• Rob Joyce | Financial Buyer Talks R&W Insurance
    POSTED 11.11.19 M&A Masters Podcast

    This is Part 2 in a two-part series about a recent M&A deal in which PE firm Broadtree Partners purchased SAAS company, RedCAT Systems, which provides specialized HR services for major corporations like Uber, NYSE, and LinkedIn. 

    This time we’ll be covering the Buyer’s side of the transaction with Rob Joyce from Broadtree. (Be sure to check out my conversation with Steven Epstein of RedCAT here.)

    Importantly, Representations and Warranty insurance was a crucial part of this deal. Broadtree wasn’t too thrilled about having this coverage in place at first, but, as Rob notes in our conversation, they did eventually come on board. 

    We talk about the initial reluctance to get R&W insurance… what changed their mind… and how this coverage changed the dynamics of the deal dramatically, as well as… 

    • How the due diligence process was delayed because of two key factors (this is something unique to this size of company and industry)
    • The total cost of Rep and Warranty coverage – how it breaks down and who pays for it
    • Why they saw RedCAT as a worthwhile acquisition (great clues for startups here) 
    • The sticking points that delayed the deal along the way – and how they could have been avoided
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, a clean exit for owners, founders and their investors.

    Today is the second of a two-part series where we’re looking at a case where an m&a deal was insured by record warranty. This time from the buyer’s perspective. Broad tree partners are a financial buyer which purchased a Colorado, Colorado-based SAAS company by the name of red cap systems. In this I’ll have Rob joys of broad tree partners, discuss his perspective and you’re going to note that, at first he was not too thrilled about going after rep a warranty but to accommodate the seller, he agreed to move forward with us And he went through a transition going from being aware of record warranty as a concept to becoming a tool that he is going to use on a go-forward basis quite a bit like an experience that we have all too often here at Rubicon where a majority of our clients are first time users even though they may have heard of record warranty. They had yet to use it and their experience changed their opinion dramatically. The other issue I want to highlight here and be aware of is that this is a lower middle market company with a transaction value under 30 million that did not have audited financials, which would have made it ineligible in 2018 to get record warranty. However, now with the market, the way it is in 2019, not only was a solution available, it came in at the right price and also provided all the same benefits. That billion-dollar transaction gets to enjoy so now have a listen and enjoy Rob Joyce.

    Welcome. I’m here with Rob Joyce, who’s a director over at Broadtree Partners. Rob, thanks for joining me today. Now tell us about brought three partners. And then we’ll get into the context of how you came to this point in your career, but give us a profile on Broadtree.

    Who Is Rob Joyce, and What Is Broadtree?

    Rob Joyce: Yeah, so Broadtree Partners is a lower middle-market private equity fund, and maybe a good way to think about them is they are what I refer to as a search fund incubator. And what that means is as opposed to necessarily looking and acting like a search fund, they act as a private equity fund in almost all aspects with kind of one unique focus, which is at Broadtree.

    Many of the executives are operating partners. And the intention is for these operating partners, to be deployed in the businesses after the acquisition and what means as broad trees focus is not only deploying dollars into new businesses make acquisitions, but also deploying people. And we view that as part of the way that that will help growth inside the acquired portfolio companies.

    Patrick Stroth: I think that’s a really important differentiator from other investors out there who are blind, you know, contributing capital, and maybe a little advice here and there. But you’ve got operating partners that have seen businesses through the entire lifecycle, from established growth into the next transition and beyond. And I think that kind of knowledge and experience is sorely lacking, particularly from owners and founders who have only had one life cycle they’re dealing with, and that’s just the one they have.

    So that’s a great additional feature you guys are bringing. 

    Rob Joyce: I think it’s something that is a real value add in the lower middle market, is I think one of the things that companies need to grow here, not just as capital, but oftentimes from a resource. constraint in terms of personnel, these companies are resource-constrained. And it is difficult and expensive to hire executives that can make a difference in your team. And for a lot of people, especially they haven’t done it, this can be something that’s a pretty scary thing to do. And I think this is a great way to make a large impact in these businesses is not only to deploy capital but to deploy resources as well and full time dedicated resources, whose objective is to grow the business.

    Patrick: Give us some context on you. How did you come to Broadtree, how did you get to this point in your career? 

    Rob: Yeah, so a little bit of background on myself is for a number of years. I did M&A mainly focused on doing integrations with a little bit of carve out work. I did that for about eight years. And then after that, I transitioned and I, you know, went back to business school, and had some experience with private equity and venture capital. And what led me to read cat was I knew I wanted to stick in primary investing. And one of the things to me that was important was as opposed to just deploying dollars, which is, you know, what we talked about a second ago when I was really looking to do was also individually to be able to build something and to be someone who is helping to actually dictate the change and create the change and create growth as opposed to just deploying and stewarding dollars are and you know, investments. And Redcat, sorry, and Broadtree, you know, offered me that ability.

    Patrick: And were you and I came in, came into the picture together was when Broadtree and you were pursuing the acquisition of RedCAT, which is a SAAS company based in Colorado. What led you to that particular investment? What was it about RedCAT that attracted you?

    Why RedCAT?

    Rob: Yeah, so outside of any sort of investment thesis that existed in the area, specifically about RedCAT, what was so interesting was the work that the existing the management team, which consists of the two co-founders have managed to build to this company over kind of its fairly long life. And the kind of proof is in the pudding in the really impressive customer base that the company had as well as the fact that they were really filling a hole that seems to exist in the marketplace. But a lot of it was really a combination of the product as well as the people who are going to be part of the team that’s really what made the difference.

    Patrick: So if you can walk me through the process just overview real quick. You meet with them their synergies, there’s a connection. You decide to move forward to design the letter of intent. How did the process Go for you from that date, how long of a time are we talking about? And then just, you know, it’s not it’s a lower middle market company, that doesn’t necessarily mean it’s going to be quick. And there’s not a lot to look at.

    Rob: Yes, this process was certainly not quick, I would say this is on the length and if not on the far end of long for these processes for a lower middle market company in terms of time. So, there’s diligence, that obviously needs to be performed, you know, small businesses, in companies in the lower middle market in general. So sometimes can be more difficult to your point. You know, sometimes they’re easy because there’s not a whole lot to look at, but sometimes they can be difficult because they also don’t necessarily hold their data or information or are and ways you’re used to looking at for larger companies. And part of it is either lack of sophistication or lack of resources to do it and ultimately lack of resources can also play a real role and how long diligence takes to know if your company has hired if your target rather is hired, you know an investment banker or has an advisor who is actively pushing it into a sale or pushing into an auction process that will be more well defined.

    Now, if you are a company that is not the norm if you’re looking at companies, now, the normal process this may or may not take longer and with RedCAT, one of the interesting things as you know, the founders are also busy running a business during this time. So, you know, acquisition or in their case of sale is a significant amount of effort. And they had to juggle that while also simultaneously continuing to grow their business. So so the process took a while but the kind of key points where there’s obviously for Due diligence, lower middle market companies will tend to have different quality of financials. And you know, which you might expect for a company that’s 10 times the size.

    The next area is obviously tech diligence, because this is a software company, as you mentioned, Patrick, and it’s having someone kind of go through and perform technical diligence and kind of understand feedback on the development process and code base, and everything else like that. And then one of the things that it also comes down to is, you know, once you’ve gone through the kind of some of these key diligence items and spoken with customers is you still have to find a deal. One of the things that pushed us past one of our sticking points in this deal was, frankly, the use of rep and warranty insurance. It was a large concern on the part of one of the sellers that we were able to satisfy by using warranty insurance and it’s part of the reason why our dealership is cross the finish line. 

