Virtual Summit Recap: Aligning Strategy with Your M&A Process

Hello M and A friends. If your M and A team is still managing M and A with Excel for sourcing, diligence or even integration, I'd love to show you how a modern information system improves collaboration, distribution of information, knowledge transfer, change management, all resulting in much better outcomes. Learn more@dealroom.net also if you like this podcast, please tell a friend or more learn Looking to build the largest community of forward thinking M and A practitioners? Now on 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. This interview is a rewind from our virtual summit. Hope you enjoy it. If you want to see the full version with video, visit mascience.com.

Hi, my name is Marcia Lewis and I am the Director of Marketing at Deal Room and I'm just going to be introducing our speakers for our next session. So our next session is Aligning strategy with your M and A process. And our speakers are Ben Sutton, Senior Manager of Corporate Development at NCR Corporation, Scott Kayser, Executive VP of Corporate Development, US Security Services at Garda World, and Sean Corcoran, SVP of Corporate Development and MA at Newstar Inc. And I will let you guys take it away.

Hey Sean. Hey Scott. How are you guys today?

No good.

Ben, how are you?

I'm doing well. All right, so I guess we can go ahead and get started. So I guess best place to start would be can you both briefly describe your roles at nustar in Garda World respectively? So Sean, if you want to start.

Sure. I assume you can hear me.

Yes, I can.

Yes. Great. First of all, everyone, thank you. First, sort of the proverbial all views are my own disclaimer, including the view outside my window, which it might be a little bit too bright to see. I'm based here in Arlington, Virginia. So welcome from Arlington, Virginia. Second thank you to the M and A Science team. This is really just a tremendous conference and event. It's a one of a kind. So we're actually. You guys are really blazing new trails here, so congratulations on putting this conference on. Second, my fellow panelists, Scott. Thank you. Ben. Thanks for trying to moderate the two of us as well. Good luck. So first two is NuStar. NuStar is a global information services leader across marketing solutions, fraud and risk communications and security solutions. Personally, I've been with NuStar for 20 years. I partnered with the original management team, the founding management team who formed the company, along with private equity. I've been part of the company developing inorganic and organic strategies for all of our current operating divisions, which I mentioned earlier. We've grown the company to over $1 billion. And along the way we've done about 45 different deals of various flavors. I have led corporate development for the most part of the 20 years with a few kind of operational and strategic planning stints along the way. Currently, corporate development's role spans the entire life cycle of the M and A process, really starting with strategy and then ending with hopefully a successful handoff to the operating team during the integration process. I kind of view our role as the design, build, general contractor, where you know you're in at the beginning and then you're also there through the warranty period. Over the time, the role of corporate development has shifted quite a bit. You know, originally when we were much smaller, corporate development was the primary advocate for doing a deal. And over time, corporate development's now one of the primary roles. And one of my primary roles has been to ensure that we've got a deal champion from the business side who can ultimately be accountable and responsible for the deal's success. Scott, thanks.

Thanks, Ben. And obviously thanks to Kisan and deal room Kisan. I think we've known each other for almost five years now, so it's a pleasure to be part of this conference and really appreciate all the hard work you and your team put in to get us here today. Obviously Ben and Sean, thanks as well. Ben, thanks for putting up with us. And Sean, always a pleasure to be a panelist with you. You know, a lot of my role and my corporate development activities mirror Sean's. I'm currently an executive Vice president of Corporate Development for Garda World. We are a global security services firm. Four and a half billion dollars in annual revenue. We're headquartered In Montreal, our U.S. headquarters is in St. Louis. And my role is performing corporate development as part of the executive team for our U.S. security Services division, which is about $500 million of annual revenue. I lead the entire corporate development team and process for that U.S. division. So everything from strategy, executive level participation and development of that through origination, diligence, contracting, integration, and as Sean said, handing it off to the operators once we feel like the acquisition is in a good stage. So that's a bit of my current role. We do about five to ten acquisitions each year. So high deal activity, generally smaller deals, anywhere from a million to 20 million of purchase price and then really just tucking them in to build market share prior to I've been doing this at Garda World and, and the company that Garter World acquired, part of that for about five and a half years. And I've been in corporate development roles for a little over 10 years in some various industries in the customs, brokerage and logistics industry, in software and information services. Prior to that I was a management consultant and I started my career Ernst and Young's Corporate finance.

