Working With Private Sellers

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That was my lovely daughter Shyla. If you want to keep up with the latest on M and A Science, our live streams, networking events when we release new resources, visit mascience.com and subscribe to our newsletter. You can Also follow our LinkedIn page to catch highlights of our interviews and if you like our content, please tell a friend so we can keep growing our community of forward thinking M and A practitioners. Now on to the interview. I'm Kisan 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 over and what actually happened during MA deals. Hi, I'm your host Kisam Patel, CEO and Founder of dealroom. Today I'm here with Isaac Lund, VP of Corporate Development and MA at National Express. He's a superlative accounting and finance executive with progressive experience in public accounting and organizations of all sizes, both public and private. Isaac has deep experiences in the CFO office, including roles such as Vice President of Finance. If you got a deal, he knows what to do with it. Today we're going to talk about how to work with private sellers to get the best outcome. Isaac, if you can kick off describing your market and your typical target for acquisition.

Yeah, thanks for having me Kisan. It's great to be here. So National Express, we're in the transportation business. Traditionally in the United States we've been focused on school bus. More recently we've developed a really nice business in the adult transportation space as well, so doing things like paratransit, shuttle and motorcoach. We are owned publicly by a company in the UK also called National Express, National Express Group, and we're traded on the London Stock Exchange. And in the UK and across the globe we're all focused on human transportation. Typically in Europe we're more focused on adult transportation in the form of shuttles and line runs that occur in the uk. We have business also in Spain, Bahrain and a couple of other smaller locations in Germany and Morocco. So kind of everywhere in the US Though we are focused mainly on that school bus market. We run about 20,000 school buses in 35 or so states where districts have chosen to outsource their school busing to a private contractor such as ourselves.

Great. Can you tell me about your role at National Expression?

The transportation space, particularly in the United States is very fragmented. So you have four or five large multinational players. National Express is one of those. Other names you may have heard of in the space are First Group. So you'll see First Student and First Transit are large players in the United States. A couple of French companies, Veolia has large operations across the globe, including in the US but apart from those large multinationals, you have a handful of regional players that maybe span a few sites, maybe a couple of states, and then literally thousands of what I would call mom and pop family owned businesses, many of which don't have sort of great exits or great next steps in terms of how they want to develop their business. And so we've spent the last five years doing basically a roll up of many of those smaller businesses in markets and in areas that are strategic to us. Since I've been at National Express for five years now, we've completed close to 30 deals, varying sizes. Most of those though on the smaller size again taking out some of those smaller organizations, family owned businesses, and providing a great vehicle for us for growth. And on the flip side, providing a really nice exit for some of these folks that either don't have a next generation or are at retirement age and just looking to monetize their assets and move into something else.

Now, when you work with private sellers, do you prefer to work through an advisor or do you prefer to work directly with the sellers?

Good question. It's a little bit of a double edged sword. On the one hand, when you work through a broker, you tend to find the deal process a little more organized. So in many cases, and especially in ones where sellers have found good representation, they've organized them, they've prepared them, they've gotten their books in order, they've given them the sense of what is coming. Selling a business is not an easy process. And so sellers that are represented are prepared for that. They are organized and they've also dealt. And we'll, I think, based upon some of the things we've talked about covering in this session, we'll talk a little bit about the emotional aspect, but they've prepared these sellers to go through the emotion of exiting their business, letting go of, for some of these people, what amounts to another member of the family. And so that process is, it's helpful when that occurs. Now on the flip side of that, if it's a professionalized process, you may have a harder time negotiating. You can't kind of play the big bad corporate guy and push the little guy around. And not that we try and do that, but there's a little advantage to being a little more astute as to how the process might play out. Maybe we're aware of some pitfalls or some things that we may want to have at our disposal and levers we can pull. And a professionally run, well represented seller, they're going to anticipate a lot of those levers and they'll thwart some of our attempts there. But I think I could go either way. We've done most of our deals with sellers that are not represented or what I would call underrepresented. So we've become pretty astute in terms of dealing with that, understanding what we're going to face when we talk to a seller that maybe we've prospected on our own that are in some cases they weren't even ready to sell their business. But when they started talking to us, got themselves comfortable with the idea and then we proceeded on that basis. And so in many cases they selected an attorney or used their family attorney and then we went ahead and did the deal. So we've been through that a number of times and it's been a really interesting learning process. So I don't know if that answers your question, but I think on both sides of the coin there's goods and bads.

Yeah, it's interesting you've done both because I feel like if you brought in an advisor, they're going to try to drive a competitive process.

Yeah, it's interesting on some of those where we've prospected and it's happened a lot where we've known the player, we've known the business, we're in the sort of, for example, we're in the same market and we understand that they're a good operator. We'll know who they are, especially for someone who's maybe close to retirement age or we're aware that they don't have a next generation that's going to take the business over. We've just reached out and said, hey, would you be interested in a conversation that we're out buying businesses? And when that's happened, a lot of times they've brought a broker to the table. But I use broker in the lightest way you might say it. It might be a CPA who's helped them put their books and their taxes together. For a number of years and we'll utilize them to help them. But in many cases, even if they bring someone to the table, we need to be prepared to face some of the things I was mentioning just in terms of managing the process, being able to move it forward and go through that way.