    Patrick: Well, the concern with that partner was out there and can happen had you use rep and warranty before I always your initial reaction to it, ultimately we went forward with it. But tell me about your reaction if this was your first time if not, give me a few your feelings on the concept of rep and warranty.

    Rob: Yeah, so this is the first deal I’ve executed with rep and warranty insurance as part of process it’s, you know, it’s been brought up and I kind of gone through bidding as well as diligence with this being understood, but I’d never gone all the way across the finish line and that is, I think, a noticeably different discussion when you’re actually going through and executing rep and warrants even when you’re saying you know, roughly how much does it cost to get something that looks like this. And you know, Paul, parking is doing forth in the real world. So that was, that’s kind of my background with rep and warranty. For me, I was in an interesting place because as the buyer for this particular deal, at this particular size, I did not have the concerns that one of the sellers did. And so this was really used on my end primarily as a tool to help the seller one of the sellers become comfortable with the transaction and part of that was based on their prior experience. And not necessarily even with M&A, but with lawsuits and things from a corporate perspective is, is they saw this as a potential area of risk and this person was very concerned very, very, very concerned about this. And rep and warranty insurance pretty much quickly mitigated the issue.

    And this was something that could have really, really been time intensive if we had not used this solution and I and it could have derailed the deal.

    Patrick: It was more of accommodation on your part. And in part of this, and this is one of those common questions I get is OK, if there’s policy here, you the buyer, or the or the policyholder, because if you suffer the loss, the insurance carrier comes to you and pays you your loss rather than requiring you to go pursue the seller on them and then find the seller so it’s more of a direct line. And the question I get all the time is okay, well, if the buyer is the policyholder then who pays for and it varies from deal to deal and it can be one of three ways either the buyer pays for it. The seller pays for or the two sides split it and you were willing to accommodate them and move forward on this and they stepped in and funded the cost.

    Rob: Yeah, I think that’s an important thing to note is, like you said, there’s a lot of options here about where, who pays for what in this process. And I think part of the different factor for this deal, in particular, is that this was not a concern that I had, as the buyer, the policy, the concerns that were brought up, were not one that I reflect that what I reflected was, from my perspective, or something I was concerned about. And so, you know, that’s, that’s part of the reason why it ended up that way. Now. Now, I know through our earlier conversations and through, you know, having spoken to some of my other past and present colleagues, is there are other cases where the answers on the opposite side of table where this is primarily a buyer concern, and that there are some real concerns and that the warranty insurance is there to really protect the buyer. Interestingly enough here, it is a buy-side policy, but it’s primarily meeting the needs. And not primarily, I mean, it really is there to meet the needs of the sellers.

    So I think that’s an interesting way to look at it. And, you know, I think if we’re being transparent about to regardless of whose needs its meeting, that’s not necessarily with to who funds the policy, you know, negotiating point like everything else in a deal.

    Patrick: Absolutely. So as you go through this experience, you had your first rep and warranty policy, any experiences you can share good, bad, indifferent, anything surprise you?

    Experience With Rep & Warranty

    Rob: Yeah, one of the things that surprised me frankly was the variation in responses you get from talking with different brokers about rep and warranty insurance, everything from you’ll hear some people ballpark mentioned it’s not even possible to get rep and warranty insurance on a lot of these lower middle-market deals. which I know is something you and I extensively talked about that that’s, you know, just not the case anymore. You’ll get that response. You’ll get responses that have differing amounts of, you know, cost, as well as coverage. And you and I working together. I know you kind of already know where I’m going to go with this. But I was blown away by the coverage options that we got working, working with you because they were far above and beyond not only what I expected, but having spoken with my counsel who does an extraordinary number of these lower middle-market deals, as well as some other people who are in this market is no one expected to get this word average. We got them still.

    Patrick: Yeah, that’s one of the big developments, which is why I wanted us to talk about this particular deal is that traditionally, rep and warranty was reserved for the hundred million dollar plus transactions they had in the last couple of years come from 100 million. down to $50 million as a threshold. The product now due to a number of competitors coming into the marketplace are now able to ensure deals with transaction values below $20 million. And the other item that was the big change is underwriters do not like ensuring more than 30% of the deals transaction value. Now mostly in Germany counts we’ve seen out there then between 10 and 20%. There are the outliers but it’s usually between 10 and 20% of the transaction value.

    So the insurance carrier’s comfort level of 30% or less was rarely breached. But when you get these sub $20 million deals, and you’ve got parties out there that want to ensure up to the entire transaction value. That’s a real change but that is now available where we are now getting involved with transactions we’re ensuring 75 to 100% of the traders that So that is the new development that’s out there. Now, how likely we got this through successfully at there were a lot more applications for it and options that you expected? How likely are you to use it again on another deal?

    Rob: I would say that the first step in that is this is immediately now part of my toolkit before it was kind of reactionary. On the only previous times prior to this deal, that revenue, I’d really looked at revenue mortgage insurance, and like you mentioned part, it’s the market I’m working in, in the deal size, you know, this was something that kind of I only looked at based on seller requirements, you know, they really should be happy to have this, you know, give a banker or someone else who basically says this is you know, you must include this, I kind of used it under those circumstances only, I would say now, this is an immediate part of my toolkit, one that can allow some risk mitigation on my side if I feel the need and too, I think it’s also a great tool to help overcome some buyer discomfort, as they’re worried about any sort of risks to the deal. things that can happen, that rapid warranty insurance can cover. This is exactly the tool to use that.

    Once again, it’s everything is about the cost. So, it depends on you know, whether or not you need it, how comfortable you are. I will say for me personally, I would not hesitate to use it again, as a tool to help overcome buyer objections or to make them feel comfortable or in some cases where I do feel there’s a risk here to protect myself from the risk.

    Patrick: I think it’s a great tool that can be deployed strategically just wear it particularly if you’re in the position as a buyer. You can offer terms that letter of intent with the seller where you say, here you go, we were looking at traditionally there is an escrow or there’s a withhold, and here are some of the risks we’re going to look at if you will so here’s another option where we don’t have to have as big an escrow or any escrow we can ensure the deal is about this is about the cost of it and seller, which would you prefer, you know, having the funds in escrow or unlocking the funds is just going to cost a little bit more, we’ve got a ballpark for you.

    And I would think more often than not the seller is going to jump in at getting insurance. Ideally, you’ll get over once they see the cause they get a custom to the cost is the peace of mind and the lack of worry of a lot of these risks as the process goes on, particularly as they go through the whole diligence process with you.

    Rob: I think you nailed the one thing that I probably didn’t highlight well enough in my response, which is, this is also a way like you mentioned to differentiate your bid because it does allow you to minimize dollars in escrow. And from my experience, at least that is something that sellers actively look at it’s not just How much money is you know when under what conditions they get it. And I do think this is a way when you are bidding with a company or structuring an LLI or whatever your process is, this is a way to differentiate yourself. And I think that is invaluable outside of the risk mitigation factor. Simply unlocking the cash for the sellers is a very important thing to note.

    Patrick: I couldn’t have said it better myself.

    Rob: Thank you very much.

    Patrick: Now, Rob, you’ve with RedCAT, which we closed a few months ago, you’ve gone through by now your first board meeting with them, how are things going with them?

    Rob: Things are going well, working with the sellers, we’ve been visiting some customers, we’ve acquired some new customers as well during this time and we are getting ready to make a big hire to continue to push growth. So things are going well and everyone is excited about working to kind of take RedCAT towards the next level.

