to continue a dialogue in this particular area. And one of the people I called up was John Sebastiani, who is the founder and managing partner at Sonoma Brands. And he says, wow, what are you going to do? I don't know, like yoga, ski, ride my bike. I'm not planning on working very hard. Why? And he's like, well, do you want to be an operating partner? I'm like, maybe. I'm not really even sure what that is because everybody's definition is a little bit different. And he's like, look, my philosophy is that if we build a team of people that, that bring in experience and expertise and a track record of success that helps build credibility for the fund but also brings insights into making deals and doing effective deal due diligence, then we're going to create a lot of value for our LPs and there's going to be a big pie to share. We want to just surround ourself with people like that. And so he invited me in to be an operating partner at Sonoma Brands at that time, which was fun too. Now we have three funds and like most growth capital or private equities or venture capitalists, everybody wants is looking for their next fund. At some point we'll have a fourth fund. And that's been a great relationship. John's fascinating dude. He bootstrapped himself and created crave jerky and ended up having a quarter billion dollar exit to Hershey. And basically that was the catalyst for him to start his fund. Because a lot of guys that start funds, it's always opm, it's other people's money. And in John's case that's also the case. But he has got his own money in it too. So he believes in what he's doing. He's putting his money where his mouth is. And I like that about him. He's a successful entrepreneur. He knows what it takes to start a business and to create real value. That's of a lot of value to our portfolio companies. There's a check and there's a check plus what else can we bring? I've had three decades of experience and a track record of success and everything from beer to pet food to snacks and treats. John has done jerky and wine. And we've got people on the team that are just smart young people with either banking or VC experience. And it's just a good group of folks. And we've got some really great portfolio companies. We hope someday to create a lot of value by having successful exits on all of those and deliver Superior returns to LPs.

That's why it's interesting. Now you're involved with a bunch of smaller companies.

Yeah.

You're sitting on boards. A bunch of companies. Can you break down the operating partner role? Give me what does it involve? What's the day to day look like?

Basically the way it works is we've got 20 plus portfolio companies across the three funds. Now I'm not involved in all those, but there's a few of them that I am very involved in and I help either lead due diligence or participate in a meaningful way in the due diligence of us making an investment. I'd say the three companies I was most involved in were Milk Bar. We made a significant investment in Milk Bar, which is a New York based bakery, confection, cookies, cakes, ice cream, things like that, sugar products, highly indulgent. And we led that Series A back in. I want to say that was 19. We got two board seats, John took one, I took the other. There was another business that we looked at and ended up making a significant investment called Mixlab, which is basically a B2C animal pharma business. So if you've got a pet and it requires medication and your vet says, hey, you're got. I'm making this up. You've got a diabetic cat, needs to be on insulin. We can provide that insulin via mail to your door when you need it and making sure that it never runs out. It's a good deal for the vet at times because there's some incentives for the vets as well. But think about doctors. In a lot of cases, they're really good at practicing medicine, they're not great at business. So businesses that can come in and help them with that. Mixlab is one of those.

Would you consider like a telepharma for pets?

Kind of, but not necessarily tele. There certainly is a customer service call bank, but it's more Internet based and it's a technology. I wouldn't call it a tech company. It's definitely a more of a pharma company, but it's tech enabled. But it's done really well and it's a good founder and a good team around it and it's just starting to grow as an operating partner. I led the deal, due diligence on that. We took that, the investment committee, they asked me a lot of hard questions. We did the numbers and asked me if I believed in it and I said I did. And so we made the investment. And then the third one was another business again pet related because I had a lot of experience in pet and a successful track record there. But we did a deal with Bobby Flay made by Nacho, which is a premium cat food offering, which is cool when you think about a world class chef creating meals for your cat, number one. And then he had this love affair with this Maine coon cat. Maine coons are beautiful. Cats are huge. They're like dog like, they're so big. His cat name was Nacho. And you're too young to remember this key sign, but there was a, a campaign years ago where there was a cat named Morris. The cat was your advertising vehicle and advertising icon, but the voice of the brand was through this cat called Morris. And so it's very similar with Nacho. Nacho is Bobby's cat and a lot of the brand voice was coming through Nacho. So I just thought it was cool. I always thought most people think about pet food and they think about dogs, but cats are highly underserved in terms of premium offerings. There's Nestle has a huge stranglehold on the market with canned wet food. Dude, in this world, particularly in private equity or vc, you look for disruptible markets. That's a disruptible market.