Yeah, it sounds like you're going to have to deal with a lot more. Valuation expectations is probably a big thing that you tend to, if you're working with Advisor, had that stuff figured out ahead of time, have a target price, whereas if they're underrepresented, then you're the one that has to help drive that.

Yeah, it's funny, we've seen it again, we've seen it all sorts of ways. I'd say what I tend to find in the underrepresented category, especially around value, is that their value expectations are high. Again, thinking of a few of the sellers, these were family members. The businesses was that was loved and cared for equally, in some cases equally or maybe just slightly less than an actual family member. I think the emotion that gets tied in with that, the pride they feel for what they've built, I think inflates what the business might be worth. And then there's just an education factor. They don't even think in terms of, oh, multiples of ebitda. Some, some people don't, except for people like you. And I don't think in terms of my business is worth a multiple of ebitda. They attach a lot of emotional value to that. They have a lot of pride in what they've built. And so we've been most successful on this realm. In particular, if we are dealing with someone we've kind of prospected on our own, if we have initial, very initial conversations, we really lay the groundwork for. By the way, deals in this space tend to trade for X to Y multiple of ebitda. Because having a broker who's done that, we try and fill in that role early on so that it's pretty clear that they can start to get their head around what this might be worth if they were going to do a transaction. So that we've greased those skids a little bit. Because otherwise you do find if someone's not thought through that or just out on their own thinking through what their business might be worth, almost invariably they're going to think it's worth much more than it is actually worth to us.

Yeah, I would assume that you get a big corp reaches out to you to buy your company and for you, you're rubbing palms for a big payday. But when you do set that expectation, when is that? Is that the first meeting? Is that. How early is that?

As early as we can fit it in, where we're talking about a seller, where we're really guiding the process on our own and they are not represented pretty typically how our process works. And we can get into process a little bit later, but we'll reach out pre Covid. We would look to have an in person meeting as soon as possible. So once we've had an initial conversation and they've reached back out to us, typically what we'd like to do is get me and maybe one other person or some group of one or two of us, three of us, maybe from our company that would represent us with the seller and go have a face to face, maybe tour their facility. We'd get to meet some of their people at a little bit of an arm's length. And we usually had some sort of a cover story. Often we were usually tagged as insurance folks who were kind of doing a tour of the facility so that there was a little bit of a cover story. And then we would sit down and we had a document that we would hand them to talk them through just the basics of the process, timing what things might look like, what to expect in various phases of doing the deal. And then pretty early we would in that conversation have, depending on how the conversation was going, but we may ask, have you thought about what your business is worth? In some cases we may in that conversation look to guide it towards, hey, these are the multiples you would expect. Have you ever thought about what a multiple might be? Or it just depends on how the conversation goes, how the person is reacting. If someone seems very standoffish and you can tell that through the conversation, they're just not comfortable in terms of even progressing with the deal. Yeah, we might not have the conversation, but if it's seeming to go down a certain path, we pretty early on want to get that value range seated in there so that it's on the table and there's not a big surprise when we come back with a valuation that's in that range and it doesn't even come close to what their expectations might have been.

Are you trying to get a number from them first?

We've done that and some sellers have gone ahead and said, hey, I think my business is worth X. And then which case we can pretty quickly determine, well, we might as well stop talking now because it doesn't look like we're going to be able to get There. But most sellers are astute enough, even ones that are not sophisticated in the ways of certain things of finance, most of them are, will hold back hard to the best and won't usually divulge. Although we've had a few that have gone ahead and said, oh yeah, if I could get X, I'd probably sell it. And X is usually a pretty big number because they're going to put something big on the table. So you usually expect that that's going to be a big number.

This is the art of negotiation, right?

Yeah. They're going to get that pendulum way out to their side as far as they can and walk back from that number and maybe they can end up with something they can live with.

So what's better not to give you a number or give you a high expectation?

I would almost rather in most cases, honestly, just given what we've seen in the market we've operated in. And again, other sellers and other industries may be different, but to us it seemed to be the price negotiations have been easier. When we've been able to lay the foundation of here's a value expectation or a range you might think about, because then they can go back and they can talk to their accountant or they can look at the books on their own and say, okay, they told me 4-6x EBITDA and they can estimate what the EBITDA is. And then they could say, yeah, it might be worth roughly this.

So you're a fair negotiator.

Yeah. I mean, you have a couple of questions. I think that may come, that'll touch on this. But if we don't keep the seller on our payroll, we do look to have at least some sort of lasting relationship with folks. And I'm a big believer in M and A or any realm that I just want to be a straight shooter. I want to deliver on what I told people I'm going to deliver to them. We've not always been 100% on that, but we've been pretty good on that. And I think if you pulled the sellers we've bought businesses from, I think they would all say that we've done our best to be fair, be upfront, deliver on the things that we said we were going to deliver on. And hopefully that means it's a good outcome for everyone involved and that's what we're really looking for.

Let's walk through the process. What's the process look like working with a private seller? Let's break it down step by step.