    Patrick: Well, I know you’re busy, a success brings on more and more Success for you. And I know that you’ve got a lot going on with us. But if there are some other folks out there that are in the same position as RedCAT, where you got owners and founders of the lower middle-market company, and they want somebody who’s not just going to throw money at them and put demands for growth, but somebody who really wants to partner with them, I really think they should reach out at least think about you and Broadtree. 

    Rob, how can our listeners find you?

    Rob: Yeah, so you can find my contact information, as well as my partners is on And I would encourage you to reach out to someone there if you’re looking to meet with anyone at Broadtree Partners. And we’d be happy to discuss anything with you tonight.

    Patrick: Well, Rob Joyce, thank you very much. It was an absolute pleasure working with you and I look forward to working with you again very, very soon.

    Rob: Thank you, Patrick. I look forward to as well.

  • Steven Epstein | An In-Depth M&A Case Study
    POSTED 10.29.19 M&A Masters Podcast

    The first of a two-part series of a real-world M&A transaction. First up, I’m talking to Steven Epstein, the founder of RedCAT systems, a Colorado-based SAAS company involved in HR and compensation solutions for clients like LinkedIn, Uber, NYSE, and many more.

    They were recently funded by PE firm Broadtree Partners. 

    Specifically, we’ll be looking at how Representations and Warranty (R&W) insurance played a key role in the transaction. What’s interesting is that RedCAT would not have been eligible to use R&W coverage to be reimbursed by a third-party – the insurer – if there had been any breach in the Seller’s reps. 

    We’ll talk about why insurers were willing to play ball now and how that could impact whether or not you can use R&W insurance on your next deal, as well as…

    • Why one of their partners insisted on R&W insurance – and the Buyer said yes
    • What they did to find a Seller who matched their philosophy
    • The biggest thing he would have done differently prior to the sale
    • The top benefits of R&W coverage and the surprising impact they had on the deal
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here, that’s a clean exit for owners, founders, and their investors. Today is the first of a two-part series where we’re going to provide a case study of an actual M&A transaction from both the Buyer side and the sell-side perspectives, where rep and warranty was used and played a key role. The first side is with the Buyer side, which is Mr. Steven Epstein. He’s the founder of RedCAT Systems, a SAAS company based in Colorado. 

    I’ll let Steven tell you his experiences in his own words and the benefits he got. What’s important here is for you to understand that prior to 2019, RedCAT Systems would not have been eligible for consideration for rep and warranty. It was a lower-middle market company with a transaction value well below $30 million. They did not have audited financials, and they were seeking insurance to a level that was well over half of the transaction value. Any of these three would have made RedCAT ineligible. But in 2019, not only was there a solution available, but it came in at the right price. 

    The other thing to consider for any of you that are either part of a lower-middle market company, or represent a lower-middle market company, the benefits that RedCAT both on the sell-side and the buys I’ve received are no different from benefits that are received with billion-dollar transactions. And now let’s turn it over to Steven. I’m here with Steven Epstein of RedCAT Systems. And Steven, if you could tell us real quick, tell me about RecCAT. What exactly is it and how did it start? Give us the background of the organization. 

    Origins of RedCAT Systems

    Steven Epstein: Sure. We formed a company prior to RedCAT in 1996 and started doing HR solutions. Started with recruiting. And then throughout the years, it’s worked on various projects for lots of mostly friends, and then that turned into acquaintances. And then as people moved, we grew holistically. And then in 2014, we formed RedCAT with a new partner. 

    And we kind of focus more on enterprise HR. Basically replacing technological solutions in the HR space, and then our specialty became compensation. So we end up doing our primary thing is high-end compensation for fortune 500 companies, the large global footprints of how they manage their compensation process, and then also in the performance management space a bit as well. 

    Patrick: Now the very important stuff, particularly as you get more and more people, you’ve got to keep track of who has stock options, who has shares in the company, all those types of things. 

    Steven: Oh yeah. And it’s difficult for large global organizations with 10s of thousands of people to manage this. If you’re in, say, 120 countries, you have a lot of currency fluctuations. You have a tremendous array of compensation decisions, from base salary to bonus, exponents, retention, performance-based stock, market conditions, performance conditions, you know, top performers retention thing. There’s a whole array of how a company would do this, but totally separate from things like payroll, actually giving an employee compensation. 

    So the tools that we do allow companies to manage that process efficiently, either sometimes with small teams. You know, some of the companies might have 50 people on a compensation team. 50 full-time people are actually thinking about compensation. And so the tool becomes a focal point and allows them to A, you know, look at all the data and manage the entire process efficiently. Because it’s easy for companies to forget that in most cases, for a lot of companies compensation is their business expense, by far. 

    It vastly outnumbers any other expense in those companies. And people take it for granted like, Oh, well, we just have to pay that. 94% of our total expenses, oh, that’s just a given. And they’re not really optimizing the fact that compensation totally affects more, you know, its morale, its retention it’s growth. It’s how employees view the company. Even though it’s sort of a fairly, you know, a  basic metric, it’s sometimes not viewed the right way. And if you,

    Patrick: Yeah, it’s a very intimately personal viewpoint held for every single person in and organization so that is central to their core why there with a company. That becomes a pretty daunting task when you got that many people. 

    Steven: Exactly. Yep. And even, sometimes even smaller companies in the financial services sector. Some of our clients may only have 1000 or 2000 employees, but especially in financial services, one of the key things is compensation. That’s why they’re at the job that they’re doing. And therefore, it’s extremely important. A lot of white-glove services, you have lots of people that are very interested in the outcome of compensation that year. So, 

    Patrick: Absolutely, absolutely. So as you got going in 2014, what led the decision to go out and be acquired?

    Why Steven Chose to Sell

    Steven: So the decision to be acquired was mostly related to the fact that we have a lot of pressure to grow. And we didn’t really want to go with the venture capital route. We had various friends and acquaintances that, you know, had gone that route, the whole bit of it and we were finding it difficult to stay our current size and get the types of clients, very top tier clients, often multi-billion-dollar payout, run the cycle, it was difficult with our headcount. 

    We’re very small. And so we knew to be able to stay relevant and to meet the types of compliance for GDPR and complexity, technically, we needed to grow. And we had tried a little ourselves and we just knew we needed more help. And so we kind of helped to, decided to find individuals that had our same philosophy, or cultural you know, had our vision group culture and philosophy, and to help to get the help we needed to be able to grow. 

    Patrick: So, as you looked at culture, philosophy. How did the process look? Did you run out and solicit a bunch of contacts that you had or did the organization come to find you? How did you go out there to find a partner that you could team up with? 

    Steven: So we originally, I mean, we were somewhat blessed because one of our partners is very well connected in the financial services industry. And he had various friends that had, you know, connections through banks and advisors and people in the M&A space who do this, right? As that’s their full-time thing is to go and find and connect Buyers and Sellers. And so for a year or two, we hadn’t you know, there was a DAC into words and approached lots and lots of possible requiring entities about us, but I think for a little while it was we were just a little too small at that time. 

    And you know, there’s a, you know, there’s sort of like this unwritten say 2 million habit of rule that sort of seems to be out there, revenue, whatever it is. And finding the kind The type of client, the type of company was we work with, we had, we began negotiations with a few that were interested, but we could tell right away that they were more interested in like, massive growth Lots of money, hire lots of people and try to mass market. And that really wasn’t our, not our client base and it wasn’t our philosophy.

