Mark Sancrant is back on TAE this time to talk about Roll Ups from his first hand experience on being on all sides of roll up transactions. What they are, why they are so popular and what to think about if you are planning to undertake a roll up or being acquired as part of a roll up.
- What is a roll up?
- How roll ups have changed over time
- The reasons companies do roll ups
- What is a sponsor and what does it mean?
- Developing a roll up strategy
- How to find a company that fit your criteria
- Building relationships
- Deal Structure
- Building a team of advisors
Mentioned in this episode:
- Blue Ash Capital
- Wayne Huizinga
On today's episode, we welcome back Mark Sancrant from Blue Ash Capital. Mark has a wealth of knowledge in the MNA space both as an advisor helping companies sell and also as an acquirer buying other businesses. Today we talk about the topic of roll ups. We talk about what that is and how to do it. Now, it was a really great episode but it went quite long we’re both deal nerds and both had a lot to say and talk about on this one. I'll actually split it up into two parts as this audio will be on the first part of the episode. If you want to reach out to Mark directly look him up on Linkedin his name is Mark Sancrant. I'll put that all those details in the show notes as well or you can email him directly email@example.com. I hope you enjoy this episode and please give us your feedback on any more of these topics you'd like us to go deeper on in future episodes. But anyway, enjoy the episode with Mark Sancrant.
We're live today on Truth About Exits. I've invited back my good friend Mark Sancrant to join us. Today we're talking about a very exciting topic which I'll get to in two seconds. Mark, thanks for jumping back on the line.
Awesome. Looking forward to chatting some more with you about a M&A.
Absolutely. Okay, if you heard the previous episode that Mark was on I kept referencing this episode, it's actually taken a little bit of time to get back together with scheduling conflicts but we are here now, which is great and the topic we'll be talking about today is roll ups. Now whether you're looking at selling your business, whether you're looking at doing a roll up or you've just heard this magical term and you want to know more about what that is, this episode today is 100% for you. Mark, could you just give us a brief overview of your personal experience with roll ups and then we'll go into a definition of a roll up.
Yeah, I’d be happy to and I'll do my best to keep it brief but I'm going to forewarn you that might be a little bit of a challenge. My personal experience with roll ups has been two fold, both as an advisor back in my investment banking days in the early, I'm sorry mid to late nineties, working with businesses that were undergoing roll up strategies and ultimately back then the strategy was to go public. Things have changed a little bit since then. Then more recently in my career I've been involved in essentially a roll up that the phrase that we used and we can get into this and a little bit is was more of a buy and build strategy. There's certainly some nuance to the term roll up and buy and build strategy. But basically I've been on the structuring side from more of an advisory role. I've also been on the operational side where I was responsible for identifying the acquisitions. I'm structuring the deal, financing the deals and then most importantly integrating the deals. I've seen seeing the process unfold from both sides of the spectrum.
Awesome. Well I can't wait to dig into that and get some more of your insights but let's start at the very beginning and I'll play novice in this conversation to give some perspective for the audience. A lot of the sellers, business owners looking to sell their business, thinking about selling their business in the near future, it's a common topic to maybe even have someone reach out to them and say look I'm doing a roll up. Our company's raised x amount of capital and it all sounds very exciting. Let's dig into what a roll up could be because there's many different flavours like the candy flavoured breakfast thing that's also called a roll up. Would you be able to explain from your perspective what a roll up could look like and then what are the variations of that?
Yeah, absolutely. I think for the audience's standpoint, if they hear someone say roll up, essentially it's someone that's executing a consolidation play where they're coming to the table saying, hey, we have this strategy of making multiple acquisitions. I think at a very high level it's just a company or a group of people or a funding source that says, Hey we're going to go make a lot of acquisitions or several acquisitions that all kind of fall within a certain theme at a very high level, in my mind, that's kind of what we're talking about here today. As you drill down a little bit and get into some more of the nuance, the term roll up itself was very hot and popular. As I mentioned in the mid to late nineties there were lots of companies under growing roll up strategies.