I touched on the initial parts first and foremost, you got to get in touch with those folks. Everyone has their pipelines and they develop those in different ways. But in our industry and in places and areas we want to operate in, we typically know who the players are. But every six months or a year we kind of reprospect the list. We would look through, I guess things are akin to like D and B and we would just look for industry codes that would be similar to ours and we would just pull a list of a thousand companies and see who we know, who we compete against. So we'll prospect lists out of people that have come to the bid table on things that we're bidding for in our operating business and come up with lists and then understand who those people are, who the operators are. And we're reaching out to those folks that we think would be either viable candidates ready to sell their business or are businesses we'd really like to have given some components. So that's the first part is really curating that list and following up on that list consistently. Once we have someone who we're in some sort of dialogue with, we will look to have that first in person meeting. Once we've done that, if there seems like there's enough interest to really take a look under the hood, we'll get an NDA in place and we will send them an initial list of call it 15 items that we'd like to get in order to do evaluation. So for our business, obviously it's financial information. We want to know some things about their properties, we want to understand what their fleet looks like. Obviously we get a little bit of high level but a little bit of payroll and benefit information. And then we put a number together, we do a 10 year model.

I want to back up. So when you make this list, you're cold calling people. We do you cold call people and how easy is it to get a hold of the owners? This is interesting. There's a lot of folks out there that really rely on intermediaries and so forth to bring their deal flow and they're actively looking to build their own proprietary process. So I think this is a key part of this interview to learn from.

Yeah, so we'll reach out. I'll give you an example. So there's a subset of the motor coach industry that we thought was particularly interesting for a few reasons that I won't bore everyone with. We sat down, we figured out who the players were in that industry. I had an analyst go through that market just using Google, using D and B, using free tools, at our disposal and figured out the 10 or the 15 players in the market. And we went through their websites, we went through various means to come up with either a phone number or an email for either the president or the owner of the business or anyone we could really get a hold of. We put together the form letter, it was addressed to each individual and we mailed it. Some cases it was physical mailing, in some cases it was an email. And in this particular one instance, we sent out 15 notes in this form letter. And we had four or five people that got back to us. A couple of people said, thanks, no thanks. A couple of people said, yeah, I'm not sure I'm really interested in selling, but I sure would love to talk to you and maybe there's something we could learn from each other. And then a couple of them said, you know, it's funny you should have contacted me because just the other night I had a dream that I was supposed to sell my business. Like, you get all those sort of types of things. I made that up, but you know what I mean, you get those sort of things where just you hit someone at the right time, at the right moment, and they come out of the woodwork as a potential deal that you could execute on. And we've done this in multiple cases. This was one specific instance in one specific subset of our industry. But we've done wider canvassing. In some instances, we've sent out 50 or 100 of these letters to operators in markets we want to be in, businesses that we're aware of, people that we know. And then once we establish that initial conversation, a lot of people that do come back and say, well, thanks, but no thanks, I'm not really ready. We just keep them on our list. And maybe in a year's time, or in a year's and a half time or two years time, we'll circle back and say, hey, we've made some initial conversation a while back. How's it going? Let's catch up and see how things are going. And maybe at that time things in their world have changed and it tickles their fancy to go ahead and explore a process and then we'll take it to the next step.

That's interesting. You send out actual letters and emails. Is there a follow up after that if you don't get a response by letter?

In some cases, yes. Generally, no. I would say if there is a business that was in our list in particular that we felt really strongly about making connection with, we may follow up and say, hey, we sent Something. Don't know if you got it. If we have a phone, if we send an email, but we also have a phone number in that case, one of us may pick up the phone and see if we can make contact. That way that's really more around maybe a business or a person or a market that we're really interested in cracking. And so we may be a little more aggressive that way.

Okay, so your pursuit is adjusted based on your level of interest.

Yeah.

Then you get the meeting, they say, hey, I'll grab an intro. And then when you go to the intro, I guess maybe if you walk me some of the key points that you would actually frame in the introduction.

Yeah. So for us, part of it is selling ourselves. Right. We want them to understand who we are. In some cases, they at least know the name. And so it's not a big mystery who we are, but we want to give them a little more detail as to who we are, what we have working behind us, how we approach deals. We give them a little bit of our, I say investment thesis. But really what I mean when I say that is our process is a little different than many where a lot of businesses will buy someone else and they'll rebrand it. They'll repaint the buses, they'll repaint the side of the building. They'll give everyone new business cards with the name of the acquiring business. That has not been our practice. Typically, we've left the names intact. So XYZ Bus Company operating in Topeka, Kansas, which both of those are made up. We did not buy XYZ in Topeka, Kansas, but if we had, we would normally leave the name of XYZ Bus Company. We would stay on the side of the buses, it would stay on the side of the building. That brand would continue to exist in the community. And so I'm not saying that's right or wrong. That's our approach. So we would outline that. We would ask them their level of interest of staying around if a deal were to happen, and we would talk about what we generally look for there. We would assure them around their employees. Because that question invariably comes up, what's going to happen to all my people? I mean, you hear the horror stories of corporate raiders who come in and buy a business and then fire everyone. That also is not our approach. Because they care about that. These employees, in many cases, if they're not family members, have become family members because they've been part of this business that they've run for years and years. So they care about what happens to those people. So we'll talk about that and then we will talk about the process. If we were to proceed, here's what you can expect. We're going to sign an NDA, we're going to do evaluation. We would kind of give them the step by step processes, what to expect in that and we try and be pretty upfront. Look, selling a business is going to be taxing, it's going to be difficult, it's going to be time consuming. You're going to be frustrated from time to time. Just really trying to lay the groundwork for what they can expect if they continue to take the steps forward with us so that there's not big surprises, there's certainly going to be surprises along the way. There's no way to avoid all of that. But just so that they can get a sense for what it is that they might be stepping into if they were to do this, so that they can walk in and make decisions with eyes wide open.