    Patrick: So how did you settle on Broadtree?

    Steven: The Broadtree was more, you know, when we first were introduced to them, they had a different idea of growth. It wasn’t like let’s hire 10 or 20 people right away and just sort of throw them in the fire and see if they can grow. It was much more measured growth, which was myself and Bonnie, our philosophy was more about that. Because of the clients, we had a fairly small number of clients. About a dozen at the time, and they were all very high-end. 

    They’re all you know, names that pretty much anyone in America would generally know if you just said it. And from that, we wanted to would make sure that our clients were treated very well, right? Which is very high-level service. There’s really nothing that we would be asked that we weren’t able to fulfill on time, on budget and pretty much the experience was exceptional. That’s why we were able to get the types of work that we do. And we wanted someone who would had share that philosophy and maintain that while at the same time doing measured growth.

    Patrick: Okay, and so then the process begins about when did you guys start the process of Broadtree? Just give us an idea of the time scope on this so, timing. 

    Steven: So when did we start Broadtree? I think it was about from now about a year and two months ago. We had a process, effectively once we had assigned LY it took roughly nine months to actually close the deal. That’s something that I had read about like, oh, diligence is hard. Oh, no diligence is nutty. Nutty hard. Oh, Welcome to the diligence process, detail. We did an okay job prior to this whole process. Had I known at the time, like now what I knew then, as a company if that was your plan I would be just keep much more meticulous track of documents with every single document. 

    The same copy, the dated copy the stamped copy. We have like 600 pages of documents like this is part of our binder. Every contract, every single thing, we’re normally like in an email, you don’t think about it, you get back a signed PDF and you’re like, Okay, they signed the contract. And whether or not you signed it immediately filed it, stored in the right thing he date it, back that type of thing and all the minutes. 

    It’s every little bit of every single dollar was ever spent took a lot of effort to come up with. And then all the contracts for you know, thousands of pages of contracts that we had already signed, but then looking and reviewing every single thing took quite a while. 

    Like when we started in September, we’re like, oh, we’ll be done by the end of the year. Like wow, that’s great. That’s already a couple of months. And just things seem to take longer than they should. Even when we are near like after all the months and diligence, even near the end, when we’re getting closer to actually doing the deal. It still kept slipping. 

    Like oh, it’ll be next week. Oh, no. Oh, we don’t have the certificate from California because you know, it’s only good for 10 days and then it expires and you have to get a new one. And oh, we have seven of those in all these different states. Oh, and this state only accepts mailed copies, things like that. Like constantly there was always some extra-long extra thing that made it difficult to close but in the end, we did. 

    Patrick: You make one, that’s one real danger out there is that you get so busy getting everything set up for being acquired and going through the diligence process that it becomes a separate full- time job, you still have to keep your eye on the ball and keep, you know, operating and doing your client work.

    Steven: Absolutely, that’s actually something that a few of the delays are just because of that exactly. Like I don’t really have time to respond in an efficient manner, because we’re in the thick of doing a project, for example. But really that in our case, it was more like I just sort of worked too hard for me for the nine months, rather than pushing it too much. 

    But it’s something that that like you read about, but you probably don’t fully understand the depth. At least in our industry, like in tech, of the level of diligence. And every bit of open source code, even when it was like 20 lines of code that was copied from something that was then felt like had no relevance whatsoever. Well, technically, it’s still an open-source piece of code that prints a little warning message. Oh, okay. Well, we have to disclose that.

    Patrick: Gotcha that, Gotcha. There’s a lot to that. Now one of your partners was insistent on having a deal insured with rep and warranty insurance. What was the background on that? And how did you actually, how did that lead you to us? 

    What Led Steven to Seek Out Rep and Warranty Insurance?

    Steven: Yes, good question. So the background is that one of our partners is part of a high net worth individual and he was more concerned about liability, about being personally sued or doing this big deal and then like what if some crazy thing happened, you know, in personally fantastical scenarios but conceivably possible given the type of, you know, our size is a very small company, versus you know, the giants and Oracle. If Oracle decided to sue us for no reason, just because we technically compete with them in an area that they would likely win, simply because they can outspend any possible sense. 

    In that vein, he wanted to have the ability need to have coverage effectively, to be able to help shield that liability. And so at the time, and when we first looked at this, the expectation for everyone we’ve spoken with was that rep and warranty wasn’t really available to a company of our size. Because it seemed to be in the 50 million hundred million, you know, big, big deals. And I, of course, did a quick Google. Google’s great, and, you know, spent 20 minutes actually reading various things, and they came across some, an article that you had written actually. 

    And that really resonated. I was like, Oh, that sounds like something, you know, an opportunity to have a solution here rather than just like we can’t do it. Like we’re going to put in a max cap that’s too low because I knew that the Buyers wouldn’t go for that. They’d be like, Well wait, if we’re spending all this money, we want to be able to have a higher limitation of our expense rather than say, a couple of million dollars. 

    So that seemed like there was actually an opportunity. And then the next thing that came out was cost. We’re like, oh, Well, you can get this revenue warranty insurance as a smaller entity, but is the cost prohibitive? Is it completely, if it’s like, oh, it’s 10% of the deal price, most likely that would make it completely prohibitive. But it, you know, obviously, as you know, the rates have been dropping, and it became something that was in the realm of possibility. 

    Patrick: When you presented this to the bar, what was the Buyer’s response? 

    Steven: Well, at first, the Buyer’s response was, Oh, that’s great. We don’t think we need it. Because the liability from us was very small because of the relatively limited number of possible infractions. We didn’t have that many contracts. There wasn’t that many, there wasn’t that much code that actually could possibly be infringing. But still, I think in the end, they were appreciative. It allayed our partners’ fears, basically of the deal as well as the liability. 

    It eliminated, from our perspective, because we stayed on, right? We’re staying on as very integral to the continued success. And if something did come up, I think it would be tremendously valuable to have in that. And why? Because if something came up, and it was like, oh, well we’re going to put something back on the Sellers originally. Like, let’s, you know, let’s say we had, we didn’t in the end because we haven’t RW. But let’s say, we did put the same, you know, million five or $2 million in escrow. 

    And then some kind of obscure thing came out, right? And we disagreed with it. We’re like, well, we don’t really feel that this is a valid thing. The defense wasn’t done right. That would cause a serious breach. Not only of you know, say it’s a million or two dollars, but then we probably wouldn’t want to stay on. And the effect is that most likely would be the failure of the business, the new business. 

    Patrick: That dilemma is something we see quite a bit where you have technology Buyer and post-closing they bring on the target company and they bring on a bulk of the personnel, the management team and so forth. They bring them on in, and that new group are just rock stars and they’re getting along great. And then all of a sudden there will be great to happen. And now the, you know, the dilemma, well do we take away their escrow that we’ve been holding? Or do we just eat it because we don’t want to have a drop in morale? 

    And we don’t want these guys mentally checking out on us. And so they end up a lot of times having to eat a loss that otherwise would have been insured. And so yeah, that’s a real great point. And  I think that the Buyer, I agree, I think the Buyer was at first, you know, a bit ambivalent, but as the process went on, they really started to embrace it, largely because, you know, it put your partner at a lot more comfort and I think that really helped the process move forward a lot smoother. 

    Steven: Oh, absolutely. I completely agree. Yes. So in the end, I think I mean, obviously it still is. You know, the numbers still feel big. You’re like, wow, that’s expensive. That’s a lot but the peace of mind can be priceless, right? Just that feeling like well okay, well, I don’t have to worry about this. If some frivolous thing happened then we’re covered. It’s not a thing that will A, damage the relationship and B, you know, just consume life energy where you’re fighting about something that is likely frivolous. 