So you send the boards, you work with all these companies, you help due diligence the initial investments. You're providing some operational guidance, advice to help them scale, keep growing.

What do you get out of it financially? I have a piece of the fund, so I've carry in the fund. If we create value through exits, then I share that value creation.

So your carry is not specific to the individual company, it's to the.

Across the whole fund?

Yeah, the whole fund.

Across the whole fund. I mean, if you think about it though too, it's like when people go to kick the tires of investing in a fund, the first thing you look at are the people. Okay, you got John, he's a successful entrepreneur. They've got some of the other team that have successful track records, maybe in VC or pe. They have me, successful consumer packaged goods executive. It adds credibility, Kisan. And I think that's what you want to do is build credibility, build a strong team that has expertise that your LPs believe will allow you to create value maybe above and beyond what other firms can do because of the people you have in it. So that's a lot of it for me too, like beyond just the money. I've worked with these really big companies and now I'm working with a lot of small companies through a growth capital business. I really enjoyed working with entrepreneurs. They're full of passion. They have just a belief in themselves or in their idea, product, service that they're offering. There's very little time for bullshit. There's no bureaucracy, there's no politics. You don't have time for that crap. I got really tired of that in Anheuser Busch and Anheuser Busch, imbev, and Mars. Look, it's not a criticism on those companies per se. It's a function of bigness. It comes with bigness.

Well, I want to get into that. Yeah, I'm saving up for the jets. That's why I ask these questions. Okay. Not to probe into your specific business. So tell me whatever you're comfortable with. What's the typical carry like for that role?

It varies, sort of in the 1 to 3% range in terms of your percentage of the fund. Our second fund, that, when I joined was 100 million plus, the third fund's in that same range. We hope the fourth fund will probably be 250 million, but it's a percentage.

Of the overall carry.

Yeah.

Okay.

Yeah. Not just in the companies I do due diligence on or the ones I sit on the board of, they'll create.

Like a structure for like a 20% whatever carry. Right. Variance. But then they create a percentage of that. Okay. And then is there a salary with it or.

No, no, but I mean, honestly, like, if I'm doing a deal, I may work a few hours every single day. If we're not doing a deal that I'm not very involved in, I may not talk to people for weeks. I go to board meetings. If I'm on a board, I'm available to the CEOs or the management team if they want to ask me questions. There's. Sometimes we have specific update calls that we're part of.

There's not a separate comp for the board participation.

There is. When I take a board seat. There's either. Sometimes both cash and additional equity. Sometimes just equity. Depends on the situation.

Got it. And they're more mature companies, so probably have a variant structure on that. Okay, the big company versus small company. M and A you were getting into. Can we revisit that? Because I'm really curious about this because we. I do a lot of podcast interviews. We do both. We cover this one of the huge companies, billion dollar transactions, smaller ones. Sound like you're more favor of the smaller entities.

I'm more favorable to the smaller entities because of the people that are part of it and the processes. I touched on it. But again, like big companies layered with process, with stakeholder management, they're just slow and lumbering. My philosophy is that opportunities in business are like windows. They open at a specified period of time, and if you're nimble and you're fast and you're decisive, you can move through that window before it closes. But big companies, sometimes they're just so slow and they're checking every box and they're, they're very risk averse. They don't want to make a mistake. And I get it. There's a lot more at stake and a lot more to lose when you're a huge company. So they want to make sure that they do what they feel is right to protect the entity. But at the same time, if you're so protective and you're so risk averse and you're so slow, you're going to lose the deals and you're going to get a bad reputation in the p VC entrepreneurial community. That's just not a company that I want to do business with because they don't move fast enough. There's too much bureaucracy. They're going to be looking under the hood every other day. So people don't want to mess with those kind of folks. But people do want to deal with folks that are decisive, that are nimble, that are quick, are willing to assume some risk. I find the smaller companies to have those ingredients in the bigger companies to be the things that I'm less interested in spending my time on these days.

