Building your M&A Muscle

Building an M&A function from scratch

I was brought in by one of our private equity sponsors seven years ago or so, and it was just a key piece of the investment thesis for the private equity sponsor that there was a big opportunity in the space.

Our management team thought that, and we hadn't traditionally focused on that. We wanted to see if we could diversify the end markets that we're in a little bit more, both domestically and internationally, and also just the overall end markets that we're in.

We were in a few pieces of entertainment, film, and television streaming and wanted to get into other entertainment end markets. And so that was like a big growth mandate we wanted to execute.

From the top, we wanted to develop our overall growth strategy and where we wanted to go in the next several years. And so we worked together as a team to map that out and what that would look like. M&A was a key enabler of how we go about executing that. So once we have those opportunities that we want to go after, we can narrow down where our focus is from an acquisition standpoint and strategy.

You will want to align your M&A strategy with the overall company objectives and growth strategy. And then, you can start building consensus and alignment on that strategy to prioritize it across the right functions.

If you're doing this broadly speaking, you need to think about:

• What are the key goals you want to achieve? 
• Do you want to diversify the end markets you're in? 
• Are you filling a product gap? 
• Does your company need to address a competitive threat? 

All of this will help narrow down critical evaluation criteria for each opportunity and help you build your pipeline. So, you think about:

• How well does the company fit in or enhance your company's overall solution? 
• Are there cross-sale opportunities? 
• How close to the core is it? 
• What is the integration going to look like? 

Those are key questions and things that can help narrow your pipeline once you have that strategy and focus.

M&A was new for us when I joined. We've closed nine deals in the last seven or so years. That ranged in size and fit any type of deals. We've done some smaller product tuck-ins and acquihires to larger, more transformative type deals. But we hadn't done any kind of M&A prior to me joining.

We evaluated a lot more opportunities as well. We typically try to close one to two deals a year depending on the types of deals we're looking for.

Steps to building an M&A muscle

You have to determine with the team what this company's growth looks like and the key growth priorities you want to achieve in the next short-term and long-term goals. For us, we wanted to diversify our entertainment end markets, as an example.

• How do we do that?
• What can we do organically? 
• What would it take from a product standpoint for us to do that?
• Can we accelerate that through M&A? Which is where we ended up focusing? 

All of those questions need to be answered and at least discussed as a team. And in the best-case scenario, you have alignment on where you want to take this over the next several years. And then, you can have this team focus on specific areas.

My team at corporate development was tasked with in specific markets or filling these product gaps for us that we think we need to fill. In doing that, you can kind of have a multipronged approach to get to where you want to be because M&A is not always going to be there. 

It's hard to identify companies. Some companies may not be for sale, so you really have to start getting out there, building relationships, and finding the targets and start to see if you can evaluate them and how good of a fit they're going to be.

Do you have the right teams that you would have? Or will you have to go and add to that team to really make it successful? Deals come up, whether they're in bank or sale processes that you may not be ready for, but it's a good opportunity and you have to just go out and do it.

I've been in a lucky position where we haven't had any issues with financing deals or finding capital for that. But if you're going out and building something from scratch, you need to make sure that you have capital, that you can go out and figure out how you're going to close these deals so that you have that alignment as well.

I've talked to a ton of people in the space, in corporate development or M&A in the corporate side that haven't been as fortunate, and they've had opportunities missed because they haven't thought through how they're going to go out and finance deals. They found them, but they haven't been able to actually close them, and we never want to be in that position. 

So we've built a good relationship or just a reputation of once we find a deal, we have the strategic fit, organizational fit and alignment, and we've agreed on a headline price. So we've been successful in closing those deals.

It's also about a conversation with our management team too. Together, we have to think about what we can take on? We have to have some realistic discussions. There's the day job, which is growing the core business, and we need to ensure that we can successfully acquire and integrate these businesses or at least develop an integration approach and strategy.

Sometimes you have just a tuck-in type deal and you won't fully integrate. Or sometimes you may say you're not ready to integrate, but this is what we're going to do over time. But you need to make sure you have that discussion and alignment across the board, at the company and then eventually with your sponsor as well.