Thanks Scott, and thanks Sean. Good overviews and sounds like you both have a lot of experience in the full life cycle of an M and A transaction. How would you guys say that strategy drives M and A transactions more broadly?

So this is. Sean, I'll start it off first. I think, you know, one of the, one of the sort of clarifications with strategy and M and A, I think is just M and A by itself is not a strategy. You know, many times in absence of a strategy, companies will try to buy their way into one. And that's just a common mistake that you see with operating executives. I've seen that throughout my career. I really view M and A as a tool. It's a really powerful tool that can help achieve a company's strategic objectives and really accelerate achieving those company objectives. So in terms of strategy, we view it as the common guidepost for all the phases of acquisition. So starting with qualification screening, informal due diligence, formal due diligence, deal execution, and then again all the way ending in integration. It's also important that all the members of the deal team, including the advisors and third party consultants and accountants, lawyers, need to have a clear understanding of what the overall strategic objectives are of the business. And then you can kind of have clear strategic alignment between that and what you're trying to accomplish in the overall deal. Ultimately, making sure certain that happens, it really just helps focus and streamline the overall effort and it actually simplifies the overall effort. You know, I think great athletes talk about how the game slows down and that's what having a clear strategic alignment does when you're doing a deal. It really just slows down and simplifies what's an incredibly complicated process.

Yeah, I agree with all of that, Sean. And I like the comment that M and A is in of itself not a strategy. I agree. You know, in my experience you've got a lot of smaller mid sized PE firms looking to acquire and grow businesses and create value for shareholders. And in the last few years, decade or so, there seems to be a much stronger push to complement the traditional organic growth routes and value creation there with an M and A strategy, inorganic growth strategy. I think we've seen the compliment and the recognition that M and A can't be ignored as part of your growth strategy. In the more recent times where there's more deal professionals, there's greater demand for corporate development teams to be built within organizations and have a corporate development function as one of the functional areas of the company. And I've seen with great success how adding that M and A and organic growth strategy can accelerate value creation for shareholders. You just have a much more accelerated growth trajectory and aggressive growth mindset in the company that permeates from the executives all the way through the entire organization. As low straw pen owners or family offices or even public investors are going to want that return and value creation and accelerating that is definitely something that is going to be evaluated and considered. And having M and A add to that growth trajectory is a great way to obviously build that aggressive growth culture in the company and frankly also just show on a P and L this growth trajectory that investors want to see in order to create value. The second point I would add, just as it gets more into really aligning your M and A strategy with the overall strategy of the company. My biggest experience would be that corporate development has to be associated and tied to the executive level decision making of the organization. That doesn't necessarily mean that the corporate development representative is a C level person, although they need to have a seat at that table. And I have direct experience with that at Livingston, which was a logistics, freight brokerage and customs brokerage company where I was a fairly young corporate development professional, but had a seat at the table with the eight other functional area executives and the CEO. As we determined where we were going to place our bets as a company where we wanted to grow and how and how we used M and A to complement that strategy. And having that seat at the table led the M and A practice and the strategy in corporate development to really align well with the overall growth trajectory and the objectives of the business. So that our deals were successful. You had buy in from all functional areas from the executive leadership group on down. So that when issues came up, when you know, as Shawn mentioned, all the complexities of the M and A process kind of rear their head. You have support from all the functional areas and all the leaders of the company that fix problems and integrate the business. Well, in my mind, integration is 90% of the success of a transaction. The deal itself and the price and terms and the reps and warranties are going to be 10% of the overall success. Obviously you have to get all that right. But having that integration go smoothly is paramount. And if you have that aligned strategy between the corporate objectives and ma, you're going to have a much higher likelihood of success than the success of your.

Yeah, makes sense. Sean, you mentioned that you need to align diligence members as part of the broader strategy. Are there cases where they don't have a full understanding of the strategy and how does that affect the deal or any transaction more generally? I mean, it seems like communication with those members at the execution stage or even post closing. If people don't understand the strategy, they're not necessarily going to drive to the result that you want. Have you seen a lot of that? What's your experience with that?

