Executing M&A Without Corporate Development

Executing without a Corp Dev team

Our team knew a lot about the space, and we had a pretty good idea of the purpose of why we wanted to do M&A in the first place, it has to start there. You have to have a real specific reason for why you want to do M&A and what it will do for the business. 

So we thought about what it could do for the business strategically, more than anything, and we had an idea of what we wanted to do. Since we knew the market well, we could identify the opportunities that had to fit a certain profile for us. 

We were able to vet them out, and none of them came to market. Only one came to market out of the 14. The rest of them, we sought out, identified, developed, and then transacted.  

We were looking for specific things. They met our criteria, and we were able to talk to the ownership or the management or a combination thereof about why we'd be better together. 

Over that time, we thought about buying a company as more like selling, and over the years, I realized that acquiring companies has more to do with selling than it does with buying, and that has been our approach. 

We didn't need to have somebody present ideas to us. We thought we could create our own. And then, we were owned by private equity, so they helped us do a lot of the mechanics of the transactions. At the back part of it, it was very helpful to have somebody that had the mechanisms. But we did a selection, the value propositions, and we negotiated the deals.

Shaping an M&A strategy

Formulating the strategy mainly was us. Every business has a particular set of opportunities and a particular set of challenges. That has to do with:

• The markets they serve
• The competition in the software space
• Where they are in a technology continuum
  

It's mainly around the markets they serve and the competition they face. In our case, we had a great product for one part of the supply chain and it was for one industry. We've identified businesses on some placement on the S-curve. Meaning every company starts very small. It goes through some rapid acceleration or growth period, and then unless it finds new markets or creates new products, it adds some totes out in terms of growth rate. 

And E2open was a poster child for being near the top of the S-curve because they had built out the market they identified as new and exciting. Over the previous ten years, they got all the easy customers, the ones that are most likely to buy, and the next ones became harder.

We thought about what we could do to expand our markets. And that's how we came up with our strategy around using M&A to open up our growth, our TAM, and open up new markets. Because we felt like it was a fragmented market, we could add functionality, different functional systems, which would increase our growth rate or increase our ability growth rate, and then also open up new markets. So we were in high tech, we could buy a company that was really good in CPG, and all of a sudden, we could participate in the CPG space as well.

Prior to that, it was very hard for us. We were all about increasing our probability of success in our selling motion and creating more cross-sell, which was essentially it. We didn't need consultants or anybody to help us through that general construct. And because we have a fragmented market, we could just execute along that strategy, and we kept refining over by the fourth or fifth one. We got pretty good at identifying things that fit versus things that didn't.

The third one was we were a network business, and we like the idea of networks, especially in our space, because networks are complicated to create. They take a long time for companies in a B2B sense to create a network. So we identified supply chain companies that were network and application businesses. And if it happened to enter a new market for us, well, that's like a 20-run homer.

We would draw these four boxes on our wall and assess them.

• Where does this company rank on a network versus an application business?
• Which quadrant are they in?

And then, we would think about the four boxes, like strategically accretive versus financially accretive. We could rate a business on how much strategic accretion we would get for that acquisition versus just purely financial. So we could literally rate different businesses in different ways, and that would help us inform how convicted we were towards the company and how much we were willing to pay for the business.

And for the ones we had a lot of conviction on, I would spend a lot of time seeking them out and pestering them until they would talk to me. Sometimes it would take six months to have the CEO to call me back and then another six months to formulate an opinion. 

We'd chased many of the ones we'd acquired for a year, mostly because we thought it was so strategically and financially accretive to us. Now, they were very attracted to us, but sometimes they weren't attracted to anybody else. Nobody else wanted them, but it was perfect for what we were trying to accomplish.

Network

Our big customers, the biggest companies in the world, think of the biggest CPG, Food, or High Tech companies like they're a client. You think of them as manufacturers, but actually, they outsource much of the activity. 

They don't make it themselves. They use suppliers and contract manufacturers. They don't ship products themselves. They use trucking companies, parcel companies, and ocean container freight companies. They don't sell products themselves because they sell through retail or the channel.