Cool. So basically you kick off this meeting with an overview, introduce your company and then get into a bit about your actual approach. And when you mentioned preserving some of the heritage of the company and things like that, it sounds like you get into your overall process. If they're generally interested in here's a process, there's NDAs involved, valuation, what that looks like and start addressing some of the concerns early and also setting expectations. This is an easier walk in the park. You're not going to just hire a couple people to do it. You're going to have to spend a lot of time and effort. And then I guess in terms of what you're looking to learn, you mentioned some of the post close is this management staying this person's going to be around because that's important to you. Is there other things that you're looking for at that point? I know a lot of chatter around culture and people start talking about that. Is that something.

I mean not really. I mean at that stage and it's hard to assess.

You just thought was a complete asshole and was like we're not going to.

Get well yes, we definitely have had that. We've still gone ahead and done those deals by the way. But you can sort of assess certain things early on from that perspective. But in terms of the broader employee base, we have pretty limited access early on so it's a little hard to evaluate. We do look at. They'll take us on a tour of the facility. We just visually observe it. So you can glean a fair bit of information by just walking through someone's garage. So how organized is it? There are certain safety protocols that we follow. Being a large company, obviously you want to mitigate your risk. And then there are some regulatory things that are technically not optional. Some people don't follow all of the rules because they either can't afford to, or it's something that they've had on their to do list, but they've never gotten around to. So we'll look for a few of those things. Just early on, are there some red flags that may not be things that we would necessarily say, oh, we're not going to do the deal because of this, but also we start to become aware of what are our risk factors, and if we were to be able to complete a deal, what would be the things we would need to really pay attention to as we think about integrating a business and mitigating our risk? So if we can do a cursory walkthrough of their facility, maybe they'll take us onto a couple of buses. You can start to tell a fair amount about how someone runs their business when you look at those kind of physical manifestations of their business. And we'll talk about their customers, we'll ask them, who are your key customers? How are your relationships with them? If they'll share information about kind of contract tenure. And it all depends on what they are willing to share. But if we can start to get a sense for how concentrated is their revenue, how secure are the revenue are their customer relationships, how long have they been operating for the school district or for the transportation agency that are their key customers? We'll start to get a little bit of a sense about what we're dealing with and in some cases, really try and validate. If this is a business we really liked, now that we've had a little peek under the hood, is it still a business that we really like?

Makes a lot of sense. Then when you go through that process, you're having this conversation, you're learning about them, essentially building up your level of confidence in doing the deal. Then you sort of say, hey, let's formalize this a little bit before you start really putting an offer. You want to start looking under the hood. And that's probably when you get an NDA. I already got a request here if you would share your initial diligence request. When prospecting, do you start putting that together at the same time? Here's an NDA. Here's initial diligence list. Or is there a certain order you follow?

Yeah, it depends. But in many cases, we'll send that NDA, we'll get that through the legal rounds, we'll get it signed. We have our form, we prefer we use our form. There's a few things in there that we like to make sure we have in the NDA. And then as soon as we get that back and it's signed, we then do send our list of kind of that 15 things that we're looking for in terms of evaluation and then they'll kind of set about getting those things back to us and then we'll start putting a model together as soon as we start getting information.

Yeah, those 15 things memorized, I sort.

Of mentioned them earlier, but let's see, this is a good quiz for me. So tax returns, last three years, financial statements, ideally those are internally produced and in Excel because that's much easier for us to work with in a model scenario. Audited financials, if they have them, a fleet list. Some people get a little skittish on this one. But an employee roster, even if they anonymize it, that's helpful. Their benefit package, property details, address. Really what we want to know there is either do they own the building or what's the rent? If they own the business and the property, what do they charge to the business or what do they think a fair market rent is? We'll ask them for. And here again is where we have to sometimes translate. We'll ask them for normalizations or expenses that run through the business that wouldn't be considered ordinary course. So honestly, we've seen everything from boats to planes to personal cars to all sorts of things that run through these businesses. Or they pay for grandma's insurance and suburban. So anything along those lines that would not continue. But I'm not eight or nine there. Oh, insurance. We'll ask them for details on their insurance. Not the policies themselves per se, but we will ask for some insurance details. There's a couple of others, but those are the big ones.

Those are definitely helpful when you do that then. Now you're going into putting this in your hands and doing valuation model.