Yeah, I mean, ultimately, as I mentioned, the strategy is really to simplify things, right? So it's to understand what's important, what are we trying to achieve. Because, you know, as you negotiate a purchase agreement, as you work through the integration process, you have to know, ultimately understand there's going to be trade offs. And you ultimately have to understand what are we trying to achieve achieve as a company. And as deal teams grow, you know, deal teams can be very sizable. I've seen deal teams that are twice and three times the number of people in the actual company you're acquiring. So the size of the target company. So when you have that size of a team, it's really important that everyone really understands why are we doing this deal. Like what are the ultimate objectives for the business? Yeah, that's important as it relates to organic business itself as well. But it's even more important as it relates to an acquisition. Obviously there's a certain level of like blocking and tackling you need to do. That's just basics and I sort of table stakes. But ultimately you have to know what are we trying to achieve here? And from what I've seen, you know, especially in the integration process, that can be. The integration itself can take years and you may not get to the integration for 612 months. So by that time, there's so much time that's gone by, you need to really make sure that the team is aligned ultimately why you're doing the deal. And that's critical. So you set up processes and procedures and you align the team and you have a communications plan, internal communications plan to address those, those concerns and issues.

Yeah, I agree, Sean, good points. And it's a good question, Ben. You know, you can have a lot of problems that pop up if your strategy and the rationale for your efforts and investment aren't clearly articulated through the organization, obviously at the leadership team, but all the way through, you know, integration teams, which, as Sean mentioned, can field teams or integration teams can get quite large, you know, and I think it's. It makes sense to have the corporate development teams understand that it's their role to help communicate that overall strategy to the entire team. You know, we sometimes can get siloed or stuck in a bubble where you just assume that everyone understands some of the strategic rationale behind your investment. And that's not always the case. It's clearly not going to be the case as you kind of work your way down through the organization, you know, and taking a step back, having a broader understanding at the corporate development level or even at the leadership level as to why you're doing, you know, the M and A is important. And I mean, for example, it can be simple. In my current role, it's really just about building market share. You know, we're trying to become the largest, best player in the United States market and the global market. But for me personally and my team in the US So to a degree, it's building that market share and building it quickly, building it with the right brand and the right team. You know, I've been part of corporate development teams and acquisitions where the intention was to add a new product line or to really diversify the sales channels or arrows in the quiver, as you will for the sales team so that obviously you can grow, but you're acquiring a business for that particular technology and the market share would come later. So understanding some of those key drivers for the acquisition will help obviously communicate that through the organization and then align your teams to participate in a successful integration and really to help achieve that overall strategy. As John mentioned, it doesn't happen over time. We always joke as corporate development professionals, we have to live with our deals. I mean, I get to deal with the fun and the not fun stuff that comes up with acquisitions that I did four years ago, five years ago, because they just assume the corp dev folks know where all the bodies are buried or the skeletons are and generally quarterback the situation and know who to talk to and who to bring in if there's an issue or something. So, yeah, we live with our deals. We want to make sure they go well. We want to articulate that strategy throughout the team, and we'll have to deal with less issues and field less questions if that strategy is more articulated throughout the whole organization.

Scott, are you saying that the corporate development team can be blamed for deals that closed four years ago?

Not saying that at all. I thought Keystone had me sign that disclaimer. Yeah, I mean, at some point I love saying, well look, you've been operating this for a year. But of course I'm not like that. I think we all do take a pretty invested role, pride in the success of our deals, whether it was done six weeks ago or six years ago. So yes, corporate development lives with our deals and we will, I will take responsibility and work with the business to make sure the train stays on the proverbial tracks as long as it has to.

Great, great.

Thanks. Thanks guys for that. So next question would be, you know, how would you guys best source deals to achieve your strategy?

Sure. So I'll take a stab here. Well, you know, ultimately corporate development is and has been the owner of the list. But deals can ultimately get sourced from anywhere. Corporate development can source deals, the business unit, investment bankers, investors, private equity sponsors, existing partnerships can turn into acquisitions, even situations with friends and family. So really spans the whole, the whole gamut. What we're really focused on though is setting up a set of strategic filtering criteria that establish early on in the process, that's established early on in the process so that you can cut out all the emotion and the noise and the underlying process. And you know, you typically, from my perspective, it's even best to do that even before you set up a separate set of criteria that are more kind of financially oriented, you know, and these filters can be, should be and are typically tailored to the specific company, the business unit, and can include things like Scott mentioned, increasing distribution or share, targeting large markets, growing markets, accelerating the product roadmap, adding additional technical capability. And there's even sort of defensive considerations as well which you know, are taken into account in this criteria. And as I mentioned, I think setting up this criteria is really helpful in just cutting the noise out of the process because the list can get very long. And then ideally there's within any, within a company or business unit, there's typically some sort of regular strategic planning cycle. So whether that's annual or sometimes there's quarterly check ins and refreshes, it's important that market scanning and candidate identification are at least topics of those of that underlying process. So you begin to establish a list, sort of rank and prioritize different opportunities. Obviously there's going to vary company to company, but it's also, I think that's also an important part of the process that corporate development gets involved really early in strategy development.