The strategy

In terms of how detailed I get with the strategy, it depends on the situation. I've gone very detailed and done the big market mapping on the private equity side. That's where you may not have much of a strategic focus or where you're trying to figure out where all the opportunities are and everything gets thrown under the sun to see what sticks.

There's not a right or wrong answer for doing that, but the more focused you can be, the easier it is to evaluate opportunities as they come up because we get opportunities that come to us all the time. And you don't want to spend time on things that you know aren't going to get anywhere. It helps you do your job better and more effectively if you have your strategy and know what you're going to do.

Of course, there will be edge cases out there that will come up, where you want to ask if this is something you really want to go. There's not a right or wrong answer there. I like to have a real, narrow focus as I can as long as the opportunity is there. Some M&A deals unlock new markets for you that add a whole new ecosystem of M&A opportunities for you, and those are great. We certainly have done that, and there's no right or wrong answer there.

You can sometimes be creative on a scene if something has a real strategic fit. However, you really have to think about, especially for more significant and more transformative deals:

• What does that deal do to the combined company?
• What does that form your company into?
• How will you pitch yourself and your business to future buyers and investors going forward?

Especially once you get into those bigger deals, you need to know what that does to your business and how you will think about the company that you are in. 

Tuck-ins are easier if they're just smaller tuck-in type deals, you're adding a product to your stack or something, and it's complimentary. There's a cross-sell revenue opportunity. Those are easier because they still fit within the core of the business. It's those ancillary markets or products that you're looking at that could potentially change the type of business you are, where you have to start thinking about that from a strategic standpoint.

There could be deals we come across that'll get us to rethink strategy in general. And the strategy is fluid anyway. You have to think if this is the right strategy. We do it every year for us, and we believe these are the growth priorities, these are the company's strategic priorities that we have across the company for the next 12 months to get us to where we think we want to be and what we need to achieve to make sure we're on track for that.

We revisit that during the year, and then you need to dust that off and talk about that as much as you can and make sure that you're focusing on the right things. Then, as new opportunities come up, then you can challenge yourselves together as a management team to see if those really are the opportunities that you want to go after.

Process and execution structure

You always figure out and learn things ahead of time. There are some basic fundamentals. For us, especially if we're doing an inorganic outside of a sale process, where bankers have been hired and we've established a relationship, and we're saying this is a potential strategic fit. We do a pretty quick high-level analysis from a financial perspective outside of the strategic analysis and fit and try to figure out what we think the company is worth for us.

We make some assumptions on that and look at the deal and size, and what we think the synergies will be, whether the revenue or cost synergies that we'll be able to execute and try to come up with internally. And we have a debate as a management team and talk about that and focus and talk about it with our board and sponsor, and come up with a headline price and structure.

Assuming we can get to that with the seller, then we'll move on to a more detailed confirmatory type of diligence before moving on to a closing. We like to get to at least a price and if things check out in diligence, we're comfortable closing on a price, so there's no surprises for a potential seller in terms of what we're going to do post-agreement of those terms. 

The ones that you can originate can always go better. Establishing that relationship and culture fit at first takes time. Assuming you're through that process, which can take many years even, we will have an NDA in place, we'll get some basic financial information, and at that time, we should already have established the strategic fit and rationale, and have general alignment across the company on that.

We'll do some basic financial modeling and structuring and things like that, figuring out how we think we want to go back to the seller regarding a price. We'll do that as an indication of interest or LOI. And then, we will typically sign that. We'll want some exclusivity to make sure that we're going to start dedicating some resources and hiring third parties to help legal, QofE, tax structuring, and those kinds of stuff. 

That will be confirmatory diligence over an expedited period, and we'll pull together a purchase agreement and start negotiating that and moving toward the closing. We move quickly once we agree on the high level key terms to get to that to an actual closing. And we would want to do that in the form of a signed exclusivity provision in the best-case scenario, and sometimes, we'll just move towards it without that. 