That's right, yeah. So we put together a 10 year model we project on the business. Well, one of the other things is if they have a budget for the current year, if they have a longer. Most businesses don't have this, but if they have a long range plan, a two or three year long range plan or a long term budget, we would ask for that just to get their understanding of what they think things are worth. Oh, the other thing we ask for is the customer contract. So if they have customer contracts, we ask for those so we can review those because that'll help us build our revenue pretty detailed. And so, yeah, we put that model together and then we calculate our own internal return metrics. We do more or less a DCF and then come up with what we think the business is worth based upon the things that we're seeing. And in that we're needing to make assumptions, maybe we have some follow up calls with them. If there's some clarifying questions they may be able to help us answer. So there may be a little bit of back and forth in there, but eventually we arrive at a number. Honestly, at that point it becomes a little bit more of an art than a science. If we think the number looks like something that based upon the conversations we've had, looks like something we think someone would bite at, we'll go ahead and figure out the best way to deliver an offer. But we'll put an offer in on the table. If we come up with a number and like, look, we had to add all these expenses in because when we toured the facility we saw all these things that were wrong with the business. And so we've assumed x million of dollars a year in additional expenses and we just can't make the number work. Then we have to decide, okay, how do we want to go back to the seller and have a conversation either about, look, we've run the numbers, either here's the valuation or in some cases we may say on review. It doesn't look like it's something we're going to be interested in. There's a range of outcomes that come from that stage gate. But eventually we get to a number and then we really have to decide what do we want to do from.

Got it. My friend Jeff Daroche is asking, do you tend to do asset or share deals in your market?

We do almost all stock deals. The reason for that is a couple of fold. One is we want the customer contracts. And so you can do an asset deal, but then you have to go through and get all of the customer contracts assigned to yourselves as the purchaser, which is in most cases a showstopper. It's a royal pain in the butt, a long term process. Plus then you open up the risk of someone saying, well, I guess if I'm going to sign the contract, maybe there's a clause in there that they'll just take it to RFP and then it shakes the business loose in any event, and then the value of the deal is significantly degraded. So for that reason we do stock deals. That way we get everything and then employees. It's a big process for us too, especially in businesses that are a little bit larger, where you have 4, 5, 600 drivers on a school bus business, that's a big effort to try and between signing and closing, to go ahead and hire all of those drivers and go through an open enrollment and do all the things that you need to do. At least that we want to do in order to bring someone onto our payroll. So it's much easier for us to take the stock, bring the employees over. We can leave them in the legal entity that we've purchased until such time as we're ready to fully integrate, and then we can either bring them into another legal entity or do however we want, but we've got time to do that. So there's some just logistical things that make it easier for us to do stock deals. Obviously on the flip side, we're then being very careful about the liabilities that we're taking. And there's a lot of diligence that we'll then have to do on the flip side to make a stock deal make sense for us. But I've done almost 30 deals. We did two asset deals out of those deals.

Yeah, it's interesting your considerations that you put in to actually move it to doing a stock deal as opposed to an asset. And the other question Jeff had here was, do you employ earnouts?

We've used earnouts. We dislike them, but in some cases that's one lever we've pulled to close the value gap. So we put $15 million on the table and the person thinks their business is worth 20, we'll engage in a conversation. Okay, well, let's understand why you think that. And if someone, if it's the right fit, if it's the right person, if they have the right level of motivation, and we feel like we can reasonably put an earn out package together, we'll use that. I will say that invariably our earn outs, as well as we've constructed them and as much thought as we've put into them, haven't always ended up in litigation, but almost always end up in some sort of dispute with bad feelings involved at the end. Would love to hear if someone's cracked the code on putting together a good earn out, but in our experience, they've just led to disputes. In a couple of cases, they led to litigation. Look, they helped us get the deal done, but we've certainly paid the price down the road. When it's come time to deal with the earn out and the calculation and the payout, I think that'd be a.

Good roundtable discussion and see if anybody out there has actually successfully figured out how to use them. So you go through this valuation, said, hey, here's where we come up with a number and you put together another intent.

Yeah, we'll do a letter of intent in some cases. And we just recently had started doing this more and more where as opposed to just sending them the letter of 10th that's full of five pages of legalese, we would again pre Covid, we would schedule a face to face, we'd fly out and we basically put in front of them a simplified, what you might think of as a term sheet. And we kind of a one pager and we would say, here's the EBITDA we arrived at, here's our 10 year sort of outlook on the business. Here's the number we arrived at, here's the math to get you to that number. We'll tell them what that EBITDA multiple looks like. Based upon what we're seeing the EBITDA in the business and the value we've come up with. We'll talk about key terms and conditions around that. So for example, we don't buy the property. If the property is in the business and the owner also owns the property they operate from, we look to lease that back from them so they keep the property and we lease it back. So one of the conditions is that we can successfully come up with a lease arrangement on that property. There's a handful of other things that'll be bullet points on this kind of simplified term sheet. So we'll walk them through that. Some cases people will throw up all over and say this is offensive and whatever dies there. If they respond to that well and the dialogue goes well, then we will then send them and their attorneys the formalized LOI that has all the points in it and the exclusivity period and all of those things spelled out in legal terms. And then we'll deal with getting the attorneys involved on that as a second step. But our first step more and more started to be let's sit down and have a face to face conversation and really walk through the key points of this in plain English so that it's not confusing.

Got it. And then you get to a point, may go back and forth, I guess outside of price. You mentioned a couple of the terms, but there are other specific negotiables that are important to sellers outside of the price.