    Patrick: Well said. I could not have said that better myself. A lot of times with the rep and warranty policies, they’re dealt with between the Buyer and the insurance people. I don’t know how much involvement you had. Did you have any involvement in doing anything other than getting us connected with your Buyer team?

    Steven’s Involvement in the Rest of the Process

    Steven: A little bit. Sure. We looked at, you know, obviously the actual policy itself and then you push back on like the wording of a couple things like, Oh, we won’t cover this little obscure thing and you say, oh, why not? And then we discuss it a little bit and we tweak those and but nothing truly material. It was all fairly small and benign.

    Patrick: It didn’t slow down your process of the deal or anything like that. It wasn’t too much extra work being dumped on you? 

    Steven: No, not really no. The insurance bit was relatively benign timewise. We didn’t spend I mean, you have to read it. You know, we read a lot, you know, still 20 pages of reading, but that it wasn’t like we spent a lot of time and effort on it. And as far as you know, the actual timeline of the deal, it was fine. Had we closed, like right away, it still seemed like that was, it was something that we could have if we were extremely expeditious, we would have been able to still meet our deadline. As it turned out, we had extra time. So it was fine. 

    Patrick: So aside from now having the knowledge of watching all your documents very closely and making sure you pay attention to every dollar that’s spent and why and all the code having that accounted for, any other lessons from this experience, or is there you know, anything that really surprised you other than the minutia on the documents and details?

    Steven: Document details was big. I would say, you know, obviously, you work very closely, in our case, with the Buyer spending a lot of time going through a lot of diligence, a lot of discussions. And so making sure that probably and that’s something that would evolve over time, but I would think that would be very important to ensure that the people that you’re working with your Buyer for your company like us, that you liked them. That they’re good people. Luckily we worked out. Our Buyer is great. I talked to him right before this call. He’s great. We love, I think it’s a good working relationship. 

    Other surprises that came up, not tremendous. I think that we, it’s easy to focus on some things that in retrospect, we spent too much time focusing on. Some of the numbers and so forth that it’s easy to imagine scenarios that are completely unrealistic to focus on like outcomes or future cases. I know that they can happen, which is why, obviously, like rep and insurance rep and warranty insurance, why it exists. But I think that probably could be streamlined. That’s something I’d like to see actually, like from you, Patrick, would be like a cheat sheet. 

    Hey, just in a lot of deals, these are the things that probably that you should be focusing on rather than this generic like oh, what if? What if that? What if this? And then coming up with language to address cases that are probably discovered for good like, reward too. Like, we did a lot of that before we had the rep and warranty. Like, oh, what about this case? What about that case? What’s the limit of this liability? How many months for this? And really all that was a waste of time because we knew that once we knew we were going to get several warranties. 

    Patrick: Yeah, then there were fewer contingencies to worry about. 

    Steven: Exactly. And some of the, and a lot of the contingencies, we spent too much time talking about that. We’re very far-fetched from my perspective. Things like oh, some unknown company in Russia is going to sue you for code that, like you’ve never really like, things like that. 

    Patrick: Yeah, gotcha. Well, now you’ve already gone through your first board meeting with your new partners and everything. How are things going? You mentioned that you liked them, which is always a really, really positive thing. But how’s it going? 

    Steven: It’s going well, yeah. I mean, you know, as I may have mentioned, our primary problem is capacity. Capacity strain, meaning that we’re small, and to really handle like larger volumes of the types of clients we work with, we need, you know, highly-skilled people that are really good. And that is a difficult challenge to find. But we’re doing our best, you know, we have fairly, you know, we’ve had recruiters, we’ve had thousands of applicants. 

    And then we have, you know, various tools that we’re using internally to try to ascertain, you know, is this person a good fit? And assuming that goes well, and hopefully it will, it should be good. Yeah I mean, then it’s just more of a How much do we want to scale? How long do we want to play this game? I mean, while it’s still fun, and that’s a big thing, make sure it’s fun. Like you have to enjoy what you’re doing or otherwise you probably shouldn’t be doing it. 

    Patrick: Absolutely, absolutely. Well as you’re having fun, there may be some other people that could have some questions for you. How can people reach you? 

    Steven: I think LinkedIn is a great way. Just reach out on my LinkedIn and ask a question. That’s easy. 

    Patrick: Sure. Okay. So it was on LinkedIn. Steven with a V, and then Epstein, EPSTEIN? 

    Steven: Yep. On RedCAT Systems. 

    Patrick: Great. RedCAT Systems. Well Steven, thank you very much. This has been real helpful and I’m glad that this all worked out. I mean, our objective on this whole venture that we have at Rubicon is we want to help people who created something from nothing be able to move on and exit one platform and move on to another where whether that you know, being acquired by a strategic or just going riding off into the sunset with a clean exit for a great retirement. 

    You’ve added tremendous value. RedCAT Systems is very successful. And your company are a list of the who’s who of Fortune 100 firms and you’re definitely adding value with what you’re doing. And I really sincerely wish you the very best of luck. And hopefully we’ll be with you when the next, you know, nine or 10 figure deal comes up for you. 

    Steven: That sounds great. Yeah, I mean like this was another interesting thing you could add of course is that once you’ve done this once you think oh, wow what about this idea? That would be fun. So there’s lots of ideas out there. I think it’s just finding the passion. And one extra thing that I’ll give you a little bit that you can throw on if you’re editing something together is when I first found Rubicon from the article, which I liked, and give me, you know, basis, of course, there’s everyone else had someone like did you talk to Marsh? Did you talk to this person? Did you talk to that person? And it was fine. 

    I tried to stay out of spending a lot of time on it. In the end, I think that everything you did was fine. It was great. The pricing was all similar normalish. It wasn’t a lot of like, wow, I need to shop around a whole lot. And it was very convenient that you were like, had worked with enough companies that you could quickly give us like an overview that you’re able to shop to the various insurance companies. So we didn’t have to spend lots of time shopping. Meaning like I felt confident that that was approximately what we would expect, and was great. It saved more time. 

    Patrick: I appreciate that. Yeah. That’s the other thing that is new out there is there when you and I spoke our first conversation was in fact, there were probably about 11 or 12 insurance companies active in rep and warranty. There are now as, just in a few months now we’re up to 20 companies. 

    And they are going all over the map from one stage focuses just on sub $50 million transactions and then others that won’t go below 100 million because they want that segment of the market. So it’s definitely maturing and something to go forward with. But I just wish you all the best of luck and we’re going to do what we can to stay in touch with you, Steven, and keep track of RedCAT Systems.


  • Austin Leo | Insurance That Increases Sales
    POSTED 9.17.19 M&A Masters Podcast

    In the world of tech, a lot of companies, especially the smaller ones and startups, their financials are quite opaque. You never know on the surface if one is about to go under or go unicorn.

    Austin Leo, VP of USI Insurance Services, highlights a specialized type of insurance, once reserved for large manufacturers, that can help larger companies identify who to do business with… especially those with the least risk of going under before they pay their bills. 

    And that’s just one benefit.

    It’s a great example of insurance coverage that adds tangible monetary value… even when you don’t have a claim. Austin walks us through the many ways these policies help and how they work in real-world terms. 