Actually if you take more of a historical look, it probably started in the 70s I think probably most notably with Wayne Huizinga and the work that he did with waste management local to me here in Cincinnati is a company called Cintas, which is $23 billion company that you've probably never heard of but they're in the uniform rental space among others that diversified quite a bit but they went on quite a bit of an acquisition spree again back in the seventies, eighties and nineties but let's kind of move forward again to the late nineties and what a roll up meant then. At that point in time, a roll up had a connotation that you were putting together more than one business. The premise behind it was we're going to be able to strip out a lot of expense because we're bringing them together.there's going to be redundant expenses that we're going to get rid of and make this thing more profitable.
Typically those unfolded and again, this kind of late nineties you would have a sponsor who might not be in the business at all who identifies, let's call it for the sake of argent, three businesses that he's going to roll up. He goes to each one of those businesses, he or she goes to each one of those businesses and negotiate a transaction. What I was seeing a lot from an investment banking standpoint is you would have a combination of multiple acquisitions in conjunction with a public offering, which was a little on the complex side and a lot of moving parts to pull off basically you would say take a group of businesses, have them all agreed to be acquired. The acquiring entity at the simultaneous time of going or making those acquisitions would also go public. Either part of the proceeds from the public offering would fund a portion of the transaction but generally most of the transaction proceeds were in the form of equity in the public entity.
But again back then it was all about kind of pulling expenses out. Then all of a sudden the market kind of soured on the term roll up and didn't see a whole lot of value being created by simply getting rid of accounting departments or other redundant expense items within the companies. We moved to more of what I would consider more of a consolidation. There was more to the story than simply pulling out expenses, elimination are most definitely still a part of it. But with the consolidation, there was a lot more thought that kind of went around the process. And that's also when you started seeing, and I think with the increase in private equity at the time, you started seeing less reliance on the public markets to fund these consolidations. Then kind of the third play, which is where I most recently was.
I think what you're seeing in the market today is more of a buy and build strategy. The premise behind it is still, hey we're gonna make a lot of acquisitions but it's not as much about pulling expenses out. If you can do that, great. But that's not what the strategies based on the strategies based on taking something and making improvements to it to get it to the next level. It's buy and build. It's not by and cut out cost. Right. I think that's kind of where the market has evolved to more of this concept of bringing a number of organizations together. If we can get some synergies on the cost side, great. But that's not really what the play here is. The play here is looking for adding new geographies, putting things on a commonised platform where you can really focus on scale adding technologies or capabilities that you wouldn't otherwise have. I think that's where most of the focus is today for sure. If you look at most of the large companies that are in almost any industry, a form of a rollout is generally how they grow. Because at some point growing organically is tough. Acquiring revenue can potentially the allure over it at least is adding that revenue to your business or the combined businesses.
You mentioned a couple things there that I'd like to strip out and talk about separately. To my understanding and the companies that we're working with that are doing versions of these strategies, there's usually a couple of reasons why they're doing this. One is simply to add revenue. The other is not so much cost reduction but margin improvement. In one deal we're working on right now, their margin is actually quite low in the business that we've taken to market, the incoming buyer has some synergies and supply chain and believes he can improve the bottom line of this business, which is cool but also adding the top line revenue is very attractive. There's a couple of reasons why you'd want to do this. Others literally just looking at it as a financial play putting three or four companies together can move the revenue and EBITDA to a point where the multiple is much higher. There's often talk of arbitrage that multiple arbitrage, they could buy a company at two to three times earnings and roll it up together and then sell it for six or seven or 10 depending on what they do. If it's purely financial.
You're absolutely right. That is I think a big driver behind a lot of the buy and build strategies that I've seen is that there are certainly some multiple arbitrage that could be had.
Awesome. Okay,let's talk a little bit about the strategy on this. Now, bear with us. If you are a business owner and you're looking to sell, what we're trying to do is give you an insight into how buyers or companies that are going out and doing a roll up could be thinking and how they could be strategizing. On the other hand, when we talk about developing a strategy, this may be interesting as a thought experiment or may be actually useful for you if you are thinking about growing your company and expanding the capabilities through acquisitions. Let's talk, oh, actually one more thing. We mentioned sponsors before I just thought I'd briefly talk about a sponsor before we move into the strategy side. When you hear the word sponsor or when you think of sponsor, what does that mean to you?