Fundamentally larger companies are more inefficient. And you think about M and A, it almost goes the same just the way they operate because they operate more inefficient at this scale. And when you do M and A, you tend to be more inefficient in terms of of how you really drive to capture value. I think the smaller entity is so driven by it. There's a lot more at stake. The stakeholders are really hands on and they know what's involved and what the outcomes are. That tends to be more efficient.

Yeah, I'd agree with that. Efficient in a sense of the way you're describing it, making a deal, creating a term sheet, doing those types of things quickly. I think big companies are actually very efficient in their manufacturing environments. They're combining a lot of back office stuff. They're trying to of streamline systems. So they're actually quite efficient in those areas. They're just not very efficient in the M and A and the deal making and coming to the table with a legitimate term sheet quickly that can get people excited and want to move forward.

That's a good argument there. Not clear cut and dry in terms of venture capital versus recapitalization. If you can compare and contrast venture capital investments with recapitalization strategy from an operating partner's perspective, yeah, sure.

I mean say VC is willing to assume a lot more risk either at pre revenue or very early stages where you're barely off the ground, there's just a belief that that particular investment is going to have a massive return. In a venture mindset, these percentages aren't going to hold true for every firm. But let's say, and you're invested in 10 portfolio companies, five of those may go to zero, two may return capital and maybe get one or two moonshots that's going to return the whole fund. So you've got that mentality as a venture capitalist when you're talking about a recap. Oftentimes that could be a business that we may look at or we're involved in that needs capital. Maybe there's some existing shareholders that are saying I'm tapped out, I don't have any more capital to deploy here, or I've lost my enthusiasm for the this particular business that you can get some folks to maybe bring in some secondary and take out those investors. The things they both have in common. Is capital's fuel. There's a need for capital. If you're in an early stage business or even a late stage business that says this capital can help me grow, it can help me build infrastructure, it can help me hire the right people, it can help me create physical availability if I have a product like we have consumer product goods or health and beauty aids and make those more available and more in front of consumers. All that requires money. And then there has to be a belief that investment is going to generate a return in a timeframe in which you feel is reasonable. That's an interesting topic too. Key sign is like this notion of what is a reasonable timeframe. Most people in the early stage investment world were probably saying hey, three to five years and now I think it's more like five to seven, maybe five to eight. Your holding periods as an LP and a fund are going to be longer, but also as a venture capitalist, a growth capital company or private equity, where you have to have enough patience to ensure that you're not what I used to call sometimes like digging the sapling up every other day to make sure the roots are growing and essentially killing the tree. You have to allow that business, that idea to have enough time to actually germinate, let it actually begin and establish some roots then eventually grow. For me, like VC and recapping are different in the sense that VC is coming in very early stage recaps probably coming in later in the game.

Yeah. So it sounds like it's more of the risk arena is where the venture capital falls in do you think there's a difference in IRR expectations? I know you mentioned like the big bets and the thing, but if you ever look at your overall pitch, the lp, here's my fund returns.

Yeah. If people are putting money into private equities or venture funds, they're going to want a much stronger return than they can get in the S and P. Typically people are going to be wanting to probably capture 3x their money within 5 years. If you think about the rule of 72, your money's going to double every 72 months. A VC or private equity growth capital is going to drastically accelerate that if they do it well. But you're going to have to assume a lot more risk for that because some of these companies may or may not make it.

Founder's perspective. I'm going to open up because I'm probing for some self serving advice here. So say your company, they're kind of like in between 10 million run rate, 50 employees. Could be venture capital, but then a lot of PE firms are reaching out to you in terms of the capital allocation structure just to make sure I got it right. If it's a venture capital, they tend to allocate capital cash into the organization as equity, but it's strictly cash that they're putting in for a percentage of the company. Whereas a recap, it sounds like there's two components to it. There's cash to purchase shares from the current ownership and then also a cash infusion to support a growth plan.