    Tune in to find out…

    • A strategy to prepare for a gap in your accounts receivable
    • A “backdoor” way to get information on potential clients
    • How to increase sales with insurance
    • Why lenders love this insurance – and are ready to spread the love to you
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there, I’m Patrick Stroth. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here: that’s a clean exit for owners, founders and their investors.

    For most people, insurance is something that you pay for, but you hope you’ll never use. Even when it works, people are still not happy because something bad has had to happen in order for you to put your policy to use. Now there are insurance products out there that provide tangible monetary value without the policyholder ever having to suffer a loss. Rep-and-warranty insurance for M&A transactions provides this very value-added capability, and that’s what inspired me to pivot our program here at Rubicon M&A insurance to focus on insuring M&A transactions.

    Today, I’ve asked Austin Leo of USI Insurance Services to join me to discuss another product out there called trade credit insurance. Like rep and warranty, trade credit provides significant financial benefits without ever having to incur a loss. That’s probably why private equity firms are now warming up to this and using it on more and more of their portfolio companies. But,  I’ll let Austin tell you how. Austin, thanks for joining me today. Welcome to the program.

    Austin Leo: Hey, Patrick, thanks for having me. appreciate you having me on. Glad to be here.

    Patrick Stroth: Well, let’s give everybody listening here some context. How did you get to this point in your career, where you’re a specialist in this very technical area of insurance?

    Austin: Sure, so good question. Sometimes I asked myself that myself. So, you know, I started off my career actually working in PR, and then ended up at a company, they were a French company, that specialized in company information in the B2B sector and advertising your products in that sector to specialized clients. Ended up you know, you know, really like that part of the business, especially the information side of that. And, I ended up at an insurance firm by the name of Coface. Now, Coface is a French insurer (second-largest trade credit insurer in the world), and I started off there as an underwriter and soon found that insurance was fascinating to me. Especially the trade credit side of things, whereas you mentioned, you know, you don’t really need to find the value when a claim happens— you can do that much earlier. And we can talk about that. But anyway, ended up you know as an underwriter, a Coface. Then went to manage our global clients, and then went on to the broker sodas business with my own firm. And then, eventually joining USI. 

    Patrick: Well, as with a real diverse industry like insurance, there are products that can cover any number of different exposures. Why don’t we help the audience out here— what is exactly trade credit, and then who uses it, or who’s the traditional user of a trade credit insurance policy?


    What Is Trade Credit Insurance?

    Austin: Sure. So trade credit insurance helps companies identify their risks, it provides companies with information on their customers, the insurance side of it really covers a company who is selling on open account terms— open account credit terms to another company— it helps them mitigate that risk against non payment, slow payment, or bankruptcies and insolvency.

    So you’re selling to another company, for whatever reason, they don’t pay you or cannot pay you. That’s when credit insurance would kick in, and pay a claim on the non-payment side of it.

    Patrick: So they step in and pay your outstanding accounts receivables because the client disappears or is somehow unable to pay?

    Austin: That’s exactly right.

    Patrick: And the traditional policy was— I can think of these where you’ve got big ARs out there were large industrial manufacturers, textiles, commodity type things. That could be the typical client of this. But nowadays, are there other clients, particularly in the tech sector, where this could be used?

    Austin: Yeah, absolutely. And you’re right, Patrick. You know, a lot of companies that have used trade credit insurance are, you know, manufacturers, distributors, the commodity traders, but, you know, manufacturer or distributor of components. And that was kind of the traditional side of a user of trade, credit insurance. Use it for multiple things, you know, both for mitigation and enhancements, financing, and sales. But now we’re finding that in the tech sector, you know, a couple of things are happening, right? Tech companies tend to be a bit focused on sales, especially to companies they might not have a ton of information on, or are new to the industry.

    So that leaves you, you know, at risk to non-payment, or lack of information on your companies. And as I always say, you know, a sale isn’t a sale until it’s paid or collected, right? So, it’s great that you’re sales focused and offering open account turns to other companies, but until it’s paid, it’s not a sale. So, that’s where we find tech companies benefiting from the trade credit side of things, you know, the heavy AR stack on the book, the last thing you want is for multiple companies not paying you, customers not paying you. 

    And then I mentioned on the information side, you know. Newer companies, prospective clients… it’s tough to pull information. I mean, of course, you know, you can, you know, Dun & Bradstreet, CreditSafe is a provider of B2B company information. The insurance companies also have big databases filled with information, and they do their due diligence. I mean the last thing they want to do is, you know, pay a claim, right? They want to be profitable. So, the information that we find from the insurers tends to be better than some of the stuff we find from, you know, like the DMV. So, yeah, I think the benefit in the tech side is, you know, data information on your prospects, clients. And then, of course, you know, mitigating the risk of non-payment or insolvency from those clients.

    The other thing that we find is the financial benefit.

    How Does Trade Credit Work?

    Patrick: Before we get into the financial benefit, I just want to go back just on a really nice use case scenario. So you have… what the service that you can provide as your insurance product can provide background checks for prospective customers. So if you’re a tech firm, you’re about to sign a major contract with a potential customer, they could turn to their trade credit insurance and say, we want to sign up this company in South Korea as a client, they’re going to pay us X dollars… and we don’t have as much information. But, the insurance company with their resources, can find out whether or not that potential client in South Korea is a good or bad credit risk. Is that is that how that works?

    Austin: Yeah, that’s correct. So yes, you know, we want to sell to company A in China, you know, notoriously, it’s kind of known in China, that it’s tough to get financials. The insurers are able to do that along with banks. So yeah, you know, we expect to have, you know, 2 million open, you know, AR exposure at any given time… high AR exposure at any given time. What do you guys think? And then the trade credit insurance will come back and say, “well, you know, you know, either yes, will approve the 2 million and, and here’s why. Or we’ll do a partial approval of that.” And give you information on why, you know, maybe they’re late to pay other suppliers, and that’s in their database, maybe their financial conditions have worsened Or, you know, the last answer you want here is, is “no,” but it’s relevant, you know, information, right. 

    The last thing you want to do is try to turn bad credit into good credit. Never works out. We’ve seen it time after time. So, yes, the credit insurance information… or I’m sorry, the credit insurance companies are all members of the Berne Union, and they share information with one another.

    So you’re seeing the information that you know, the bank’s get…. the insurance gets, but you might necessarily not.

    Patrick: Wow, so then, not only are you protecting your client from from a perspective loss, but you’re just giving them that that background information so that they can make a better decision that’s got to improve, you know, they’re not necessarily I think, guaranteeing this AR is out there. But, they are really protecting those.

    That’s got to make a company’s lenders really happy. I mean, you had just referenced me there is a financial benefit, I can imagine, you know, with their, with their lenders, companies, lenders would love if the company had this kind of protection.

    Austin: Yeah, and you bring up a good point, Patrick. So, yeah, the lenders, they love trade credit insurance. Especially when there is ABL: an asset-based lending facility in place. You know, companies… everybody thinks about their assets, right? You know, you have the people, you have your property, you have your inventory, all of those are insured, right?

    A lot of times companies don’t think about your receivables as an asset. And they are, and in some cases, they’re the largest asset a company has. So the lenders love it when the foreign receivables are insured with trade credit insurance because it allows them to include those into the borrowing base of an ABL. It also allows them and their credit folks in the bank to feel comfortable raising advance rates, which is really key. You know, you could have a company that has a facility that’s getting, you know, an 80% advanced rate on their assets. With trade credit insurance, the bank can bump that up to 85%-90%. 

    We’ve seen companies that have gotten, you know, 1 million-2 million, just an increase in working capital, just from having a trade credit insurance policy.