To me it means like a source of capital and we can kind of walk through some varying degrees. Going back to one of my examples in the 90s there you have a sponsor come in and kind of put up limited amount of capital just to handle the due diligence and get all the pieces in place prior to the IPO but they weren't funding the transactions. They were themselves, they were the sponsor. That was kind of organizing it all and that required some capital. If you fast forward to where we are today, whether you're an individual going to do it or you're a private fund because if you think about it and a lot of cases, this is exactly what private equity funds are doing. They have access to a lot of capital that they have to deploy and oftentimes it's easier to deploy it by making acquisitions as opposed to solely relying on organic growth. But in my mind again at the end of the day, the sponsors, the person that's providing the capital, they're not necessarily the ones operating the business, but there are definitely the ones providing the capital.
Okay, sure. I think it's worth noting here that like he mentioned in the first version of this where maybe they had the capital to cover the closing costs and diligence costs. Often the person that you talk to first either won't have all of the capital, they'll need to go talk to other partners or raise debt to do the deal. Even funds that have private equity groups with committed funds that have a timeline still don't want to put 100% of the cash up. They still need to do the diligence and essentially sell the deal to a financing partner. Even if they're working with that debt provider, they still need to go pitch on a deal by deal basis. Right?
Correct. Correct. As you said that it kind of got my wheels spinning a little bit. In addition to just sponsor, you'll also hear the term fundless sponsor. You'll also hear the term independent sponsor, and generally that's not anything to be afraid of. But as a seller of a business, if someone uses a phrase like that, you're absolutely right. That means, Hey, I'm the one kind of running the show here but I'm not the one pulling the purse strings to speak. In most of those cases they will have to go out and find additional capital. They already may have that resource available but they're still going to be a process that they're going to have to go through to get the capital call approved.
Absolutely. Definitely dig into that a little bit. Don't be blinded by I'm a private equity group doing a roll up because essentially anyone can say those terms and it's whether they can actually close whether they've done it before. That's a whole other topic that we'll talk about another time. Awesome.let's switch gears and talk about developing a strategy for roll ups. Is this right for you or what could a business be looking to do as a strategy if they're looking to acquire you? What points or what thoughts do you have on developing a strategy around a roll up?
Yeah, I guess I would start first and foremost with really understanding what your organic growth opportunities are. Those are the opportunities for you to grow your business outside of making an acquisition. Because that's an important piece of the puzzle here because by doing acquisitions, you're ultimately changing your risk profile because with each acquisition comes additional risks for your business. You're outlying additional capital, you have integration risk you have general business risk. With the acquisition you have cultural risk. We have a lot of risk profiles that you don't currently have. I'd say first and foremost, understand what your organic growth opportunities are and then start looking at, okay, if I were were to undertake acquisitions, how can I augment or supplement those organic growth opportunities or have identified an opportunity that I really need to think about more of a buy and build strategy.
If I know that I can grow my business, if I have a new capability, what's it going to cost me to build that capability versus what will it cost for me to go out and acquire that capability? I think the first step in building the strategy is really understanding why you might want to do acquisitions. And I think that's probably one of the areas where I think a lot of people get in trouble with acquisitions and it's real easy to Google and find an article about how 75 plus percent of acquisitions fail. I think people underestimate the power of acquisitions and I think they underestimate the planning that needs to go into it and just kind of get caught up in the sex appeal of doing deals. I would once you've gotten through understanding the organic growth opportunities, I would start to think about what it means to do the right deals for the right reasons or that kind of starts like, go ahead.
Sorry. Just before we go into that, I just want to add a quick side note to this organic versus acquisition. We've actually had a couple of companies in the ecommerce space that have acquired a number of brands and their initial goal was to buy many brands, almost as many as they could find this was the initial mandate and a few of them, after a couple of acquisitions, maybe four to eight acquisitions have paused, done the numbers and realized that putting money into growing the brands they've already acquired could have a better ROI than going out vetting all of these other deals, doing diligence and actually acquiring and then assimilating the deals.even if you started off with acquisitions, it's good to keep that check in place as you go along.
Oh, you're absolutely right. In addition to what you just mentioned as I hit on a little bit ago with each acquisition you take on a whole new risk profile. That needs to be reassessed along the way. I completely agree with the Coran. You have to look at okay we've made an acquisition now let's reassess the organic growth opportunities based on what we have. Let's understand what we need to do to invest in these businesses to continue that organic growth. Let's also take a fresh look at our risk profile because now maybe we have bank debt that we didn't have before and we need to make sure that we're following certain bank covenants and aren't getting ourselves in some potential default risk down the road. It's an ongoing process. It's not a Hey, I'm going to design it and then I'm gonna look at it again when I exit in five years. It needs to be a continuous learning process.