Yeah, I agree wholeheartedly and you said it, Sean. I think that List is vitally important. I mean, it sounds so simple and in many cases it is. You know, my list in the two corp dev roles where I've been more successful was just in Excel, but there was a very robust list. And I guess my, my advice would be, you know, at least from my own experience, lead corporate development down the path of success is to be the owner of that list. In many cases you may be coming in to the beginning of a corporate development function with no list and therefore you get to create it. Sometimes that's easier, definitely easier said than done. But sometimes, sometimes the information availability on companies, both the names of companies, the geography if you're lucky, the size of people or revenue or God bless you if it's ebitda. But building that list and having corporate development be the owner of that list and the manager of that list, and I say that because it is active, right? You're always adding to it. As you learn more information through networking or and other efforts, you're going to update the information on the list. I also use it to keep notes, you know, when I'm talking to owners or even brokers or bankers, keeping notes on targets so that I have as me as corporate development and my team has the most information on the marketplace, you know, and the next step to that, as Sean alluded to, is then when you're bringing that list, sometimes you're bringing that list in a short form to many of the operational leaders or geographic leaders of your company and they're going to add to it. Especially in the instances of looking for new products or markets to enter into. You're going to have a salesperson tell you, gosh, we just keep losing opportunities to this company because they have this functionality. Well, now you've got those company names or some research to do on that functionality to build the list. And those are the areas where networking within your own organization is going to help you refine that list. That list is going to be your. My, my database and the foundation of your deal origination. You know, phase two, phase three, four, that is when you get well known enough in your market where deals are going to start to find you, whether it's bankers or brokers that know you're the deal representative for that strategic buyer, you know, then those are great when the deals start to find you. Obviously a little easier than making the cold calls from your list. But those various, you know, I think if you know, in terms of my advice for origination of deals, it goes back to owning that database, meeting it with as many Fields of information as you can on the target markets. It can be pretty broad. You know, it may be, you know, some way out there, opportunities and targets. And at the very least, when you have your strategy sessions with the leadership team, either corporate development is bringing some of that up or some of the other business functional areas are bringing up those correlated markets. That may be high in the sky, but at least it's worth discussing and strategizing on. And having that list as part of corporate development to me is paramount.

Yeah, very interesting. Would you guys say there's internal tension between leadership and maybe project manager or product managers and other strategic players for a lot of the prioritization of the list, or is there somewhat of a seamless process?

I'll take it. I mean, I think the answer is yeah, obviously there's competing resources, cash, opportunity, cost. So the answer is yes. I mean, I think that's why, at least from my perspective, you gotta take some of the emotion out of it and set a real set of strategic and financial criteria that can help you filter these lists. These lists can get very long, but in doing that, again, it just simplifies the overall process and takes a lot of the underlying emotion out of it.