Yeah, I think that's a perfect description. Yeah.

From that business owner's perspective, is it the variable of hey, I want to take cash now, how much cash do I want to take off? Is that sort of like a variable to be determined and influenced on the owner side or. Or that coming more from the fund of we think a company's this much, we'd like to cash you out for this much.

There's a specific company in our portfolio right now we're going through that where the founder wants to take some chips off the table because left a big corporate job, started a business, drawing a meager salary because he wants to put as much money as he can back into the business, but is like, hey man, I got family now and I got expenses. I need some cash. So oftentimes it'll be the entrepreneur coming our way to say I need to realize some value knowing full well that they're probably giving up some value down the road if they were just let those shares ride. We have those situations from time to time and we Want to be thoughtful and good partners about working with them when they have a need or they have a want. And we don't get hurt by that, let's say. And there's just a way to make that work for everybody. When there's new money coming in through investment. Same. Well, some of that can be put in the business. Some of that could be to allow the founder to take some chips off the table. Thing I've seen too key sign is founders start to get weary after a certain point, after a certain amount of time. It's like, hey man, I'm working my butt off. I'm really not making that much money because everything I'm doing is going back into the business. I need to generate something that's going to just stimulate whether it's the income part of that or sometimes it's just like money is. When I always, I've got a 30 year old son and I always talk to him about money isn't going to buy happiness, money's not going to to solve all your problems. But money does make things easier. Think about straying relationships between husbands and wives or partners in businesses. It's like oftentimes money is at the root of some of those issues and disagreements. And so when money can maybe make things a little bit easier for people that's a founder in a particular situation, then we want to be thoughtful partners around that.

Do you have a View on Minority vs Majority recap? Is there different fundamentals that happen? So if I do a majority now you're under the fund's control. We're going to dictate the strategy and everything versus minority is we believe in you and we're supporting your vision.

Yeah, majority recap is going to shift the balance of power to the people that own the shares. So you got to be really smart about that. As an entrepreneur, my advice to entrepreneurs is always don't borrow more money than you need because you'll just spend it and then all of a sudden you're going to be beholden to people that own that paper. Borrow what you need. It's okay to give up a significant amount of equity if you think the pie you're going to create is significantly bigger than what you have. Right. That's what you're betting on. So there's nothing wrong with that. But be really smart about that, be thoughtful about it, be frugal about it. The money that you borrow has to be. I always think about it as sources and uses. Here's my source of money and this is what I need, here's how I'm going to use it, this is what it's going to deliver. And if all that comes to fruition, the way you've thought about it, then you've hit it out of the park. Problem becomes you borrow a lot of money and then all of a sudden doesn't deliver and then you got to go borrow more money and then you just keep being, giving up more and more of your share of ownership. And at times, smart PES, smart VCs, they're going to put preferences on these things. And if, let's say the company ends up getting sold for a certain number and that PE's got a 2 or 3 x pref, they're going to get their money first and everybody else will get whatever's left over. And sometimes there's nothing. Unfortunately, I've seen founders really get screwed in deals by borrowing too much money and over leveraging and the money that they have borrowed, they burned through and haven't delivered. The. That's when he really creates problems, creates animosity. It creates a lot of issues that you want to avoid.

As a founder, you're a piece of the capital allocation puzzle. I'm doing all these interviews, talking to investors, I'm seeing their lens. At the end of the day, it boils down to irr. But even for the founder, if you're taking that capital, you're part of that, you have that accountability. You need to be thinking the same way of how are you going to deliver irr. Make sure you're using that money wisely. You shouldn't take more than you know how to really allocate, otherwise you're going to diffuse that, then you're not going to, and then that X preference is going to come back and bite you pretty hard. The key element there is having that full level of confidence. You're going to put that capital to work and really deliver that value increase on it.