Absolutely. Okay, let's say we're a business, I know we've looked at our organic growth opportunities and we're maxed out. We can't invest more capital. Doing acquisitions looks to be a good option for us. What's the next step?
Yeah, as I started to get into I think the next step is building a profile of what the right deal looks like because again I'm a big believer that you have to do the right deals for the right reasons and not just make an acquisition because it seems like it makes sense. Part of doing the right deals for the right reasons is all about discipline and discipline in M&A process comes in a lot of forms, right? It can be disciplined around what you're willing to pay for an acquisition. It can be disciplined around the due diligence process. If you can't get certain levels of due diligence material, maybe it causes you to have to say, I can't do this deal. To be successful with acquisitions. You have to be incredibly disciplined and you can't be afraid to walk away from deals even after you've started to invest some money into it. Really understanding why you would do an acquisition in what you want to gain from it. Then start building up this disciplined process. I think that's kind of the next step.
Not falling in love with the deal. Oh sorry.not falling in love with the deal is some part of the process. Right? This could be great. Let's just buy it regardless. Yeah, exactly. Exactly. Oh, sorry. We've got a bit of a delay here.
Some of the most successful companies that I've seen in the last couple of years doing this are very unemotional when it comes to the deal, if the deal doesn't work for them for whatever their parameters are, they walk away and that it's like, it never even happened. How do you get to that monk level sen level financial, acquire a mindset. Do you have any tips on how to get that?
Yeah, that's real hard. But it ultimately comes back to what we're talking about right now, right? It's developing a strategy and you need to stick to the strategy and the things start to deviate from that strategy. You have to know when to say this isn't going to work. The way that I kind of think about some of the strategy is there's a lot of different strategies where you might want to use an acquisition to achieve. Let's just kind of walk through some of the reasons why you might make an acquisition. As you just talked about, maybe you've tapped out opportunities for organic growth. It could be probably not in what we're talking about because we focus a lot on e-commerce but there could be a case for an acquisition to move into a new geography or a new market or add some additional capabilities or add additional products.
There could be a strategy just around getting larger. Larger businesses tend to attract higher multiples. There's potentially a multiple arbitrage opportunity. But whatever your reason is, I think you need to start with why is it that I'm going to make an acquisition or what do I want to achieve with the acquisition? Then start to think about the universe of companies that might fulfill that need. Right? I would start by trying to find opportunities where there are large markets that are pretty fragmented, where there's more than a handful of opportunities because if there's just a handful of opportunities, you're either going to be paying a ton or the likelihood of success is just not going to be there. You want a large universe where you can kind of go out and start talking to people and identifying opportunities back to organic.
I think once you make an acquisition, you got to have a game plan in place for how you're going to grow that acquisition. It might be the exact same game plan is kind of your platform or your the business that you're starting off with. But regardless of what it is you, you need to have a plan on, not day one. You need to have a plan before you closed the acquisition on how you're going to grow the business. Then back to what I said before, I think you have to start to develop that discipline process. What exactly are you looking for? What valuation multiples are you willing to pay for the acquisition? A lot of cases it's kind of like dating, right? When you look for someone to date you probably have your checklist of these are must haves and , these are the things I can live with or are they clean, are they pretty, are they this are than that. It's not dissimilar from dating, right? You put together this checklist of what the ideal candidate looks like and then you have your secondary checklist of well if it doesn't meet this, that's okay. But you also have to have that list of must haves. If the must haves aren't there, you have to be able to be willing to say this isn't going to work.
Absolutely. And one of the things I've seen, I look at it from an unfair advantage is what I refer to it as with the company. Looking at the acquisition can I do more with the business than the current owner is already doing.I don't think in my novice opinion, it's not really about just adding revenue and profit. It's about what can you really do that can ensure that the whole process is a bigger win. Once you find the right target that you can bring more unfair advantage to this company, integrating it into cross selling to your current customers or something else, whether it's distribution, supply chain, whatever it may be.