That means from a supply chain perspective that the data they most need comes from those partners. Our business is around connecting applications to those partners. A network would be, for instance, we acquired a business that books 26% of the world's ocean freight because it found a way to connect the ocean freight carriers to the company that does the booking of ocean freight. That formed a network.

The data sources became really important because if you're going to make a decision with an application, you don't need to be a rocket scientist to figure it out. You need data and an algorithm to make a decision. So we thought an interesting angle for us would be to provide data from the network and app algorithms and applications to help companies make the best decision possible.

Scoring

Scoring out is all relative. It started with very specific criteria, and that was almost a binary criteria, and for us it was mission criticality. So we wanted something that a company relied on every day. We didn't want any discretionary software. We didn't want software that wasn't working so we'll turn it off or stop using it. We wanted software that was embedded in the operations of a big company. That was important to us.

The other one was adjacency. We didn't want to buy a functionality we already had. And because software supply chain software is connected, it needed to be adjacent so we could sell them together. So I have like, manufacturing goes into shipping. Those things are adjacent, so it makes sense for us to have manufacturing and shipping software together. 

It's all about cross-sell and upsell. That was our criteria. If it didn't meet that criteria, we were not interested at all, at any price and it wouldn't matter because it wasn't part of our strategy. 

From there, we would think about a piece of functionality we wanted. The number of potential combinations isn't great because it was so fragmented. So in each category, there might be four or five that would be interesting to us. And then we literally rate them and plot them.

• How financially accretive would it be? 
• How strategically accretive would it be?
  

And then we'd look at other aspects too. So we had three or four different ways of looking at them. And it was pretty easy to tease out that in this functional space, this one company was perfect for us. 

Now, it didn't always follow that it was the most obvious choice because our frame was different because our frame was for us and what it could mean for our business collectively. So it's not just about whether was it growing fast or was it profitable.

It was more about how it could change our business and their business together. It was just a matter of relative rating based on a different functional category we were looking to acquire.

We didn't use any other tools to identify companies. We knew the businesses. People on our executive team have been in the business for 20 years. We've basically seen the market growth. So we had an intense amount of organic knowledge about the market.

Working with the exec team

We work with three different people in our exec team.

• Head of strategy
• Head of go-to-market or revenue
• Human capital people
  

We have a set of operating principles. We constantly evaluate how they feel and if they understand our operating principles and assimilate to them. That was important. It mainly was the strategy and revenue and me, and then the PE firm would've been very helpful and instrumental in terms of doing the calculations on the valuation. That way it would help us out in that way. That was it. We didn't need a team to tell us what to buy.

We didn't need a team to tell us how to value them for us. We felt we could do that by ourselves. And we were able to execute that a lot of times.

Finding deals

I grew up in sales, so it's just like selling. If a business is interesting and I know little about it, I talk to some people about what it does, what they do, and how they are. Then, if it's worth my time to pursue, I just triangulate. 

Sometimes I get an intro, sometimes, they would not respond. Sometimes I would just have my EA reach out cold and like to try that avenue. Sometimes I would just call and leave a message. Sometimes, our PE firm might know who their owners are, or PE firms own them, so we can go to the PE people.

It was just like selling, the same thing I did for 15 years on how to sell software. I need to find out who is in charge and just knock on doors until I get to that person, and hopefully, didn't embarrass myself when I talk to them. That was pretty much it. 

I have a level of persistence in me, for sure. I'm not obnoxious about it, but I'm showing up, so I'll meter my persistence. I've learned how to taper it over time. 

And the other thing is, if you think about the strategy of adjacency, that means that the broader our solution or platform became, the more things and more functional areas became adjacent. So if you think about supply chain software as a series of A to Z in terms of functional capabilities that are all interconnected, if I have C right in the middle, I could only buy under our framework B or D. 

Now if I have C through F, anything adjacent to any of those letters is interesting to me. So as we got larger and our platform grew in breadth, you have more surface areas of adjacency. So that means you have more aperture. 

So, let's just say I would identify that these six companies are all important to us. One may not be more important than another one. It is not that there's no order of operations, but they all pass our test. We could be very tactical about what's available and very strategic simultaneously.