To know who to get under the tent before getting an LOI signed, we will have more meetings diligence-wise during that period, and that will include the key top leaders from each of our key functions. So, I'll work closely with our CTO, CFO, Head of Product. In addition, we'll have executive meetings on a weekly or biweekly basis, depending on how quickly the deal is moving with other key functional areas.

Legal and I are close on all the deals too. We'll pull into HR if we're talking about, depending on the structure of the deal, but if we're having positions and organizational structure changes we'll be partnering with HR and talk about 

• how that's going to fit
• how we're going to put the company in place
• where they're going to stand in the company
• how the reporting lines are going to work

That's a real collaborative cross-functional effort with the leaders. And we'll have a bunch of those key leaders, including sales and marketing in some of those diligence-type meetings where we really dig in, have management style meetings, where we're going through the business' key findings out of diligence and all that.

We do that post-IOI or LOI once we've agreed on high level key terms of the deal, including our headline price and valuation. Before we get a signed LOI, the executive team is under the tent at that time and sometimes their number two or three, depending if it's like a heavy tech-focused product-based deal. We'll want our team to think where this product is going to fit into. We'll have that team very involved on the front end as well.

And then we have a legal person there too. So my GC and I and his team will be attached to the hip throughout the deal. Same with our CFO on all of our deals. And we'll hire third parties to help us with confirmatory type diligence for quality of earnings, tax structuring, and legal. Then once we get assigned, we get a lot more of the functional lead and a lot more folks under the tent. 

Every deal's been different. We want to move quickly, and we also need to make sure we get all of our work done. So that's why as long as we know we're in alignment with the seller on price and some of the key structural aspects, then we're focused on the diligence because we pretty much have a good pulse on the legal documentation and all that. And we've been able to negotiate good deals with that and haven't had any of those things come up in our deals that have prevented us from closing.

So, getting to that headline price and general structure has always been the key. There are some things when we have management teams coming in and fitting in with our broader organization where we need to have conversations from a conversation perspective and reporting lines that we will be very focused on. 

It's almost more of a legal documentation negotiation that we need to have as part of our deals, then that will come in that post-agreement on the headline price as well. We don't really need a signed LOI to go to that step. We just want to make sure that after time, we have an agreement on those key terms, including the valuation and we're going to be working towards a close and confirmatory type diligence.

Critical things to consider before signing a deal

First, we want to ensure that the company's financials are what they say they are and that we've reviewed them, and we have third parties and internal folks that are experts in that. We want to make sure we're buying what we're buying and that the financials are what they represent. That's one of the biggest pieces. 

We have our technology team depending on the type of deal. We'll have our team look at the tech and some basic key metrics around the technology, the product stack, architecture, etc. And occasionally, we'll have some third parties come in, depending on the bandwidth of our team, to help us with that. But they're leading that. Our tech teams are leading that.

When we have a target and have the acquisition conversation, we have done much front-end work before. We've done phase one of diligence before we deliver our first indication of interest, whether that's in a short letter talking about the value, general structure and critical assumptions, and what we need to do in our next steps to get to a closing. Or if we do it in a more formalized LOI, which has potentially some longer form type things that you would see in a term sheet that you would use as an outline for a purchase agreement.

So in most cases, though, it's a more informal, non-binding indication of interest where we just talk about those key assumptions. We talk about value; we put a number, not a range, on the valuation, which we negotiate. And once we do that from there, we move into phase two or three of what you would see in a banked process, moving towards a closing and confirmatory diligence.

We still do many things you would see in a more formalized process. For example, we would have a management meeting. We would have the management of the sellers and the seller meet our management team. And we have—ideally, in-person meetings going through key diligence, analysis and work and a diligence-type discussion.

We would talk about our post-acquisition integration strategy and philosophy and make sure we're aligned internally as a team and externally with the seller in terms of:

• What are we going to do together? 
• How is this going to look both organizationally and going through and taking advantage of the opportunities that we're going to have by being together?

That depends on the type of deal that we can go into. We've brought in people from every single organization at multiple levels where we have full-day or multi-day integration diligence meetings. And sometimes in a bank process, you're not allowed to do that until you own the company. So that just depends.