Yeah, that's a great point. The one thing I would add to that though is I had a thought that I was going to add to it and it just disappeared. But you're right, you need to understand what the unfair advantages are and how you're going to exploit it. The thought just came back to me but I always advise with an acquisition what you just described as absolutely true. But I think a lot of people also get themselves in a little bit of trouble thinking they know more about the business than the seller knows about the business. What I mean by that is on day one you start making all these dramatic changes and that can be bad.I usually advise someone acquiring a business to not do anything differently for six months to a year. That way they can learn the business and understand it before making this change or turning this knob or pulling this lever. That way they know exactly what the effect is going to be. You need to really understand the business before you go in and start making those changes. But you're absolutely right. It all comes down to game plan and kind of the unfair advantage if you have one.
It definitely right. I'm glad you brought that up. Oftentimes we'll see buyers that overestimate their capabilities and the influence on what could happen next. That's a really key piece because what we're talking about here as businesses, it's not a, I refer to real estate quite a lot. It's something else I'm quite interested in a building, whether it's commercial or residential is kind of safe and set as it is. It's very few levers there. But a business is a living, breathing thing. When you're looking from the outside in, you may think, why are they doing this? But like you said, if you just let it breathe, understand why the business is doing what they're doing, you may actually find that it needs to be done a certain way. Also there might be more opportunities than you realise just by looking at how the business actually operates. But you don't mess with the revenue until you understand what's actually generating it.
Yeah, exactly. To use another example with Amazon businesses you might be looking at a target and you're reviewing their advertising on Amazon and you see that they're a cost is a lot higher than yours. It might be real easy to go, oh heck we can come in and reduce that cost and really cut out a lot of expense without really thinking through, well maybe they're over investing in advertising to attain a certain rank on a keyword or protect rank on a keyword. If you come in and start tinkering around with that a cost, if you're not maintaining the same sales level, all of a sudden your rank on that keyword might start dropping and you find yourself kind of in the reverse of the flywheel. Lots of reasons to kind of just sit back and understand the business before you make any fundamental changes.
Absolutely. Okay we've gone through and we've looked at organic growth first. We've gone, okay, we're going to go acquire something and we understand the risks. We're going to let the business breath when we acquire were not kind of jump in and change things straight away. What do we do next? How would we go about finding businesses that fit our criteria once we have the criteria set?
Yeah, that's the part that, this isn't a plug for either you or I, but if you're a business owner and you're interested in proactively undertaking acquisitions and what I mean by that is you're actually willing to go out and find one as opposed to just being opportunistic and have someone bring a deal to you. That's when you need to think about some areas where you might need help. The reason I bring that up is it can be a very time consuming process to develop an acquisition pipeline and maintain it because pipelines like anything else or active as well and they kind of ebb and flow and you need to bring new people into the pipeline as people leave that in itself can be entirely exhausting. It's often helpful to either have an internal resource take that or start looking at external resources to help you with fire identification.
But if you're fortunate enough and you kind of have an easy way to identify and list of targets, I would say start by just doing that, identifying, okay, if I could go out and make some acquisitions today, let me put together a list of whatever the number is, a list of companies that I know that seem like they might fit my type, my criteria. From there, I would start to kind of maybe rank those acquisition candidates the best you can and prioritize where you're going to spend the most time. But at the end of the day, what I found is the most successful approach to identify an acquisitions is it really comes down to just building relationships. Some of the best acquisitions that I've made as a buyer in the past had been those that it was a three year process where when I first reached out to the owner, they weren't quite ready to sell.
We started to develop a relationship over time and that helped me better understand him and what was important to him as an owner. It helped him better understand who we were as buyers and why he might want to work with us. We were able to develop a certain level of trust over time before any checks were written or any dollars were spent on attorneys, on developing the agreements and whatnot. That whole process of building that relationship, that was kind of key to the successes that we had from an acquisition standpoint. But I think you have to be willing to invest time and commitment not just in the building relationships, but just letting the process work, how the process is going to work. Because there are only certain things you can control and really the only thing that you can control in this process is reaching out to prospective targets. Aside from that, it's up to them whether or not they're ready to sell are ready to talk. Right. You might get lucky with highly fragmented areas and find some that are, I guess I think about it as fishing, right. You might get lucky and put your line in the water and grab a fish right away and you might have to sit in the boat for six hours before you're going to nibble is you just never know.