I mean really comes down to price they'll talk about things like a couple sellers have brought up. What are you going to do with my employees? We're never going to work rep or warrant that. We're going to do certain things with certain employees we will talk about. If there are key employees we'll talk about. One of the terms we want is that we can successfully come up with employment agreements for the people that we want to keep. That's a couple of people, that's one or two, three at the most, key individuals at the company that we want to make sure we get locked down. Those are the main things that we'll look at, getting on paper and get really clear understanding before we sign an loi.

Got it. You go through this process, you're going to agree on an loi and then from there you're moving into confirmatory diligence.

Yeah, we go straight into the meat of diligence. And again, we've hopefully if they're not represented or underrepresented, we've done a good job of prepping them for what that looks like. Our due diligence list has about 150 items on it. So once we've agreed to an LOI, I then send that to whoever they've designated, whether that's themselves or maybe their controller or some other person in the entity who's going to be the point person to manage the document and the follow up flow. I will send that to that individual, we'll set up a data room and we'll get started in getting those things populated.

This where you see deal fatigue and burnout sit in?

Yes, absolutely. I mean even the best we've done and the most prepared sellers, the ones who are the most organized, that first round's usually not too bad though. Even the ones that have done a great job of responding to those 115 items and have provided the preponderance of the things that we want. Where the fatigue starts to set in is once our Experts, once our SMEs have looked at that and start to ask questions and there's the inevitable. Okay, you showed me this document, I now have this question. Okay, you answered that question. Now as a follow up, I have this. Once you get into that back and forth. Yes. Then there, yeah, almost invariably there's a point in time where we get that phone call. When are you guys going to stop asking all these freaking questions? And they usually don't word it quite so nicely. So that definitely creeps in. There's no doubt about it.

Any tips around that? Because it is a Common issue and just a perspective. You went from 15 initial diligence items to 150 and then on top of it you have all these corresponding back and forth. What advice do you have for either side?

Well, one thing is, and I stumbled into this, but for a number of months had used a contractor from a firm I was familiar with and he just happened to be this guy. And I'm not even sure if I could pinpoint what it was, but almost every deal he worked on, I would get a call from the seller after the deal was completed and they would just rave about this individual. I think what it was is they were just a nice person and they were patient and they weren't pushy and they spoke in plain English and they didn't make them feel second rate or less intelligent or whatever. And they just were really willing to sit down and maybe explain something again or had a little bit of a soft touch in terms of like follow ups. Hey, a week ago we asked you for these five things. You still haven't provided them. You can be a real jerk and ask that in a particular way, or you could have a little bit of a white glove soft touch approach and kind of coax that out of someone or really come with a little bit of a softer touch in terms of how you approach that follow up. I don't really have to describe it. You get a picture maybe of what I'm talking about. But they did a great job of really making the process comfortable. I think the other thing too is just being organized. The worst thing you can do is not follow through on timing commitments. If you're going to schedule an on site due diligence call or meeting for a fleet inspection or for a property inspection, or for financial due diligence, whatever it is that you're coming on site to do, follow through on the commitment. If you say you're going to be there, be there. If you're going to be there for an hour, be there for an hour. If you're going to look at 50 buses, look at 50 buses. Don't say, hey, can I look at five more? Hey, while I'm here. Really be mindful of how you are approaching the sellers and respect their time and the fact that they're running their business day to day and also accommodate all of the things that we're looking for. I think some of those just common sense things that we do lose sight of really play a role in terms of keeping sellers engaged in a positive way in the process.

Got it. So be organized and be Patient don't.

Ask the same question twice. I mean, that seems like it would be obvious, but I can't tell you how many times we've been guilty of it. And I can't tell you how many times I've been on the seller side. And people ask the same question five ways, even if they slightly word it differently. That is incredibly frustrating to answer those questions over and over again.

You ever used a tool like Deal Room to help you manage the diligence process?

Yes, I have. Not yours in particular, but yes, those tools can be very helpful. And really what can be helpful in terms of managing that? I mean, look, you can manage documents and you can find ways to manage documents, that's one thing to solve. But if you can manage a back and forth in terms of follow ups and questions and those types of things, that is really, really helpful and that can really cut down on the frustration and the deal fatigue that starts to creep in.

Awesome. Somebody from Dilram's gonna call you, by the way.

Yes, I'm looking forward to that.

Let's switch over. Let's get into what's the best humanistic approach to working with a private seller. You know, what's the mental and emotional prep entail?

Yeah, I mean, so we touched on this, I think being aware, especially the businesses we were buying. And this may not hold true for everyone who ultimately ends up listening to this. But as I mentioned, these are in many cases family businesses. They've been run for at least a generation. In some cases we were buying businesses that have been run for 50, 60 years, 70 years under the same family name. So they're interwoven into their daily life in every facet, in every way you can imagine. I think just really thinking through that and being aware of that. Obviously it comes down to reps and warranties and deal points and valuation and integration time. All those things are very important. Mitigating your risk is critical. But we've at least felt we're most successful long term in terms of really creating value from a deal. When we've respected the fact that this is someone's baby and during the process we treat it as such. And then even more importantly, after the deals close, we continue to treat it with the dignity and respect that it deserves. Because people ask a lot, well, what happens? And what about my legacy? Or if they don't ask us, I'm sure they're thinking about what is their legacy, what do they leave behind? And so being sensitive to that, I'm not saying you have to kowtow to every desire and every whim that a seller might have. But at least being respectful of it, understanding it, being patient, and talking through some of those emotional pieces can really help you, especially if you're looking to keep a seller on board. Post close can really set the foundation for a lot of value creation. Post close, Otherwise it could become very contentious very quickly. They don't feel like they can trust you. Then the process really does break down in terms of even negotiating the more logistical things or ordeal points or reps and warranties or money, all of that can become much more contentious. We've had a lot of success not getting into those contentious arguments and debates and issues when we've, I think, been real sensitive and done a good job of being sensitive to the emotional feelings that someone's feeling when they're letting go of such an important part of their life.

