Conducting Effective M&A Without a Dedicated Team

‍Text Version of the Interview

Initial Exposure to M&A

Investor Relations and marketing are my initial exposure to M&A. Everyone says that with M&A they can make or break an acquisition to get the people on board. 

It's about understanding what you're working with. It really is the first asset that I look at. Who is the team? What's the culture? And that was my role on the M&A side. 

It was certainly not just to look at how we position an acquisition branding and present it to the analysts, but also how I embrace them and how we become one culture, one team. So, that was my original background and it served me well understanding that out of the gate.

How to Execute Deals Without a Dedicated Team?

It's an advantage even though it means more work for us. The team that works with me on it all have regular jobs, and they are probably a little exhausted, but it's an advantage. 

Sometimes, when there's this dedicated internal M&A group, as well as working with a banker, they get your input as someone in the company will vet and float the idea to make sure products align. But it's off on its own course. The day-to-day team that will inherit the acquisition is not really involved until it's a done deal. 

I think it's slower when there is that dedicated team and it's given to the in-house team to run with. 

Our group is primarily me, our COO, our CFO, and our head of product strategy. We know from the beginning that we're going to do this deal, and we're pregnant with it during the negotiation stage. It is our baby! We know the financials, we know the products, we know the people because we've been the ones that are looking at the deal so we can realize the benefits faster.

Deal Sourcing

Aside from proprietary deals, we do use bankers. They refer clients from time to time.

I've spoken at conferences, on panels, on podcasts and I've just grown out there. Whether it's now or down the road, there could be something, either a partnership or a deal. 

One of our recent deals was referred to us by a banker. Unfortunately, we did not close the deal at first, but a few months later, one of the founders remembered us and reached out directly to us. Maybe the timing was better for both of us this time. 

The relationship with people allows us to build our tech but then get something else concurrently that's very cohesive and works with our strategy; I'm all about it. 

I'm not running around telling everybody what we're talking to. But I think that when you're open to doing M&A, you need to talk about it.

Do you Engage with the Product Team?

Yes, and our internal team is pretty excited about it. 

When someone on the product side goes to take a demo or take a call, our mind suddenly thinks, "what is the size of this company and really what they're doing."

The timing plays a vital role; deals do not happen overnight. But we are hoping for that, especially when people come to you once you're a certain size like we are.

If someone's pitching us that you haven't got invested and built a sales team and account team, I'd still take a call. They think everything's going to align, but they've been using five, six years, and they're still wearing all the hats - HR, finance, and still the founder. This structure has gotten away from maybe what they got excited about in the beginning. 

I'm not here to help your sales, I want to build this company, but do you want to do it together? 

What's Your Strategy

I like to find out early on what's broken. I want to find a diamond in the rough. And it's very critical in a collaborative way where I'm not beating anybody up because I've also seen certain investors do that. 

What is that problem that stopped you from going alone or stopped and limited your growth? That is where I start. I think that's also a really good way to see if you can build rapport with these humans and understand their culture.

Sometimes that's part of the problem. Maybe they just haven't focused on culture or maybe the benefits aren't great and they have a lot of turnover. I always look at it once we're together; it's us. It's not us versus them. Once you do a deal, the team builds a great brand, a great company, and a great culture. 

How Do You Create Value?

It's how we find a way to work together and fix things.

I don't ever want our team having all the answers. They have lived in this business. They know what's going on and what they need. 

The more we can learn from them, the better. Even if they don't continue with the company post-acquisition. 

What is your Deal Process?

It always starts at the NDA that goes to our CFO if they're in any process. I let him handle that. He tracks the copies and looks for anything weird. He has worked with me for eight years, so he knows what we're looking for. 

Next is the first conversation with the client's CEO, CFO or Founder. I will take anyone's call; I'm not going to relegate that down to someone more junior. 

The next step is usually with our COO and our head of product strategy because we want to see what they're doing. Maybe it's not a full-on acquisition. Before we go any further, I like to see what they're going to show us. 

Team discussion comes next. We see how much they are, what's the team line, and you just start to run the numbers. It doesn't usually happen right away. We put them on a spreadsheet and do get a sense of urgency from them. 

We also tend to go probably a little quiet and do our own little investigative journalism. And then, at least monthly, we're talking as a team about what's next? Then just seeing if there's any urgency to move faster on another deal.

What Does Making an Offer Look Like?

It depends on the stage that we're in. If we've recently made two acquisitions, unless it was an amazing deal or there was some crazy reason to jump into another one, we're not rushing to do another one. We want to execute really well. So, some of it is timing for us. 

We do like to keep an eye on Companies that are still exploring their options. There's no one-size-fits-all in how we run a process or the timing, but our CFO does quarterly checking for updated financials before we might get serious and talk about what a deal looks like.

If I've gotten enough information, I would just have a one-on-one talk with the founder or CEO about timing and the deal structure. We might offer equity so they also need to know more about us. And then, we build their spreadsheet and give it to them.

We can just run some numbers on a spreadsheet and show you a couple of scenarios because if you're going to come in. If you're going to stay a part of the combined entity, or if you are going to have an exit one day, let's run some numbers and then let them play around with the spreadsheet. 

We can do due diligence pretty quickly. Usually, people are surprised we can get through it in 30 to 45 days. 

Letter of Intent (LOI)

Then, it would be LOI. Hopefully, there's no big surprise. 

The worst thing you can do is get an LOI and then spend months in due diligence, and then things fall apart because you're not as transparent as you can.

I don't like to waste my time on that anymore. I'd rather do it on the front end. 

Every single owner, investor, CEO, founder, you never know that the deal you're going to take is the right one. Sometimes you don't know for years post-transaction if it's going to transpire the way you think. So there's that fear, and I think the more transparent you are and collaborative, as long as we've got an NDA, let's go through some of those things.