Absolutely. The biggest problem oftentimes with some of these deals that don't turn out to deliver at or above expectations is execution. People don't execute. Ask for money, said it, you're going to do this with it. And it was going to generate X, Y and Z and it didn't happen all of a sudden. Now you need more money. It's like, can you execute better? Because if you can execute better, maybe you won't have to do another series C or D or E. You have what you need. You're creating your own oxygen and you're delivering on your promises. It's One of the things I used to always tell my teams when I was running businesses was like, do everything in your power to deliver your plan. Because a plan is a promise and you should always be in the habit of keeping your promises. When that happens, you build confidence, you build momentum, and you maybe reduce the need for additional capital and to give.

Up ownership, because that ties right into the capital. It should fit right into a plan that you can execute and deliver on. On have that full commitment and confidence.

On a hundred percent.

This market's been really funny the last few years, if you haven't noticed.

Yeah.

That'S right. Valuations, interest rates, a big factor of that. All the different sectors have been affected in different ways. How do you look at that? How do you look at just the effects of valuations, interest rate impacting investment decisions?

It's been a really interesting last couple of years. Years. Maybe we're easing our way out of it, but right now we're still in the throes of it. When I say it, it means that if you're a business, an entrepreneur, whether you're early stage, a startup or one that's been going for a while that needs capital, it's a very difficult time to raise capital. Why is that? You hit on one of them. Interest rates are high, number one. Number two, while there's capital available, it's being fairly tightly held in terms of saying, okay, I'm going to be really just cautious about how I allocate that capital and be in the business of picking winners, number one. But number two, also knowing that if somebody needs money that I'm going to use the fact that the leverage is on my side of the table now. So if you need the money, and I believe in your business, I'm willing to deploy that capital, then you're going to have to give up more ownership than maybe you needed to give up three or four years ago. The balance of power is probably always to some degree in the hands of the people that had the capital, but even more so now because access to capital is difficult. Whether you're going to try and get a loan and take on debt. If you do that, then you have a lot of debt to service because the interest rates are high. And if you're going to go the other route, which is a growth capital company or a PE or vc, then they're going to ask for more ownership and you got to be okay with that. If you truly believe that capital infusion is going to deliver what you think it's going to deliver, my crystal Ball is no better than yours to. But based on what we're hearing and what we're seeing, that you'll see some relaxation of the Fed and maybe see some rate cuts down the road that'll flow through to people that need to borrow money. 2 I think it'll create some enthusiasm for the overall financial markets which will maybe loosen the purse strings on the folks that have been very stingy about allocating their capital. People have learned some lessons over the last few years. They made some mistakes and I think they're learning from those things on both sides, by the way. On the sides of the investors who are making investments and also the entrepreneurs that are taking those investments.

On the investments. If you were a fund investing in a sector that was 8a trading at 10x multiplier and now it's 5, what are you doing? What's the plan to make up for it?

Yeah, it's basically back to what I said earlier, like execute. Put your nose to the grindstone, be very frugal about how you spend your money. Definitely try and be efficient on the SG and a side of the equation. Create the value that you think you can create.

You think it would deter a fund to do. There's still an active fund to do less platform plays and more add on plays just to push for growth on those to try to make up for that.

Say more about that. How would you make that distinction between platform and add on?

You're just doing a whole new investment into a brand new business line sector in general and saying hey, we're going to invest in this new sector at 5x and sort of get the new start right versus we've already got these seeds in there. Let's really focus on the add ons so we can make sure that we can push the growth and really have a negative on this investment. A different flavor of ice cream for everybody too.

Yeah, it is okay world according to Keith here. So let me preface that. But when you have a fund you say I'm going to make an investment in a business, you better be reserving capital to make investments and follow on rounds. If you don't do that A you either didn't believe in the business strongly enough to make that first investment or B you're just going to dilute yourself and that's going to be a problem if you're not reserving enough capital to do that, but then you're always needing to make sure that you have some dry powder. When some great ideas, some great founder comes along, you've got the ability to step in and do that deal. So it's always a balancing act. It's never a perfect formula, but I think you want to make sure that. Let's pick a round number. If you got a hundred million dollar fund, you've allocated 50 million of that, you should at least be thinking 30 to 50 million of that for follow on rounds and not just looking for the new shiny toy to just increase the port coast. Because along with that additional investments and new platforms becomes more board seats, more personalities to manage more, more more versus a more focused portfolio where you say, hey, I went on series A, I went on the series B, I went on series C, I'm in D, I'm all in on this thing because I believe in it. And I want to make sure that if I was whatever 20% of the business when I wrote my first check, that I maintain that same percentage as time goes on, if I still believe in the business. It's a strategic thing. Not every fund does it well, but I think it's a discipline that most good funds should be building and adhering to.