We're talking about empathy. Yeah, you know, it's easy to say that word, but I feel like it's more challenging to actually apply it. And I'm curious, what are your thoughts on that in terms of mindset or just really being able to practice it as opposed to just use it as a word?

Well, look, I think empathy can be trained, but I think inherently people are either nice people or not. Maybe that's a little bit of a limited worldview on my part. So I'm open to criticism on that viewpoint. But I do think, I mean, there's.

A lot of consciousness that you could be conscious about it because we could be a nice person, but there's all this inherent nature to be a little bit more self driven.

That's right. Yeah. And I think it's really easy to get wrapped up into the dollars and the cents and the spa and again, all the things that have to get done to do a deal. But I do think even the person who's maybe not the most empathetic, if you can at least continue to remind yourself, hey, this is an emotional process as much as anything else for the seller. I think it will help make the process go smoother and will give you a better chance of having, I think, a more positive value creation outcome as opposed to something that descends into chaos, into contention, and things that are a little harder to harder to deal with.

Makes sense. Going through all these post close activity, what's the degree of integration you guys typically do?

Yeah, so like I mentioned before, we don't necessarily always integrate the brand, but we do bring them onto our safety platform. Our safety culture is very important to us and we let people know Right up front. Some things are going to change in your business. Some of the norms and things that you've done in the past, whether they're right or wrong, we're not here to indict you on those things. But in almost all cases there's going to be safety practices, there's going to be safety technology that they don't have, that they can't afford, that we can't afford, that we are going to bring as part of our process. So we definitely integrate from a safety perspective, we bring our safety platform, our safety technology into the vehicles that's very important to us. If they are not up to snuff on regulatory compliance items, whether that be labor or fleet management or anything else you might think of, we will certainly be bringing them into compliance. We do integrate the back office to a certain extent. We'll bring them onto our benefits platform, which in most cases, especially for some of these smaller family owned businesses, our platform is going to create value for the employees. That's a better platform for them to be on. So usually there's pretty little resistance on that front and we'll let them know like these are going to be the few things that are going to change from a back office perspective. If you have four payroll people running around, we're going to eventually consolidate you onto our payroll platform. We may not need four payroll people at the local site. That's not to say we would get rid of them, maybe they're repurposed. But we will bring some of the back office stuff into our realm. So there's quite a bit that we do integrate from that perspective. But we do try and strike a balance. Look, there's something we've learned from sellers. Hey, we do it this way. And there have been some practices we've adopted from a seller that we've run through our entire organization because the way they were doing it was just better. So we used it.

That's good. You're open minded about that. What usually happens with the leadership of the private seller? Do you bring them on? Do you spin them out at some point later? Do you have consulting relationships with them? What does that look like?

Yeah, it depends. A lot of these sellers that sort of fit into the, this is their retirement vehicle. Maybe they stick around six months to a year, something along those lines on a consulting agreement. And really what we're looking for there is them to help with some of the change management, kind of the bigger change management pieces. So we'll spend a lot of time with them, transferring customer relationships to our Management, whether that's someone that's been nominated from inside the company we bought or whether that's someone we bring in from our side, they'll help transfer those key relationships, and they will help do a lot of the talking to the employees. Look, I know that you didn't used to have to do this thing, and now that we're owned by National Express, you have to do it. So as an example, we have some bus technology that requires the operator to take a wand and they walk around the bus to certain key points on the bus and do a little bit of a safety check. Maybe they weren't doing that before. Now you have to do it. So the seller has a position of respect and authority with these folks and can be a change agent. If, again, we can get them on board, and we work very hard to do that, they can be the kind of person that can say, look, I know, Jim, you haven't had to do this for 20 years. You've driven buses for us. But it's important they can help be that kind of talking, that mouthpiece for us in terms of helping assuage concerns or doubts or whatever. And so we do at least try and keep those folks around for at least six months, maybe a year. In some cases where the seller doesn't fit into the I'm using this as a vehicle to retirement. In many cases, they're excited about coming into our organization and being part of a larger organization. We have seen some of our sellers that were more in that younger category have then gone on to have really successful careers with increasingly more senior roles inside the organization. It's been a great opportunity for them. So not only did they monetize the business and made a good chunk of change on that exit for them, they then created a second career for them inside of National Express. And it's been really nice to see that. So we've seen that and then everywhere in between. It just really depends on the individual desires.

You ever have a seller get his check and poof, disappear?