    Patrick: Wow. And so, in addition to mitigating risk on the one side, you’re now improving their accessibility to more cash. And that’s got to be just a great benefit that offsets any costs. And this can also be used in a couple of other things, not just for increasing your cash flow, but does it impact on other operational things like your sales? 

    Austin: Yes, yes, it does. So, you know, you could have you can have a group of customers, right?  Where your credit folks internally, within the organization say, “we’ve looked at the financials based on the information that we have, you know, credit report financials, we’re comfortable granting $2 million dollar limit for them in credit.” 

    Whereas you there could be a credit insurer saying, “you know, that’s great. You know, we have information, we can justify a $4 million limit, and would be willing to include that in a credit insurance policy and underwrite that and ensure that.”

    So, I mean, in essence, you know, you can go above and beyond what you might be comfortable doing internally, from a credit standpoint. And you’re just having a partnership with the credit insurance company, letting them take on that risk and really risk transferring that which in turn, you know, you can sell more to a customer… you’re obviously going to increase your sales, depending on how many times a year you do that, and what the open account terms are. So yeah, we’ve seen companies, I mean, in general— we have statistics on this, based on what the insurers provide— companies can increase their sales by 20%, just by using the trade credit piece.

    Benefits of Trade Credit Insurance

    Patrick: Okay, so that’s benefit three. Benefit one was protecting yourself with the information on prospective customers that you can get from the trade credit insurance company. Number two is improving terms from your lender, so they can get more cash flow probably improve their lending rate, and then you can increase sales. So all those are tangible, testable, you can do with evidence and so forth.

    So that really is something. Do you have any case studies or just use examples in the technology sector? I know, you’ve been writing some tech company lately, you share with us some examples of that?

    Austin: Sure. So, you know, we had a tech company that we’re working with, that had a private equity company go in, and partner with them, right. One of the things that were not making them look, so financially sound was the bad debt reserve that they had on their balance sheet.

    So, you know, tech company, as I mentioned, you know, tech companies can be so much focused on sales. So they, were, but to the wrong companies, right? So, piled on a ton of AR, which turned into bad debt, which, you know, when you have bad debt, you have to keep a bad debt reserve on your balance sheet, which negative negatively impacts working capital.

    So, what we did for them, is, we were able to use credit insurance as a way to take out that bad debt reserve, right? You can completely remove that from your balance sheet, transfer that risk to the insurer. In addition to that, they had, you know, two or three clients that were a concentration risk. So the three clients made up about 70% of their business. So what we did, and what the lender liked and in the private equity company, they liked that removing that risk of concentration, right? Because God forbid something happens to you know, one or two of those three big clients completely would put them out of business. So we’re able to transfer that risk. 

    And then from a financial standpoint, they were able to get additional working capital, from some of the foreign receivables and increase to their advanced rate on their ABL facility. So the working capital paid for the credit insurance policy times ten. And the main thing that, you know, we’re sitting down, we’re talking with the CFO, and he goes, you know, what I don’t want is to detract from sales, right? We’re a sales-focused organization, that is where we want to stay focused, we need to grow. So the tool that they really liked was, you know, using one of the large insurers for their database, and even before selling to a company, a new customer— they were able to go into the online portal of the insurer, putting the company’s name, where they’re located, and the credit limit needed, they would know before they even made the sale, if that would be eligible for trade credit insurance. Which gives them a competitive advantage, right? So you know, the information, the lending, and then removing the bad debt reserve off their balance sheet, completely changed this company. It was actually amazing to see what we’re able to do for them.

    Patrick: Yeah, the one thing is private equity firms are notorious when it comes to insurance, they really do not like spending any dollars on premiums unless there is some real value coming in. So, it’s a real validation for you to have private equities firms now becoming more active and really warming up to that. Have you seen a growing trend of that with private equity?

    Austin: Yeah, absolutely. I mean, you know, when private equities go in, and they invest in a company, they want to make sure that they’re getting the best return on their investment. Right. And they don’t want to spend any more money than needed. That’s for sure. So yeah, yep.

    You know, we’ve seen I mean, yeah, there’s a way for us to do a financial benefit review. Right? So, before you even get the trade credit insurance policy, there’s a questionnaire that we have, there are things that we like to review, to see if it would be, you know, cost-effective or cost-prohibitive to the, to both the company and then the PE firm.

    So yeah, we’re seeing private equity use tree credit insurance a lot more. You know, over in Europe, the trade credit insurance market is like 60% to 70% of companies use trade credit. Here in the US, it’s about 12% to 15%. So I think it’s just, you know, a lack of knowledge… a lack of people out there in the marketplace really educating people on trade credit. And we’re starting to see that come around. So, yeah, private equity firms are getting very keen on it. And understanding the benefits and utilizing the trade credit, you know, from the financial benefit, and from a risk mitigation benefit. For sure.


    Patrick: Well, it’s all it’s also nice, because even before they have to commit to securing a policy (there is an application process) but they can find out dollar-for-dollar, how much more they can make before the even have to get a policy, I think that’s a really nice element. We see the same thing and do it proposing terms of rep warranty where you can go ahead and get the terms of a deal set up and we can already kind of model “well, here are ways that you’re going to be able to exit the transaction with more cash than you would if there were no insurance.” I mean, and usually, the financial benefit is a multiple of whatever the cost is.

    So it’s as a lot of people say, once they learn about trade credit a little bit more just as with rep and warranty, the same to word description they just say it’s a no brainer. And that’s why I really think the more people that learn about this, and see how it’s being deployed is a real benefit. What’s the application process? What is there a minimum eligibility requirement? What’s the process? So if someone were to reach out to you, how would they get started?

    Austin: Sure. So no, there’s no minimum requirement for trade credit. There used to be. But as we’ve seen, you know, I was talking to a client of mine 10 years ago, there’s about, you know, maybe 10. In insurance companies who’d be willing twice, right trade credit. Now, there’s about 25, or 26, we can go to, which kind of, you know, change the market and added a ton of additional capacity into the marketplace and softened the market as well, which is good for prospective buyers.

    So no, listen, not a very labour-intensive application process. Basically, they want to understand, you know, who is your company? What do you guys do? Have you had losses in the past? Who are your customers? You know, one of the benefits from going through the application process is, as I mentioned, you have lots of markets to go to, you have lots of insurers who have big databases full of information. Basically, you get a free review of your top 20 customers, by multiple sources. So you could have five or six trade credit insurance companies saying, here’s what we think about all of your top 20 customers, here’s how we would risk rate them. And if we see any problems, here’s what we see. So it’s a nice kind of due diligence process, as well, as you know, looking into the product itself. So no, essentially, you know, you can reach out to me, we have our own application that all the insurers accept, and we’d be happy to guide you through the process and see if it’s something that’s right for the company.

    Patrick: How long does the process take?

    Austin: Generally, applications, you know, sitting down working on it, I’ve had clients fill it out within, you know, 20-30 minutes. I’ve had clients take months to get back to me, but I think it’s due to other priorities. But listen, you know, I think, you know, sitting down, it should take no longer than 20 minutes to maybe an hour if you have all the information necessary.

    Patrick: Well, the other issue is just how long does it take for the insurance carriers to processing? Assuming full submission, complete submissions out there to you go to the 20 markets for them? How long is it approximately… weeks? Days?


    Austin: No, it’s… you know, Patrick, it’s relatively quick. If we have a filled-in application, and we submitted to the market, we expect to have responses back from the insurers within a week to 12 days. So, you know, two weeks if you’ll all of the markets have quoted, and will sit down with people and talk about the pros and cons to each. 