I guess a couple things to add to this part. Deal flow is kind of tricky. It takes time to build up and deal flow simply means the amount of, it's like a sales funnel. The amount of targets in the top of the funnel and then working their way through to trust them and are they open to selling if you're on the acquisition side and then do the criteria match. Oftentimes if we have someone who wants to sell today what we usually find next, is there something wrong with the deal and or they haven't got their financials in order, which is the absolute baseline of criteria. Once you get down to it into diligence, the numbers actually really matter and can be a red light or green light on the whole deal. Getting, like you were saying, it takes time to build up trust and build up a relationship but also it can take extra amount of time for the company themselves to get their financials in order. If they're a larger company, chances are that financials could be two to three months or longer in a rears to get the updated financials maybe a little bit tough to do.
No, that's a great point. That's a great point. Yeah. I'm glad you brought up to , kind of sales pipeline analogy because the other piece to this is it's also one of those situations where you want to think about how can I work smarter, not harder.
Think about things like how can I utilise the CRM, right? Because managing contacts and when am I supposed to follow up with this guy or when was the last time I talked to her. All that stuff becomes incredibly important and being able to reference, okay, here's the last email that I sent or here's the last conversation that I had before the next follow up with that person. It makes the process a lot easier. If you haven't ever gone through this kind of process before I highly encourage using a CRM. Second I would also say it's also not just about sending out emails and picking up the phone. A lot of business and pipeline development happens in real time with face to face meetings.I would think about who's in your network, who might have access to people that could have an interest in selling and I would also think about conferences and trade shows where you might go and just talk to people and let them hear your story and it's amazing how when you talk to people and tell them what you're up to, how many people go. Another way of saying this is when building that pipeline you have to look at all available methods and I would employ a strategy that touches on all of those. It's sometimes picking up the phone, sometimes emailing, leveraging the network that you already have or in the process of developing and then also attending conferences and trade shows or events where you can network face to face with people.
Events are an absolute gold mine and one thing I like to do with events, I'm not sure if you do this as well, is typically if I'm speaking this is much easier. I talked to the other speakers that are also speaking at the event and build a relationship with them and lead with how can I help you? Then also what I do at a trade show or a conference. You can also do the same thing with sponsors even if you're not speaking, you can go talk to the sponsors. The reason for talking to sponsors, if it's not obvious, is they are actively paying to acquire customers in that space. If the vertical that you want to make acquisitions in or deploy your roll up strategy and you go to a trade show that's full of those types of businesses going to service providers and sponsors that are selling actively selling into that space, they'll probably know way more people than you would befriend them. No one really wants to talk to the guy selling in the booth unless they're looking for what he's selling. Buy the guy a beer, hey how's sales today? What are you looking for? Maybe you could refer them some business. Start with that leading hand of helping and also look at people that are already in the space. Even if it's just for information about trends in this space, they will know a lot about that market.
Yep. You're absolutely right and you hit on something that I think a lot of people until you get into it, you might not really think about but you said going up to someone and saying, what can I do for you? It's amazing how powerful something that simple is. Quite honestly when I do use that approach, most people don't really say, oh well here are five things you can do. But it's the presence that you bring when you start off with not what can you do for me? But what can I do for you that starts to open the door for that relationship building. I can tell you from efforts that I've gone under to identify and reach out to prospective targets. What is not successful usually is when you send them an email and say, hey, we're interested in you are you for sale? That doesn't work great. What's even worse about it not working is nine times out of 10 they're not going to reply to you and say, no we're not for sale. All you did is waste your time, you're not any smarter than you were before you sent that email. I would always take the approach of, Hey, I just want to introduce myself we're in similar lines of business or here's what I do and here's what you do. There could be some interesting things for us to talk about. I'd love to talk shop with you sometime. I don't even bring up the concept of, I might want to acquire you on that first outreach because again, it's about getting some engagement and once you have that engagement, then it might make sense to prod a little bit into, hey, , what's your future strategy or , what's the next two to three years look like for you? And you can start getting some pretty important information that might help you. One better assess whether or not they're a fit, but also better assess the likelihood of, of furthering the conversation into one of an acquisition. Okay.