Yeah, it's a good question, Ben. I mean, is there any stress free, seamless interaction? I mean, in my current role right now I have exactly what you're talking about, which is lots of functional area leaders and geographic leaders all wanting to accelerate their growth in their area and asking for M and A help or time or investment to do that because it's worked. I mean, we've got some good case studies. I was on the phone yesterday with the leader of our events security division, which has gotten pretty beat up over the last three months, of course, but we're doing screening, metal detector, you know, event screening for sporting events. And we do a lot of MLB teams, NBA teams, even NFL teams. We did the NFL draft, obviously didn't do it this year. But you know, that business leader was giving me some examples of times where M and A helped grow a market for them. And Las Vegas was a great example. We acquired a business in Las Vegas last year and you know, of course we took the book of business there. But having that toehold or beachhead in the market then allowed us to expand and we've expanded by leaps and bounds. We signed up a lot of the larger casinos and event venues and obviously looking forward to those coming back online here soon or now over the next few months. So that was an instance where M and A really supported the growth of a particular business unit. And because of that and other examples like that, I have a lot of competing voices asking for support and investment in their particular, in most cases. For my current situation is geographies and it's corporate development's job to gatekeep all of that. And it is a balance between the deal flow, the deal activity. You know, we get to a nice situation where you have more deals than you can do. So you can be a little pickier, but you could be a little more particular in valuation and field terms where we want to spend our investment and our time and efforts from a corporate development standpoint. So it is something that I think is pretty common. You know, Sean and I were talking in an earlier discussion, just, you know, you're pretty hard pressed to find a corporate development team that's overstepped. You know, we're typically a lean, very lean functional area. And you're going to have more demands placed on your investment and your time and energy than people that you can maybe designate or delegate to certain projects. So you're always balancing exactly what you brought up, Ben, which is how you devote your time. I think, you know, the investors of a company, the executives of a company can trust corporate development to have the wherewithal to align the strategy, their strategy, investor strategy, board strategy with M and A, so that you're able to determine which direction you want to focus on and where you want to take your time. And does sometimes that mean you have to say no, not right now, to some pretty senior leaders within the organization? Yeah, absolutely, that happens. Try not to be an A hole, you know, and piss them off because then your integrations will go well and you finally get around to some of their deals. But you know, I think generally the business leaders understand where corporate development has finite resources and understands the need for patients and the squeaky wheel will also get the oil in many cases. If you've got a business leader that calls you every day because an acquisition just, you know, opportunity came up that just cannot be ignored and it has cross collaboration with current products or current customers or something, I mean, they're going to keep being a bug in your ear to where that, that particular opportunity probably starts to kind of jump up the prioritization line and become something you can focus your time on. So yeah, it's always something corporate development teams have to focus on.

Makes sense. Were there non strategic reasons for the Las Vegas deal?

I try and do my and south deals in the Chicago winter and then I do my northern deals in the summer. So that's, that's a Corporate Development Strategy 101.

So how, how would you say that strategy impacts the success of execution and integration? You know, is there, if you have a more complex strategy, you know, does that make executing and integrating more difficult? Potentially?

I'll take a shot. Again, I think the answer is yeah, obviously the complexity of the strategy is, is important to take into account and then that obviously has to go into the deal calculus in terms of whether or not you're going to proceed or not and its evaluation and everything else. As I mentioned earlier, I think strategy is really that sort of guidepost that takes you through all the phases and just simplifies, simplifies everything. And as you mentioned, execution and integration are really much, as I mentioned earlier, much later in the process and typically 6 months, 12 months, 18 months, even 24 months by the time you get to these phases. And so you just really need to make certain that there's clear strategic alignment in the strategic alignment. Alignment objectives aren't lost by the time you get to these phases of the deal. Especially as we mentioned earlier, as the deal team expands in size and then again as well, I think with respect to simplifying the deal, you know, really a really solid communications plan, keeping team members updated as it relates to how the deal relates to the strategic objectives of the business. You know, what's this, what's the mission of the business and how does this deal help us accelerate that? It can be a very simple, you know, okay, it just accelerates the product roadmap here. Or it could be much more complex, complicated and transformed informational in nature. Ten years ago, NuStar embarked on really transforming the business into an information services company. And M and A was a key part of that. So that was a very complicated. Took, took many years and still we're still going through that today. But then you see much more sort of tactical acquisitions. But even those tactical acquisitions have to relate back to the strategy. Okay, we're trying to expand, share that, that makes sense. So we can expand, share and then we can cross sell the customers. So again, I think it's really important the communication plan to the deal team. As Scott mentioned earlier, you know, the corporate development team itself is typically very small, but corporate development really is a virtual organization. So the team itself can be significant and can dwarf, as I mentioned, the target company. Especially as you're dealing with much smaller deals, plus you're bringing in third parties as well. So there's communication required between yourself and the attorneys, the accountants, potentially investment bankers. If you're leveraging investment bankers. So that communications plan is really, really key to success in terms of communicating the strategy and continuing to communicate the strategy through the entire process.