I got the big money question for you. Timing on all this stuff. And I think of timing or an exit timing for a recap. I feel like this is such a critical thing where I've seen entrepreneurs wait too long and all of a sudden growth has slowed down. Valuation is really getting cut because of that or you've done it too early. I've seen them where they've got the exit at like a $20 million, $50 million exit and then watch his business blow up to a billion dollars. How do you think through timing on that to get it right? From everything you've seen, this is like.

The two headed llama, the push me pull you when you want to make sure that business you invest in has enough time to reach terminal velocity and unlock value. Oftentimes though, funds want to make sure they have enough exits so they can raise the next fund, in which case they don't always allow enough time for that business to unlock the value that it has the potential to unlock. That's definitely an issue. But then you're right, like sometimes you wait too long and I've been involved in some of those too, where we probably waited a little bit too long or maybe had a more inflated price tag than we thought the business was worth and didn't take the burden to hand if you will, and a couple three years later you're going, boy, I wish I would have taken that. Timing is crucial and I think right now in Particular, as I indicated a little bit earlier, I think the holding period's a little bit longer. The time to actually allow businesses develop, it's taking a little bit longer. Maybe that's a function of not having enough, enough money to actually accelerate growth or business development, if you will. Some people just get lucky. John's example is great. John Sebastiani had crave. He wasn't really ready to sell the business. Somebody put a very tender offer on the table and took it. And in his case timing was perfect. Other cases you've seen it go the other way.

I talked to some of these founders again, the 2021 magic year, they raised extremely high valuations, got your preferred X on those valuations and now look, I mean that's a tough spot I would want to be in again. Even though at the time big champagne bottles were being popped and people were partying hard because they get 200 plus million dollars raised, that's one thing. Let me go back to the self serving side here. So if you're at a business that has strong organic growth and I feel like there's a timing factor of there of I almost feel like it's probably, probably your own confidence of how long are you going to sustain the strong organic growth to time it at that right point because you don't want to do it too early, you don't want to do it too late when your growth declines. To do a recap and introduce M and A as a strategy to start accelerating the next stage of growth. And you're looking at the market around too where its current market valuations are low. We should push this out a couple years or so and really wait till things turn around and the market's favor. But then pretty confident we're going to have strong growth strides for the next three years. How do you sort of look at that? Is it a year by year evaluation?

It's a difficult question because of you've seen a lot of down rounds right now. Now people raised money on big valuations to your point, 2021 and now we're sitting here in 2024. Dynamics are completely different and they still need money and they're willing to issue equity at a much lower valuation. It creates problems for the entrepreneur, also creates a problem for the existing investors making this up. But if I invested at $100 million valuation and now we're doing a new round of $50 million valuation, like that's not good for me. So this is little esoteric, but I'll say it anyway. The boards that I'm on today and even boards I've been on in the past. What I've always advised people to do is, yes, you want a successful exit. At some point you're trying to create as much value as you possibly can. But if you're so focused on that and not focused on just creating a great business, you're going to run into problems, I guarantee you. Just think about what it's going to take to build a great business and then suitors will come, investors will come, eventual strategics that may want to acquire you will come along. When you're not even even thinking about it, sometimes that gets lost. I was running a company last year for a bit and people kept whining and saying, well, shouldn't we be thinking about what our exit strategy is like? I want to talk about that with you guys. I want you to think about what it's going to take to build a better business. Like your job every single day is to drive positive change and create more value. That's it. Anything else is going to be distraction. And I think that's what happens to people. And look, we're guilty of it sometimes as growth capital companies and investors, we're pushing people into those directions because we want that for ourselves, shareholders for LPs. But it's a fine line of really allowing the business to stay focused on what really matters versus just focusing on, well, how much can I sell this business for one day and how do I dress the baby for that sale?