Meaning I didn't have to buy the one adjacent to B because I could buy the one adjacent to F just as easily if that became available. So talking to them over time meant that I'd have a greater probability of success of one of the ones that I'm talking to, being ready to transact at some point in the future.

So I didn't have to be locked in on one. I could be locked in on six and work them like you work in a sales phone. I'm going to try to get one deal a quarter. I do that by having 10 prospects and trying to work with them. Because I don't know if I will get all 10, but I might get three or four of them and I just need to keep working at it to increase the probability of success. 

You just see pattern recognition. You get better at reading, and understanding situations. And some of that you don't even know you're doing it just because you did it so many times. 

Managing M&A activities and running the company

When we were doing a lot of deals sequentially, we had 40% looking for companies to buy, 40% talking to customers, and 20% just making sure everybody's working and hitting the traps we need to trap hit in terms of the integrations that we have or any other things we're working on.

Accepting acquisitions

We always had a process, a very technical spreadsheet process to do these things on this order of operations. We had a team of people that would do the functional part of the integrations. We did steps 1 to 5. 

But about the third and fourth one,  we started to realize that we had to think about the structure of our business differently from a go-to-market perspective because we found that the head of sales all of a sudden was slowing down and couldn't sell as much because you had to integrate and figure out all of the integrations.

The integrations slowed our selling motion down. So we devised another way of organizing around business units, which allowed us to break the business down into several business units. So instead of having one person in charge of sales that, at the time, had three or four heads of business units, each one of those were in charge of some subset of customers. 

And by doing that, when we acquire a business, it could fall into one of two categories. It could become its own business unit. We just have them operate like us, or we would sprinkle the clients into the business units we had. 

And by doing that, we didn't tax any one department, go to market or the selling department too much. So we found that that enabled us to go very, very quickly. We would announce the deal and have headcounts assigned within 30 days off. 

We had taken a very rapid and immediate approach to integration. So we wanted to reduce uncertainty for our company and the company that was coming onto the platform. And we would give people a lot of information about what they were doing.

This is how you're going to do this. We're not running the business in parallel for six months. We will run as one combined unit as best we can right away. It's going to be bumpy, and we will have our challenges, and things aren't going to be right, but we're going to learn to operate together. The sooner we do that, the sooner we'll get to operate as one.

So we thought about the structure of our business to accept businesses in, which served us well. That allowed us not to slow down as we went forward.

Restructuring the business for faster integration

I worked for a company for 12 years and that company grew from 40 million to 400 million over that period of time. I learned so much about what to do and what not to do. And what I learned not to do was let the business get too big before you thought about structure. 

And that business got too big. It was just too big to run the same way. So I distinctly remember it was August and I'm talking to the team, thinking we should change our structure and we needed to go to business units. 

Everybody thought we were not big enough yet to do that and it'll cost us more money. What I learned then that I could apply now was it's better to go to a new structure earlier than later because change is hard. So if you do it when you're bigger, you have more things to change. If you do it when you're smaller, you can grow into it and be more manageable. 

So we literally did it. A year or two prior to when we needed to do it. But that served us very well because it allowed us to get to that operating structure much more quickly and learn how to operate together as a team more quickly.

We've always felt like no one knew the market better than us, so we've never used third-party consultants. Also, you have to be careful when you bring in third parties because the third parties will think about who they think are the influencers and will speak their language. 

They're going to try to get more business, and it becomes a political animal. And we could be more direct with each other as a team and decide and also give ourselves some space. 

We might make a mistake. We may mess this up, but that's okay. If we do, we'll course correct. We'll get the big things right, and the small things will clean up. Just get it 80% right, and move fast. That's literally how we thought about it. We are better off moving fast and knowing that we can't be that wrong, and if we make a mistake, we'll take responsibility for it and move on.

Approach to due diligence

We're in the AR business, so churn becomes the big thing. The first couple, we got burned, didn't really sniff out enough of the churn, and then we realized that we're never going to sniff out the right amount of churn.