Yeah, I agree with all of that. You know, making sure corporate development continues to communicate with the integration teams is paramount, as Sean just said. I mean, that's where you're going to get the problems are going to pop up with the acquisition is through that integration process. And if corporate development starts to disappear and expects to just hand off the majority of the integration teams to functional area managers and folks, you're gonna have problems. And you know, in my experience, I've had success where even now where we close an acquisition and corporate development leads a weekly integration steering committee call with all the functional areas. Sometimes those calls, I mean, as Sean just mentioned, you know, virtual, you have bad 30 plus people on those calls and you know, not everybody's gonna speak necessarily, but they're gonna listen hopefully and they're going to continue to hear the high level points of the integration process and where corporate development continues to weigh in on the rationale, the strategy, the complexities behind the integration and the acquisition so that everyone participating in those integration steering committee calls can continue to hear the strategy. And those take place months after an acquisition and in some cases years, if it takes that long. Sometimes you have some fairly complex mergers of systems and processes and things that can take over a year and those calls should take place throughout that time period so that you don't have that, I guess, fade of understanding and communication and collaboration to maintain that strategic vision all the way through the entire integration process so that you can look back during that time and have a successful transaction.

And on that, how would you define a successful transaction?

Well, so defining success with M and A is a challenge. And you see statistics out there. No one can really agree on the percentage of deals that are actually successful. So the problem is again is it's the life cycle, right? So the actual measure of success is typically off into the future, like I said, many, many years. So it's not easy to do as it relates to execution. There's just some obvious like blocking and tackling that you can measure success whether it's valuation or certain deal terms. You know, you can, you can look at those and say, okay, where were we successful from a negotiating perspective or not in the long run? Do those have an impact? They can, but they're less likely. I mean, it's less likely. You look back on the deal five years later and say, oh, if we really were successful negotiating misrepresentation or warranty, the deal would have been turned out much different. That said, I'm not trying to dismiss it. It's still important. But from my perspective, what sort of success, at least in the execution phase, is really number one, it's establishing the accountability and ownership up front before you close the deal. And part of that is really getting this sort of advocate, right, deal advocate from the business side, deal champion, who can champion the deal. So it's not just corporate development saying, you know, this is a deal we want to do and here's the reason why. You've got somebody with a vested interest as part of the business who takes responsibility. So again, that's, that's a key function within corporate development. And then sort of as you get into the integration phase, you know, typically what I've seen work best is to set up a set of strategic criteria, strategic milestones, integration milestones that really kind of measure success. And are we headed off course? Are we, are we on track? Red light, green light. So that if, if things aren't going as planned, you can course correct. There's some sort of feedback loop because things don't always go as planned. Right. So you have to take some, some actions, typically with any deal, to address issues or potentially capitalize on opportunity. So success, at least in the execution phase for me, is really about setting accountability and ownership and then setting these strategic integration milestones that lets the entire team know, the executive team, even the board know. Is this acquisition on track or is it not?

Yeah, the question's good. It reminds me of a quote from a communist minister in China where he was asked whether he thought the French Revolution was successful. And he said, it's too early to tell. You know, to define the success of a transaction can take a very long time. You know, and it always makes me laugh when folks within the organization patch on the back and say, that was a great acquisition, that was a great transaction. Three weeks after closing or six weeks after closing. Don't get too ahead of yourself because these things have long payback periods with the multiples that are out there right now. You got many, many, many years of making sure that business doesn't implode or that investment doesn't have major problems before you could really call it a success. That being said, of course, there's many milestones, as Sean just alluded to along the way. We're structuring most of our deals with some significant seller holdbacks that are based in ours right now are based on revenue generation and achievement over a six to 18 month period after closing. So that's one milestone for me where depending on how we're obviously monitoring the business on a monthly basis, the acquisition on a monthly basis. But when we hit those pullback milestones, one area where I truly believe we've been successful in our acquisition process and our deal process is actually aligning our incentives as the buyer with the seller's incentives and going back to those holdbacks I mentioned. If the seller is earning their full holdback, that's good for me too. My incentives are aligned in that regard, meaning I want to pay that hold back. If I'm not paying that hold back, it means the business deteriorated since closing and I'm losing multiple years of value on that deterioration that I don't want to see happen. I would like to see the business grow as well as the seller so that they're earning their earn out or hold back and we can at those milestones declare a success. I mean, not having a claim against your rep and warranty insurance, not having to fight when you have to open up the purchase agreement and go to page 70 to look for your dispute resolution provisions, you know, those are no fun. So obviously not having to do that is a success. I think the broad answer, Ben, to your question is, you know, we're pretty model oriented people, data and analytics oriented people in corporate development and monitoring. Our five year projections for the business after closing is a very good indicator of success if it's hitting its revenue. And more importantly, profit targets, EBITDA targets, you know, those are more easily deemed a success. And if you're well above them, you can start to worry less that you know, you've got an issue with the acquisition or that you overlooked something and don't. So, you know, broad answer. A lot of avenues you can take with how you define the success of an acquisition integration to me again is paramount. And doing that, having corporate development continue to participate throughout the integration process helps avoid any of those non successes that I'm sure none of us have ever had in our careers.