Tough to keep everyone happy, your customers, your team and shareholders staying true to the mission or stay focused on irr?

Yeah, you think about it. You put all the noise aside and everybody's just focused on building the best possible business they can build. Then value will come. It will come.

I couldn't agree more. To wrap things up, what are some golden nuggets of wisdom, whether in the M and A side or investment side that you might have to share?

I've learned a lot over the last, call it seven, eight years or so, having done it for Mars Wrigley, now being more involved on the fun side of the equation. Some of the things that I've learned, I guess, are as follows. One is that check isn't always a check. If you're an entrepreneur, you have to think about, about what can come along with that, number one. Number two, what's the culture and the ways of working of the people you will be now beholden to because they own a piece of your business. So that's something I've learned a lot about. It Stands to reason in general business or investing, but it's under promise and over deliver. I see a lot of over promising. I see a lot of things even through some of our deal flow. When I look at got people promising $100 million run rates in three years and positive EBITDA in the same time period and I look at that kind of stuff and I go that's over promising. So trying to find the right balance of enthusiasm with realism, but also the ability to execute on that. I've made some personal investments outside of the funds that when I looked at those types of equations still had my spidey sense tell me it wasn't, wasn't going to actually come to fruition. I still put the money in and I've had some misses on those things. That's a big piece of it. Just under promising and over delivering and execution is a big piece of that. I think for people that want a career in M and A, or whether you're on the fund side or you're on the corporate development side, it's like you need a fair amount of financial acumen for sure. So there's the numbers part of it, the irr, there's the how do I read a P and L and really look for or some of the gremlins that may be hiding underneath the surface to make sure that I ask the right questions before we do the deal. That's a piece of it. But I think just real world experience in a sector that you may be interested in, whether that be tech or the area that I'm in more like consumer products or it could be in services. Just I think people that can bring that kind of street level experience to the deal side of the equation could be quite valuable. So one part's about having an MBA or knowing the numbers, another part about really understanding the dynamics of, of the segments categories you're working in.

I like it. What's the craziest thing you've seen in M and A?

Probably part of it was the AB deal I lived through. Man, when you think about somebody coming to the table at $53 billion in 2008 when we were in financial apocalypse, that was crazy. I've personally seen some things that I've been involved in where I've seen 30 times revenue multiples being bought with no EBITDA and no line of sight to cash flow positivity. Yet people wanted those businesses so badly and felt that they were so unique they had to go buy them. I'm fascinated with some of these documentaries on wework and Uber. And I had a good friend of mine for a while was president of Uber. But like when you watch those things, like just the craziness that went on, Adam Newman's convincing SoftBank to put in billions of dollars, it's like that's kind of stuff just blows my mind, man. But it's also part of what keeps us interested in this business, like finding those truly unique gems that are just going to have this massive exit that's going to be somewhat unheard of, but yet it's going to just deliver a lot of value and that create a reputation for a firm, create a reputation for an entrepreneur. There's some things around that stuff that just fascinate. But living through the ABDL the way I did, seeing how it got done, seeing someone, the consternation in the family and the board and the time we were in in 2008 and it actually working just blew me away. And I was both proud to be part of that and certainly reaped the financial rewards of being part of that. But it shook the world that I knew. It turned out in a fashion that I never would've expected.

That was history right there. That's gotta be one of the largest M and A transactions in history.

Pretty big.

A lot of interesting story behind it. From the book I read him. Keith, thank you so much for the time today. I enjoy this conversation. Thanks for hosting. You've helped me become a better M and A scientist.

My pleasure. Thanks for having me.

Those of you still with us, I'm curious about what you think about this interview. I had a lot of fun and found it really amusing and educational. Hit me up on LinkedIn. Let me know what you think. Till next time. Here's to the deal.

Foreign.

Thank you for taking the time to explore the world of M and 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 and 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 Kisan K I S o n a science.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.

Foreign.

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