But we move in those non-bank deals pretty quickly into confirmatory type diligence and do QoE, and all the work. We hire third parties that we want to do talking to our financing sources and get that teed up as well if we need to. And we're also giving board updates and other types of updates so everybody's aligned and know where we are in the process.

We have that pretty buttoned up and try to do that quickly so that process never holds us up to a closing of a deal. That's why you do a lot of courting and upfront work in those non-bank deals. So, once you align on that price, valuation, and general structure and philosophy, it's really confirmatory. So you can move quickly and there are not many outstanding controversial points. At least minimize those so you can get to a seamless closing.

Hiring people for the M&A team

Finding people for the M&A team is a challenge. We're not hiring right now. But in the past, we have hired for shorter-term integration-type roles.

But if I were hiring right now, I would be looking for skill sets that would complement mine and more of the transaction or M&A strategy area. Consulting-type things. If we're looking to dig into some new growth opportunities and new markets, I would love somebody to help assist in that, who is an expert in doing that kind of work or building out more detailed sales growth strategies and things like that.

The first hire for me was after we did an integration. We did a big acquisition and we stood up a new integration program. That's where we needed somebody for a short term role to come in and help with the day-to-day cross-functional work from an integration program management strategy. 

I'm a department of one right now. I have great partners across all the functions that we work with. So if I didn't have that, I don't think we'd be as successful. I have some great leaders across the key functions that I work with and we work really well. 

We've done many of our deals and know how each other works now. I'm lucky in that sense, and we have good partners on the private equity side that can come in and help with any kind of work in more detailed analysis that we need to have. And they're very hands on and super helpful, so I think I've been able to pull resources to help in that sense. 

We haven't built out a team at all here yet, and we look at that. As we've gotten bigger, we potentially need some more strategic junior resources but at this point, we're not looking at that.

Building the diligence muscle

In diligence, a lot of people don't have M&A experience. So I've been able to work with our team on what I'm trying to understand and better understand.

• Is it a growth opportunity that we have? 
• Is there a cross-sale opportunity? 
• Do the customers that we have here have the same problems as the other customers?
• Is there something here, or if there's not, how would we sell these as a platform together? 

It depends on what type of deal you're looking at. I like to work with our team, telling them where I would love their help and opinion on this business, their position, and their market. So often, these partners of ours and our functions, we'll have them go and talk to some of their customers and see. So it's kind of our own internal proprietary research that we're doing. So what do you, as our customers hear about companies like this or other companies in the market?

We have to do our own internal homework, and that's where I'll help them. I'll have their help. And then, on the technology side, that's just not an area of expertise in mind at all. So I'll just want them to say:

• What are the key things you need to evaluate these three things we want to look at?
• Are there other things that you want to see that would get you comfortable with what we're acquiring here? 

It's a real collaborative effort and knowing what expertise that you're bringing in and what you're going to leverage those people for to help you with that diligence front.

People alignment in M&A

I like to talk to people about the value of M&A and how that drives value for our overall company, and everybody at the senior level is incentivized to grow the business and drive equity value. 

We've seen that over time. M&A has been a huge equity value driver for our business over the period of time. And in my experience in my professional career, I've been able to give examples of that and I think once you get folks excited about what this could potentially do, I think it's a pretty easy discussion and people get excited about it.

And sometimes, product folks or whoever'll be a key person who helped have the idea or source. So there's a sense of ownership with them around getting the deal done or just what the value could do to the company, and they get excited that they were such an instrumental piece of getting the deal closed. So there's a sense of ownership there.

If you can, you can always do it with the value of equity. You can say, if you thought your equity was worth x, a deal like this could have a multiplier effect to that. So, there's the growth incentive equity discussion that you can have.

And sometimes there's just a broader opportunity, so if we get this company, it will go in your department under you, and it opens up a bigger growth opportunity with a new organization or a new department or something like that for this leader. So there's a professional growth aspect of it as well. 