Yeah, it's happened a couple of times. And look, we've had a couple of sellers that we've thought, boy, this could be a real key player for us. They got in, they got soured on something and it just didn't work out. And we've had to let a few of those folks go. Ideally, though, what we really like to see is if it's not going to be the seller himself or herself who continues on running that operation in the local market, that they've at least helped us Identify someone who ideally is already inside of their organization that can then become that general manager that we then look to lead the local day to day operations. That's usually the best outcome for us. It usually is not the best to sort of say, hey, we're going to tap so and so already in our organization on the shoulder and ship them out to XYZ location and ask them to run this business. If we can create that continuity, whether again, if that's not necessarily the person who's selling the business, but it's their second in command or third in command who can then rise up and be that general manager at the location that tends to be the best outcome for us. If that person's qualified and capable, how.

Can the seller help themselves?

Having said everything I've said, I'm a little hesitant to say this, but. But I would say get good representation. And when I say that, I'd say that in sort of two realms. One is legal. Having a good M and a attorney. Representing yourself if you are a seller is key. And in many cases, in fact, in most cases that probably means that's not the family attorney who's represented your family in everything from family matters to real estate concerns to for business formation. They're probably just not going to be the person who's familiar with looking at an sba, understanding how rep and warranties work, understanding the workload that's going to be required for that law firm to deal with that work, to put a set of schedules together that are going to accompany the sba. And we've had it a couple of times where someone did not select the right attorney. And it really bogged down the process for us and became frustrating for our attorneys because then our attorney was then having to instruct and advise, which is, that's a tricky place to sit if you're an attorney and you feel conflicted in sort of telling the other attorney, well, you might want to think about this or you might want to think about that. I mean, that's really not where you want to be. So selecting a good attorney who can represent you appropriately in doing a deal I think is really key. Look, I think a lot of sellers can sell their business, especially in the right environment, unrepresented from a broker or from a kind of a financial side. But there's a lot of people out there who are very good at doing this. And again, typically this is not going to be the CPA who's put your taxes together and has done your compilations for the last 20 years. Really think through finding someone who can not only prepare you for evaluation, but can also be someone you can trust to have those sometimes emotional conversations about your concerns about selling your business and how that feels and what that looks like. That can also then prepare you for diligence and can be organized in terms of getting all of the things in place that need to be in place, ideally beforehand, before you even think about selling your business. So look, we've ambushed some of our sellers by being that person who's cold called them and they got their head around it and maybe the process moved really fast so they couldn't be really mindful about some of these things. But if you own a business and you're thinking about selling it, I think you can really help yourself by being mindful, being prepared, surrounding yourself with good advisors and taking a measured approach to doing it will be the best outcome for a seller.

Find advisors that have M and A experience. I think LinkedIn makes everybody pretty accessible, so it's hard to do that.

That's right.

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

Well, I've seen a few crazy things. One that comes to mind that was speaking about attorneys. This one sort of falls less in the camp of the attorney was ill prepared to be a deal advisor to this business, but sort of flipped more over to the other side who tended to be really proud of his M and A track record and honestly was first and foremost was a very tough negotiator and good for him. I mean he helped his client get an outcome from that perspective, but was also just a real jerk. And I remember on a number of occasions, and I don't know that I've ever hear about this, but you hear about unprofessional things but literal shouting matches on the phone with us, sort of our representatives, our attorneys. I was on these calls and then his client and then obviously this attorney was on the phone literal, just screaming at us through the phone about one thing or the other. And it tended to be positions that we were just not willing to hold on to generally around reps and warranties and just launched all sorts of if they weren't personal attacks. They certainly bordered on personal attacks around just our unwillingness and just how horrible of people we were in terms of what we were requiring. And I just don't know that for seeing anyone literally shout on the phone that way like at that full voice just shouting at us. And we would just get off the phone after these things and just have like it was a mixture of just comedy and then like shock and awe that had just like occurred. So that definitely sticks out as just something that was really crazy. I don't know, maybe I'll see it again in my career, but I suspect I'll never see anyone that vocal and angry about certain things that were going on that honestly were not that unreasonable. We just weren't willing to fold on certain positions. And he didn't like it.

Right. That's interesting. Shouting doesn't seem to work anywhere.

Yeah, I mean, it definitely did not move the process forward. And this was one of the most painful deals we got through. We got the deal closed. And what's also really interesting about that is that these sellers fit more into that category of younger sellers. Both of them, they were brothers and had inherited the business from their parents. They still work for us and they have been great employees. And the one, in fact, the one I don't stay in touch with as much, but the other one, him and I like, overlap in terms of, like, personal interests. So we've become like friends outside of work. And so it's just like on the heels of it, it's ended up being a really good deal. This was a good deal for us. It got us into a market we wanted to be in, but the actual doing of the deal was one of the craziest and one of just the most painful processes we went through for sure.

Well, this would be great. My daughter is watching. We're going to have a conversation around this. We talk about this occasionally. Responding with your emotions versus staying calm and using your logic. Hey Isaac, I appreciate this conversation and all the experience you've shared with me today.

Yeah, absolutely. Thanks for having me. Looking forward to hearing more from other people you have on your podcast and consuming great content from M and A Science.

My pleasure. Thank you.

All right, take care.

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