Absolutely. That's a perfect point that it feels talking to someone as a peer or just as a friendly ear to talk they're likely going to open up to you a little bit more than if they're on the back foot. Thinking of that they're trying to acquire me. I have to make this sound better if they're open to it. You can find out a lot more about the business in a relaxed setting as opposed to going straight for the kill. Yeah. Okay. We've built up some deal flow where we're going to conferences where looking at this as a long term prospect, of course we've got some advisers in play. I've got no problem pitching that. Definitely get some help. We can help you with that if you need help with that. But find good advisors that know the space as well and know that the players in the market.what do you do next once you start to go into acquisition mode, what would you need to do on that piece?
Before I get to that, can I add one last thing to the of building the deal?
What we've just talked about is building proprietary deal flow and that's very different than like I said, being opportunistic. I think you have to do both to be successful. If you're looking to acquire a business, I would get to know as many people like myself and Coran as you can or other investment bankers whatever. Because you do want them to provide deal flow for you as well. But you absolutely want to supplement that or have the main deal flow come from your own efforts. It's much easier to close a transaction when you can put the transaction on your time frame rate and let it build as it needs to build as opposed to Coran or I reaching out to and say hey, here's is a deal. You got two weeks to get back to me. I'm a fan if you're making acquisitions on your behalf of having proprietary deal flow but you should also have kind of that non proprietary deal flow that's brought to you from your network. But I just wanted to make that point that you can do a roll up strategy probably without having to go out and actually look you'll have more success if you make an effort that is focused on developing proprietary deal flow to you.
Yeah, that's a great point. What I would do next which kind of gets back into that discipline. You need to start thinking about the structure of the deal. What makes sense for you as a buyer. How are you going to fund the transaction? How are you going to value the target and start developing a due diligence process?
What are the key things back to that list of things you want to think about from a dating perspective, what are all those must haves that you need to see and what are the things that you would like to see, but maybe they're negotiable and you just really need to understand all the different aspects of the business that you're going to want to look into. The caution that I would give there is there's always a challenge when going into the due diligence process of getting way into the weeds. I would always advise like having a, I don't know if it's a slide or just some hand written notes of why I started talking to this company to begin with and keep the high level strategic points in mind as you start the due diligence process because it's really easy to get hung up on well we want them to do accrual accounting and they're doing cash and therefore we're not going to do the deal. Obviously it would never do that, but you need to think about what's really important to not get lost in the details or if you did get lost in the detail, have a way to come back up to the surface you can keep a focus on what's really important with the transaction.
I think that's a great idea. Developing a diligence checklist, not just when your signed and in due diligence but you can actually explain this to the company you're talking to. You can explain this to any advisors involved in the transaction from the sell side they understand what you need to see to get comfortable with the deal. Even Pre LOI, letter of intent. It's the more transparent you are with that the more confidence will have as advisors if we're working on the sell side what you're doing next and the easiest way. I see your note here to assemble a team. Who would you suggest to put on that team to help you develop this if you've never done acquisitions before?
That's a great question. I'm definitely a fan of having a team but I'm also cognisant of you could do you need the Dream Team like OJ had from a legal standpoint and a bunch of high priced people that you end up racking up a ton of fees on and then find out that you can't continue with the deal. That's probably not the ideal situation. But you need certain help along the way. I guess I would start with what resources do I have within my organisation. If I already have a company and I'm lucky enough to have a CFO, then I can leverage my CFO for a lot of the financial due diligence. For instance, if I'm maybe just an independent sponsor looking to make my first acquisition then I might need the resources of an accountant.
I'll definitely need some resources from an attorney those are two pieces. I don't want to leave out probably the most important piece but someone like myself or you Coran, it can help you think about deal structure, how to get the deal, staying on track, some project management where to focus your attention, M&A can definitely help on the due diligence standpoint and organizing the due diligence and making sure that you're hitting on all the key areas that you want to hit on. I'd say those are probably at a high level the three probably most important pieces of the team. You might find there are specific areas depending on what kind of acquisition you're making, where you might need to bring in some more kind of subject matter experts. Maybe if it's an advertising driven business you might need expert that really understands advertising and where they're placing their ads and what the messaging is. Or you might need someone to really dive into their social presence, how active are they on social media would see overall sentiment of the business or how people feel about the brand, whatever it might be. There are certainly areas might need to bring in some specialized help. Absolutely.