So just assume that some companies are going to be a bit weak and let's bake that into the economics of a deal and then hope we don't get it. But don't be surprised if it happens and don't be too upset by it. Because it's hard to remember that you baked that into the economics of your consideration because now you have already paid the money.

Be a little more realistic about what that company was all about, what was good and bad, and accept the bad because you can't separate the bad from the good. We could change the bad, but that takes a little bit of time.

We got a bit more realistic about some of these companies we acquired are much smaller than us, and some were being acquired because they needed to be acquired. They weren't run that way. They were strategically constrained and stuck.

We just took that on and showed up at the purchase price because we felt we bought things for an excellent value as we owned it. Unfortunately, and this is an interesting fact, not one of the companies we acquired grew, and none made any money. 

So we bought companies that were not growing and made no money, but we thought we could take the costs out to make them profitable. We generally did that by 35-40%. And then we made them grow faster. Every year our growth rate increased, even though we would buy another company that had no growth rate.

So we would dilute ourselves of growth rate and then be able to come back on the other side and increase the growth rate. So we knew we were buying an asset that was perfect for us but had its own challenges. But we always felt we could change the bad part. So we'll just change the bad part and make it better for us and operate the way we want to.

We have billable hours for the key people involved, where we hired lawyers and accountants. But every functional area does its due diligence.

• Legal team - they have their playbook
• Go-to-market team - for contracts and talking to customers
• HR - looks at the census carefully to identify people overpaid, underpaid, and who have to be cleaned up.
  

Key things to look at pre and post-LOI

I look at the consistency of revenue. Can I count on the revenue? I'm not really banking on their growth rate, so I'm going to grow it a different way, and I'm also banking on the fact that I can remove duplicative costs. Because we're the same business, you can remove a lot of redundant costs without affecting the customer experience.

Whatever the size of the business, 20 million, 30 million, a hundred million, it doesn't matter. Is that a hundred million solid? Can the hundred million dollars be reduced by $20 million? That was the key.

If it's a hundred million and we felt like it's a hundred million business for the next three years consistently, pretty safely, then okay. If we felt the revenue cycle was weak, we felt that their contracts were too weak, or they were just contracting too fast, and we couldn't count on the revenue, that was the biggest thing we focused on. 

It goes back to one of our key criteria, mission criticality. That was done for a particular reason. One is we always wanted to go fast, but when you go fast, you disrupt things. You change things. You can't help but break things. But if I can rely on the revenue knowing I'm going to break some things and I'm going to make some clients not so happy for a while, but they're using us and they really have a hard time changing, that gives me a runway to be able to go back and fix things.

So that's why mission criticality was super important to the overall speed at which we wanted to operate. That's why knowing the revenue was solid became pretty important to the op to the overall strategy.

Culture and the people aspect

We talked earlier about how we transformed the business early on. In year one, I showed up in July, and by July 7th we announced we were shutting down the California office headquarters and relocating the business to Texas.

We also embarked on changing every department all at once. I did that because I was afraid of a year and a half of sequential change, which would be very demoralizing to the business.

So if we did it all at once, it'll be very disruptive, but it'll be over quickly. So the duration of disruption was important. But what I did to start was we set out about creating a set of operating principles to ground how we do business. 

• How do we treat each other? 
• What's the ethos of our business? 

Not what we do, but just how we will go about our work. The exec team needs to develop these. 

All I care about is two things. And those two things are to be prepared and treat others with mutual respect like those were the two things I said. 

Anything else we came up with seven or eight of them. We still use them today, publish them, and articulate that we strive to operate to these principles. And that helped us in those first six months a lot because we could actually articulate:

• why we're changing the purpose of the change
• why we had to change. 
• And how we will come out of this tumultuous time and operate as one company. 

And we use that as the starting point of every single acquisition. So that helped us from a culture perspective, even though we grew the business 10x in six years. So there are many people to bring into the business and operate as one. 

We have a way of operating, and the seller knows about it right from the start. So when we talked to the management and ownership about how we will integrate, we were very upfront about it. 

• We are going to change a lot of things really quickly 
• It's going to impact people's lives. 
• What are we going to do to soften the impact on people's lives?
  