Yeah, I mean, it's pretty interesting to hear about a holdback being used for, you know, based off revenue. I mean, that sounds like an earn out to me essentially. And I have limited experience in earnouts, but I've been told that they're very difficult to ever not pay essentially. Maybe you have different experience with that, but essentially there's always some type of lawsuit around. Even if they miss the revenue, there's some type of lawsuit or something around that. I mean, what's your experience with that?

Yeah, it's a good question. But Sean, you want me to take that one quickly?

I don't know, Sean, I don't know if you do those as well. I mean.

Yeah, no, no, we have. And the philosophy tends to change with earnouts. I mean, I think the saying is, you know, never earned and always paid for earnouts. But it's, but look, it's one of the tools I think that you've got to look at and the risks have to be evaluated against. Okay, what's the opportunity and what's it going to take to be successful? These are in many cases competitive processes. And earn outs also do. The benefit is they help align incentives, but they're not without their complexity, that's for sure.

Yeah, that's right. Definitely complex. I am no expert, although I would in our cases define an early burnout. Generally being a situation you put in place to bridge a valuation gap where the seller is, as they always do, expounds upon the future growth opportunities of the business. Obviously many of us have had those scenarios where the seller is just so certain that in 12 months from now the business will be double and they want some credit for that. They want some way to get credit and value for that. And typically we earn out in that regard where we put some metrics in place that are above where the business is performing currently. And if the business hits those that you're paying on that earn out. And again, I try and align incentives where when you structure that earn out, your deal metrics improve as well and that makes sure you're aligned so that you don't want a scenario in which you're paying that earn out for a business that's worth less or, or your valuation metrics don't improve creates weird disincentives for growth that you don't want. So structure your earn outs such that your deal metrics improve with the seller's total purchase value. On our end right now with our holdbacks, we're not putting growth targets on the holdbacks. It's more of a maintenance of our current book of business. Of course, if it grows that book of business, if it grows, that's great. Going to be more likely to hit your holdback and get paid your full purchase price. In that regard, it's a bit, you know, my downside protection for me such that if the business does, you know, shrink after closing, if a customer leaves, we have 30 day termination clauses in all of our customer contracts, generally industry standard. And so you do run that risk through a transaction that a customer would invoke that termination provision and go find a new security services provider. So having those holdbacks and that downside protection is how we avoid having to have 20 different meetings with customers and having them sign new contracts and commit to a long term relationship prior to closing, which sellers are always loath to do to introduce you to their customers prior to closing, even in a delayed closing environment. So that's where that hold back is downside protection for us. Little different than an earn out. And getting back to your comment about, you know, never earned, always paid. I hold to my guns on earnouts. I mean I of course want seller references. And so where it's the gray line or things are going well and it's ticky tack, I get credit. But where we've had big customer losses, where prior to closing a seller has just insisted to me that there's no risk to that customer leaving, that they love us, they're going to love you, there's no risk. And then they do. I don't pay for that customer. And it creates tension. Absolutely. You know, it's not the most fun part of the role, but it's part of the role where you say, look, this, here's the math, you know, lost his customer, I'm not paying for it. And my only then add on to that is we've instituted good dispute resolution provisions in our purchase agreement to keep it out of courts. Meaning we're going to go to in many cases an independent accountant. So third party arbitrators. Yeah, yeah, we've got a dispute resolution provision that would pull us straight to an independent accountant, which in our mind is going to be more favorable just looking at the numbers, which is how we're going to do the math versus some sort of emotional quote process or you know, or frankly expensive process trying to go through the courts to determine. You know, my experience with arbitration is they like to split the split the difference. So we try to keep, you know, keep it out of arbitration too, such that, you know, we have a stronger argument but the seller has the emotional quotient in their favor that we're really just trying to steer, steer those disputes to an accounting firm. Then the other thing we've done recently is frankly in the purchase agreement, the fees and expenses of that accounting firm are borne by the seller. And you know, we get that in some of our deals. We don't get it in all of our deals. But my argument to it is, look, I would be happy to negotiate, you know, with the seller and come up with something that's fair and reasonable, based on the facts as we know them, to have a document dialogue between us. And I'd rather do that and create a disincentive for the seller to then go to some third party dispute resolution provision or court. So, you know, we're trying to, trying to force that seller to have a dialogue with us and be realistic versus, you know, versus having to pay for a third party dispute resolution process. So those are some of the tactical nuances that we've used to maybe protect ourselves in some of those instances. But yes, it's always. Well, not always. I shouldn't say always. In many cases we have great deals that do earn their full holdback and in some cases earnouts. And then in some cases we have to draw our lines in the sand and say no.