All those things help. At least for us, everyone at our company just has a good culture of just working hard and wants just to do the best thing for the business. So I've been lucky that I haven't had to have many of these kinds of conversations. It's always been like, how can I help? So, there hasn't been much resistance to doing deals like that.

That can help if there's resistance to M&A. I haven't had to do that, but I think always talking about the excitement around what this does to our business excites people too. So it doesn't have to be individual. That's a lever you can use.

Building the integration muscle

Integration is tough. Usually, depending on the deal, we've done a lot of banked deals that are moving very quickly and processes, even if we've started sourcing them proprietarily, and eventually they go into a banked process.

Which is fine, it puts us in the driver's seat because we've been talking to them. We have a relationship with management teams typically, so we've successfully won those deals. But the integration side is really tough, especially for much larger deals.

Some of the back office stuff is super difficult because you're talking about financial systems to integrate different technologies, CRMs, all that kind of stuff. We've developed a good program for that, but that takes time, effort, learnings, and focus. So you have to prioritize this stuff.

It's really difficult. And then, when you get into businesses where you're buying products that may have overlap or something, and part of your deal thesis was synergies around merging products or sun setting certain ones, and migrating customers, and things like that. That kind of stuff can be difficult, and there's so much cross-functional impact not only to customers but organizationally as well. Those are very difficult and can take a long time to execute.

It takes a strategy, focus, and prioritization starting from the top down to the people that will be executing that. That's really difficult integration stuff. Tuck-ins are somewhat easy. If you have a business that you're just going to buy and the strategies to keep it are on its own, that's not that challenging, but the other ones, they really are.

It's tough and most companies, at least that I've worked with, both on the buy and sell sides, and corporate development, aren't set up for that. So you have to really think about that integration strategy and how you're going to do that, set yourself up for success with a program and prioritize all the efforts accordingly.

And make sure the right people know what they're doing and they're buying in on what they're doing. If we have these two products that serve the same customers, do we keep them that way, or are they different? Are they different enough that they need to be kept that way? Or are they competing with each other to cause customer confusion? And we need to figure out what the proforma product is and how we get to that product. 

All those kinds of conversations are the challenging ones. How we put two HR teams together, two finance teams together, two legal teams together, two kinds of IT teams together, and systems and all that across those.

They're super difficult and they take time, but they're more straightforward. Even those take time to get to a good place where we have a good program for how we're going to go do those back office things, but then the more complex customer facing type discussions impacts are, those take a lot more time and they're much more difficult. That's why you often end up not doing them, and sometimes for good reason too.

Best practices when doing deals

Your reputation is important. If you're going to keep doing M&A, how you work with banks and the target companies you buy and the management teams you bring in, you really want to build a good reputation for that.

I want to have a reputation of closing on the number that we say we're going to close on, and if we don't, there's a good explanation for that. That's something that you want to continue.

You want to be the natural acquiring company for your potential targets. They want you to win the deal because when all things are equal, you want to be the company they choose as their home for their business, and we have good examples of that.

You want to have the sellers be a recommendation for you in future deals. So you can bring somebody you acquired depending on the deal type. But even if they end up not being at the company anymore, as a seller, you want to be super aligned and transparent with them and make sure that you're taking care of the people that they want you to take care of in the right way, so that you have that good reputation going forward.

Also, always get a Q of E done. Again, it depends on what you have from a financial team. We have a powerful finance and accounting arm and they're busy. So I want to supplement their work and ensure they're involved in the Q of E. But we have a real independent third party looking at it that we trust, that knows our business that we can rely on to work expeditiously to ensure that we're covering our bases there.

On these tiny little deals, it all depends on how we're valuing the company. If it's like an acquihire and we're just buying some technology and that's subscale and any revenue, you can avoid that kind of stuff.

Then, where does your focus go? Where's the concern? Is it going to be technology? First, you want to make sure, then you may want to hire a third party to look at some of the key things from a tech standpoint. 

There's always something. As long as you either have the expertise in-house, that's fine, but there's a certain level of diligence that you need to ensure you do on all of these businesses.