Integration 

We make decisions very quickly and our audience knows that 65% of the cost structures of software companies are people. And the next big piece is hosting costs. Other than that you have offices and coffee, so there isn't much left. So the business is basically people and you're hosting costs. However, you do it, are fixed; you can't change that.

We know we will affect people's lives and we want to make a decision quickly, so we always want to transition. We would literally go in and let go of a subset of people early in the process. That's mostly C-suites that don't wanna stay, or it's part of the deal. They're fine, they got equities, so they get paid. 

And then there are a lot of people who want to transition for three to six months. And at the end of that time, we'll give you a stay bonus and we'll give you severance. That meant people got at least nine to 12 months of pay, which is unusual, especially for mid-level managers. And what that allowed us to correct mistakes. 

Sometimes we have people with who we don't have any roles, and then two months later, we find out they're amazing. So then we offer them different positions and give them an opportunity where it's great for them.

This allowed us to elongate the period of having people who know the business around longer to help us create stability through change. And if you create a lot of stability you can change faster.

We've gone above and beyond to treat people well on their way out, which is why we have a very high score on Glassdoor even when we've taken a lot of heads out of business over the years.

Just treat people the way you want to be treated. Be direct about the changes coming and tell them what you're going to do to help them. The worst thing you can do is instill fear uncertainty and doubt in an organization. So tell people where they stand immediately, even if it's bad news, is a thousand times better than telling somebody bad news abruptly on Day One. 

Integration cost

Severance is one of them. They just become cost and are included in the purchase price. But we never compare people, and we treat everyone the same. We identify the people who need to stay, and we pay those who have to go. Then we identify how much it will cost us to have them stay and then pay severance, sum them up, and we just perceive it as included in the purchase price, so you don't get emotionally attached to it. 

There are also other related budgeting integration concerns, such as capital expenditures. Repeat the aversive in our own data centers so we know we will have a fair amount of extra capital expenditures when we do it and a fair amount of one-time costs. We try to sum up everyone can cause that we have and make them a part of the overall price. 

Go to Market Integration

We're all about distribution, so it's just getting new customers from the acquisition and cross-selling. We actually have grown primarily through existing clients and our new bookings with existing customers are 75 to 80%. We just give the salesforce more things to sell.

It doesn't happen overnight but eventually, we have built long relationships with clients. And before, we have two solutions for customers, now we have six, so eventually, one will hit.

Acquiring away from core

It's about adjacency. We started at the supply sign of manufacturing but as we grew we had everything. We started on the supply side, and now we bought the demand side. We filled the adjacency spaces in between so there was no more core. 

We don't buy anything to shower from what we do now. Name something that can give you leverage in your go-to-market distribution. If it doesn't have that been, essentially, you're a private equity firm which is fine if that's your strategy.

Keys to success

For a software company, two pieces are most important. It's the go-to market and technical integration. So to have and add the value of having a and b we're together, you have to have some schema on how that can work.

In our case, the technology our company built over before I got here was the skin so we had a very elegant of combining fast without having to rewrite software.

GTM Framework

There's no general framework that can be applied around go-to-market. So it becomes a matter of warriors and markets and how you think about similar cohorts. Like us always thought about markets and distribution in what markets can be served and where can we be successful.

Universe pairs of operational software it isn't easy to show a billing industry and convince them that they need you and your product. It's about understanding the business really well. 

• What does that business do? 
• Who do they serve? 
• What's the competitive framework? 
• What are its challenges? 
• What are its opportunities? 
• How do I most effectively reduce the challenges and accentuate the opportunities?
  

Advice for first-time acquirers

Be mindful of the purpose of M&A. If you are running a business you have to sell a vision for the business and see how many might be a part of it to help you achieve the vision you created. That will define your purpose.

And then, from there, you can evolve your strategy and how you go about it. And the rest of it is just tactics. And then focus on the people. 

Alignment

For us, it was not just the management team. It was also the sponsors. The board should not be any different from us so we are very transparent in all the good and the bad that's happening in the organization. 

We would literally give our sponsors the same week report I would get. The major goal is to create alignment between your major constituents: the board and the owner.