Yeah, very, very interesting. All right, I'm going to open it up, I guess, to outside Q and A here. We have a couple in the pipeline and maybe a couple others will. I guess let's try to address these as much as possible with the remaining time that we have. So first question I see is how much does a realistic understanding of your integration capability have an impact on the corporate strategy of the business? It feels like these two areas have very different KPIs, and that can lead to real problems. So, Sean, I don't know if you want to tackle that or. Scott?

Sure. So I'm not certain I've got the full context for the question, but again, I think there should be alignment between the corporate strategy and the integration KPIs. Obviously, if you're doing an acquisition to add an initial, to accelerate the product roadmap, then the KPIs from an integration standpoint need to be focused on that objective because that's what's important. That's ultimately why you're doing a transaction. So I would say there definitely needs to be some level of alignment with respect to the corporate strategy of the business and the integration KPIs. I will say these typical sort of strategic integration milestones are usually tailored pretty specifically again to the acquisition to say, why are we ultimately doing this acquisition? Maybe if you have a more sort of cookie cutter approach because you're doing a series of acquisition a string of pearls, you can, you can apply more generic sort of KPI's. From an integration standpoint. Again, there's some simple, you know, blocking and tackling things, some standardization with respect to, you know, employee retention and culture. So those things can be pretty universal. But usually, at least in my case, you know, most acquisitions have like one or two sort of primary objectives and you need to make sure that those are ultimately reflected in the integration KPIs.

Are there instances though where you, and maybe I'm reading this question a little differently but where you know, it's going to be very difficult to integrate. So it's probably, it's potentially a bad acquisition to do. Even if it's strategically based off whatever intellectual property, property they have or what, you know, geographic space you're going to be gaining.

Well, I think ultimately that's value. So yes, obviously the, the level of complexity of the acquisition, as I mentioned earlier, like the most underestimated and overlooked cost of doing deals is opportunity costs. So with respect to that, that has to be reflected. So if you're doing a more complicated transaction, maybe it's a carve out or something like that that just requires a lot of intense activity over a period of time, then you have to look at that in the context of the overall business and what you're trying to achieve and the level of risk associated with it. And again, the opportunity cost associated with executing the deal needs to be part of the underlying equation. Are we going to go forward with this or not? So I think the answer is yes. It needs to be factored into the overall deal criteria and decision making.

We have limited time here, so Scott, maybe you can take the next one in your pre close review. What financial measures do you use to evaluate attractiveness of an acquisition? Do you set target levels? I'm assuming he's talking about return levels. Obviously you already mentioned you rarely do deals over $20 million. What metrics are you looking at?

Good question. And I think we look at many. I guess there's a few answers I would say in terms of my current strategy and from a attractiveness of an acquisition, again we're building market share so we're going for the larger one. So revenue, we're an EBITDA based or profit based valuation methodology. But in terms of attractiveness of a transaction, if there were two transaction opportunities, all else being equal, which is of course never the case. But you know, to simplify my answer, if there's a larger transaction, we're going to go after that. There are many cases where, you know, if it's more of a strategic acquisition for a product line or something, that maybe certain financial metrics aren't going to matter of the target. And then I guess the second part of that question, or my answer is, you know, from a valuation metrics, we're looking at ebitda. We're evaluation profit based valuation methodology. So EBITDA Multiple Year one pro forma EBITDA multiple is something that I think generally is easy for the non M and A people to get their head around. I also Our models look at IRR over a five year planning period, discounted cash flow and payback period. So those are some of the metrics we use from a valuation standpoint to evaluate effectiveness of a target. We've got some thresholds for you know, where we'd be at. From a very simple standpoint. We think we know where we're trading from an EBITDA multiple standpoint and so obviously buying at a multiple less than that, in many cases significantly less than that is immediately accretive to our overall value valuation as a buyer. So that's the simplified version of what we're looking at to evaluate.

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