Okay that's cool, you build the team and that is a good question is where are you actually starting from? If you have a team you can lean on that team, especially if you're looking to do acquisitions that are relevant to your industry and you have some synergies in house but you can sometimes get hung up on the synergies and not really look at everything else. It's good to have some advisors you can reach out. I've heard some people on the acquisition side using an incentivised team where they have a piece of the deal or compensated if the deal closes. Do you have any insight into which type of advisors should just strictly be paid advisors and which advises you might want to bring into the deal to add value?
Yeah and you got my mind going in a bunch of different ways here on the one hand, if you think about it, my business is one that's predominantly based on success fees, right? I see that as I'm adding value and I'll be compensated when a transaction closes. I've had similar structures when I was internal to businesses as well. I was the one leading the acquisition effort and I would have a bonus that would be tied to the closing of the deal. I think this might be out of line a little bit, but there's probably an opportunity for the industry as a whole to rethink that model a little bit. When I say that, I think more along the lines of if I'm internal to a business and I'm going to get some sort of compensation if I close a deal, are your interests really aligned with the companies? I could foresee situations, particularly with internal employees of yeah, we found this in due diligence but it's not that big of a deal and we can fix that once we close. But I really want my bonus kind of thing. Absolutely. I would say with any advisor that you use, I would look at what their role is and how you can align their incentives with your incentive and make sure that you guys are kind of focused on the same thing with attorneys, I want an attorney to tell me what my risks are and making sure that I'm not going to step on a landmine. I don't want him or her to be compensated only if I close the transaction. My attorney's going to get paid no matter what, which is what their model is.
But that makes sense, right? Because again, I don't want the attorney to be afraid to come to me and say, hey, you shouldn't do this deal. I think with attorneys, it's fine. I think with accountants it's kind of the same thing. What value are you adding? It would be great if accountants could kind of have a little bit of a success fee model also. I don't know that you could find any but yeah I would say just really thinking through making sure everyone has aligned interests is the best way to get there.
That's a great perspective. The aligned interest piece, you don't want someone on your team just pushing to get a deal done so they get paid the most possible. It's easy to think, someone once told me that everyone, every owner, every person is much less attached to future money than present money. Yes, sometimes being cheap on the front end can actually hurt you later down the track. Definitely make sure everyone's aligned. Like you said, you want someone on your team coming to saying, we have to absolutely stop this deal and here's why. You don't want people to be incentivised not to do that because ultimately a few of the business owners or if you're a major shareholder, this is going to be your problem after the acquisition. That's right. Cool. Is there any other points on the acquisition side? I mean we could do 10 episodes on just acquisitions but this is more of an overview at episode before we get into operations and integrating, is there anything else on the acquisition side you'd like to mention?
Yeah. The one thing we didn't really necessarily talk through before you get too far down the process of talking to people, I would have a pretty good handle on how you're going to finance an acquisition. Coran is an advisor. There's nothing worse than feeling like you're moving towards a deal and then having the buyer come to you and say, Hey, I can't get the funding. Then you just kind of think, wow, I just wasted three months.
Thanks. Yup. Nothing worse.
Making sure that you have either investors or cash on hand or access to bank capital or some alternative lending source. I think walking through that process before you have a deal on the table is helpful and it's going to be one of those chicken or an egg scenarios where I would say develop as many relationships as you can before you have a deal on the table.
That includes talking to your local bank or a banker. You might know they're not going to be able to tell you anything until they see an actual deal and analyze financials and most likely the same scenario with an equity investor. But it's just like developing the relationship with the target. Developing relationships with financing sources. You've got to do that in advance. That way when you do have a deal to bring them, you've already gone through all the who are you and why are you doing this? They've gotten to know you. That part of the process is already done and you can kind of streamline and say, okay, when we last met you said if I found a deal that fit these parameters, you'd have an interest in it here it is. What do you think? Again, I would always make sure that you have an ability to actually execute the acquisition strategy
That can help you in a competitive scenario with you while looking at a deal that's on the market and you're coming in with a bid. It's not just coming in with a strong bid and good deal terms. What are the chances that you can close this thing? If you've already talked to a bank and they've essentially pre-approved or said yes with these parameters will lend up to x or based on the deal, here's what we need to see. Then the advisor, the sell side representative can even reach out to the bank and have that conversation and get more clarity on your offer versus other offers. Even if the deal is off the market as a way to give people more of the target company, more confidence that you can close sharing this information early will help show them that you're serious. Absolutely. Absolutely.