That's really important. And it's been interesting even when the founder decided to walk away or at the time he wasn't right. Or we couldn't do a deal. We've remained in touch with no hard feelings with some investors.

Confirmatory Diligence 

Since you have that rapport established in the previous steps, it also alleviates some of the angst when they've got to open up and share some things. Sometimes it's mostly a lot about them when you thought you asked those questions more informally and it doesn't come out until they're legally pretty much obligated to disclose. 

So it's good to have that baseline and formally ask a lot of questions, get to know them, go to dinner, and know what's going on.

And then, once you get into it, we put it on paper. In the formal due diligence, you have to outline all these things you have to disclose.

CEO's Involvement in the Confirmatory Diligence

We divide and conquer quite a bit. So I do have a great executive team, as I said, and they kind of know the boxes they're going to have to check. 

Often, the companies we're talking to are not in the formal process, or if they are, they've got a data room setup.

We know what to look for; we always ask for disclosure, even just in a word document or if they're supplying different documents. I want to see down our list of pretty standard questions for every deal we ask. 

I want that founder, CEO to sign off on something. It's almost like an appendix or clip notes. And then, depending on what that tells me, I sent our team off to go, okay, go in the data room, or they'll hunt this down.

I'm like an air traffic controller who is looking at it from the top level. 

But then, once our team tells me certain kinds of red flags, I would ask them to bring them to me, but I'm not the one in the data room. We divide and conquer that. And then once there is an issue, that's when I'm like, okay. Let's look at this together.

How to Avoid Burnout

They do feel burnout, but we all think that this is the fun part. 

We always learn something new, and it's almost like an ongoing executive education of how somebody else structured a vendor contract or benefit plans. Not that we're stealing information, but you're always learning. 

I think more than when you're doing that, and you expose the executives to how other businesses are truly run if you're in diligence. We make it a part of our culture.

Integration Planning

We start thinking about it on Day 1. We try to think about even the people we may bring in to do more of the deeper dive, like a director of technology or someone, a product manager; we're pretty open. 

We're looking at this company, and I want you to look at this if we might buy them. Maybe there's a partnership opportunity, but we want them to be thinking about it right then. But we're thinking about it before them. 

We're just trying to see how the pieces fit. You do not know how it's going to work until you buy it. Sometimes it's good; sometimes it's not too good. You still get in, and no matter what questions you ask, there is still a chance it will not work. 

Deal Surprises

There's always both good and bad, but I think we have more good than bad for sure. Again, cause I believe we are so involved in the front end. 

But sometimes, they just literally didn't think it was a big deal, and they didn't realize it might be a big deal to us. And then we get an upside later. 

That's where you sometimes get the biggest bonus because you don't get the chance to talk to all of the humans. And once they're part of your team, you do. And I always like to incentivize them as well. Even if they're not owners, I want them to hit the ground running. 

It wasn't that we were surprised by it. We always got excellent talent that we didn't know. We just didn't get a chance to talk to the broader team.

Communication with Customers

Each deal is different, but we like to do it as quickly as possible. Again, I'm all about being transparent, and we want to get out of the gate and get to obviously the largest customers first. So, we're ready to go, and we ideally do it with a member of the acquired team that already has a relationship with the customer.

And then we would do press releases. We talk to the media, we let folks know that this has been done. But we don't try to change too many things especially if it's not broken.  

How do You Deploy Internal Resources 

Before we even do the deal, we have in mind what we're going to do in terms of some goals and even some compensation for our internal team. We're letting them know that we realize that they have a day job, and we might have short-term bonuses for them. 

We want everyone to win. We have some values, and one of them is to think like an owner. All of our employees have stock options. The more we grow, the more we make successful acquisitions, their stock will be worth more. 

And because of that, our sales team gets excited about selling something new because of that acquisition. Our product team thinks we've got some new features or partners. Like a puzzle, we're all together trying to figure out how it fits together. 

More so, it is because internally, we do all this together. It's not an us versus the M&A department. 

Now, of course, we're always very careful of leverage is you have to have confidentiality. Once that deal happens, we want people to know about it. From day one, we invite the new team members to our company. 

Another value that we have is passion and action. We love what we do. Even though we don't always get everybody in the right seats on day one, we still try to get everybody excited about what they're working on, which is a big part of it.

Biggest Lessons Learned

Sometimes you learn the most from what you don't do.

Early on in our NDAs, we did not have a no-solicit policy, and we had someone come after us to take our team once they learned more about us. So that's a lesson people need to think about when they're doing these meetings.

Also, it's tough if there isn't day-to-day management or founders still involved. No matter what they say, if there's no more leadership team in place, it's probably not a good deal. 

And then, of course, the devil's in the details, really know the numbers, and trust but verify!

Red Flags to Look Out For 

See what they're doing online, talk to customers if you can and get a sense of the space.  Go to some key clients, key partners, key vendors, and say who he's got it going on in this space.

You've got to do your research even before you're in diligence. 

Advice to a CEO's First Acquisition

I  wish we would have made more acquisitions sooner. That's my advice. 

Don't be afraid and certainly take meetings. I take calls bi-directional. Right now, prospects come to us and say, "Hey, are you guys up for sale?" And I'm like, "No," but you'll never know.

So, I take a lot of calls and talk to a lot of people. Don't shy away from something and assume assumptions are horrible. I would speak to more people and not be afraid of it, even if you're not quite ready.

Just keep an open mind.  Sometimes, we get so into the job that we have our heads down doing our own thing, thinking we have the answers. But I think it will help you broaden your perspective if you become open-minded.