    Patrick: Well, that’s that is it, there is no reason for someone not to reach out because just having the information will… even if it’s a no-go, that that information, I think, is a tremendous use to business owners out there and management firms and so forth. 

    Austin, these products are tailor-made for each and every particular client, there’s not a lot of heavy lifting, the cost is a fraction of what the benefits are. So there’s no reason why you shouldn’t be flooded with people reaching out. How can our audience get ahold of you so that they can see if this is a fit for them? 

    Austin: Sure, so you can feel free to contact me via LinkedIn, which is Austin Leo. You can reach out to me at or there’s always the phone which is 908-240-5145.

    Patrick: Excellent, Austin. Thank you very much for helping me bring in another value add that doesn’t require somebody suffering pain in order to get benefits. So thanks again.

    Austin: Patrick, thanks for having me on. I appreciate it, it was a pleasure.


  • Colin Campbell | Strategic Buyers vs. PE Firms
    POSTED 9.3.19 M&A Masters Podcast

    After culling through a decades-worth of data on IT services companies, Colin Campbell, Associate Director at Livingstone Partners, sees the potential for a market downturn on the horizon.

    He shares what trends he sees that point to this potential slowdown, as well as how Buyers and Sellers approach M&A deals to account for it.

    Colin says that Strategic Buyers are being quite selective in companies they target and tend to go after the company aggressively once they “fall in love,” wanting to move quickly and are willing to pay a premium.

    This is in contrast to Financial Buyers (like private equity PE firms) who may have a wider appetite for acquisition targets, but factor into their analysis the possibility that values may level-off or decline due to an economic slowdown or other factors – they are mindful of the potential downside when pricing a target.

    In our conversation, we take a deep dive into the above concepts, as well as…

    • The type of revenue that is most attractive to Financial Buyers
    • What drives real value in data processing companies;
    • Who’s buying IT services companies today;
    • The disconnect between Buyers and Sellers in the IT services space;
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there! I’m Patrick Stroth.

    Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. And, we’re all about one thing here: that’s a clean exit for owners, founders and their investors.

    Today, I’m joined by Colin Campbell, Associate Director at Livingstone Partners. Livingstone Partners is an independent M&A advisory firm with a proven track record of delivering exceptional outcomes for private and public businesses and financial sponsors. Colin recently published a piece titled “Does An Old Bull Need To Learn New Tricks?” which outlines possible changes in the M&A sector for tech. Which is counterintuitive to the current thinking of late of the unending robust market for M&A in general, and tech in particular. And if slow down is in the cards, well… what middle-market companies do about it?

    Colin, thanks for joining me, and welcome to the program!

    Colin Campbell: Thank you, Patrick. I appreciate it.

    Patrick Stroth: Before we get into this report that focuses largely on the IT services companies… tell me about you, give our audience a context for you. How did you get to this point in your career?

    Colin Campbell: Sure. So, I’m a multi-time entrepreneur. I’ve started a couple of businesses over the years, I’ve been an operator, I was in private wealth management for many years, focused on estate planning, asset management. And, I think at some point, I had experience from a private wealth management standpoint, guiding my clients through mergers and acquisitions, and decided that that was really an interesting part of the business. And, I think an aspect that really sort of captured my attention.

    And so, at some point, I pivoted towards an M&A role coming out of USC, so I did USC undergrad at Marshall School of Business, and then graduate school, also at USC Marshall School of Business. And now, in my spare time, when I’m not advising middle-market businesses on sell-side transactions, I’m also an adjunct professor at the Marshall School of Business.

    Patrick: Well, you’ve kept yourself pretty busy there! Now, with this report you recently published, “Does An Old Bull Need To Learn New Tricks?” (which we’ll link to at our show notes here at… what led you to focus on the report? Where did this come from, and give us an overall genesis of what led up to this report?

    “Does An Old Bull Need To Learn New Tricks?”

    Colin: Yeah, so, we spend a lot of our time talking to business owners that are contemplating a transaction in the next 36 months. And, at the same time, by virtue of the processes that we run, and then staying current on the market, we’re talking to a lot of buyers. And, what we find is that there are some interesting trends going on right now, not only from evaluation perspective but also from the overall economic timing, the catalyst as to what’s driving some of these transactions, and felt like in many instances, there’s a bit of a disconnect between sellers and buyers and the thought processes. So, we thought it made sense to do a little deeper dive, look at it from a historical context. And so, we pulled all the transaction data for the last 10 years in the IT services space and tried to start drilling down into what sort of conclusions can we start to extrapolate from the data?

    And I think what we found is that, you know, there’s a longer-term trend— not only in deal size (and by that I should say multiple), and also deal count— where there are the beginning impressions that while we’ve been in a very, very long bull market, that there are indications that things are starting to slow down and potentially turn. And from our perspective, our clients are generally operators that are looking for a sell-side transaction. You know, there are important considerations to take account for when you’re thinking about what could happen to the economy, and specifically, what could happen to your particular sector in the next 12 to 24 months. 

    So, the idea behind the article was: let’s start to suss some of that out, let’s start to talk about what some of those trends are. And, obviously, the actual implications are going to be very specific company to company, operator to operator. But, it’s important to start thinking now for many of these business owners, how does that actually impact their specific business, given their specific situation, and their businesses nuances?

    Patrick: Well, where you’re targeting this with technology when people talk about technology is as diverse as somebody talking about retail. You can have everything from widgets to items over at Tiffany’s, in the scope of the wide variety of things. And what I liked about what you add here is you are trying to broaden your research for all things, to all people in tech. You focused on a real finite specific group with the service providers. Tell us about that… is it just because those were the most numerous classes out there? Or is there a preference there? You know, most describe the categories of tech that you looked at in the service provider side, and then why those projects?

    Colin: Yeah. And, Patrick, you make a great point, right? I mean, as you look across all of the various industries, even some of the most traditional ones, you’re seeing more and more technology being infused in these businesses. And, that’s ultimately impacting those valuations and those transactions. I think the reason why I tried to focus is that you can’t look at all of it in one fell swoop. It has to be distilled down more than that. And so, where I spend most of my time, is within the broader landscape of business services. We’ve drilled down into IT services, and that’s really what this is focused on.

    Beyond that, I spend even more time really thinking about IT consulting and other services businesses, which is one of the three legs to the stool, if you will, in this IT services landscape. That tends to be where we spend a lot of time talking to business owners that are operating on one of the cloud platforms that are: providing consulting services, that are leveraging technology to impact other businesses, that are managed services providers, that are actively shifting their business towards a slightly different mix (from maybe an older, more traditional consulting business). And so, that’s seemed particularly relevant to my experience, and where we were spending a lot of our time these days.

    So when we take this broader IT services space, and we drill down into data processing and outsource services being one tranche, internet services and infrastructure being the second tranche, and then IT consulting and services being the third… What we find is that there’s each one has their own DNA, their own trends. And, it’s important to think about, even though they do overlap, overlap in some instances, where specifically a business would lie, and then that’s going to significantly drive, how they ultimately become viewed and valued in the market.

    Patrick: Why don’t you give us a quick synopsis of each. What is data processing? And then, what the predictions are based on the report from what you observed. Segregate that from internet services, and then segregate that from IT consulting.

    Data, Data, Data: Processing, Internet Services, and IT Consulting

    Colin: Sure. So, data processing and outsourcing services businesses are what we might think of as your traditional data, big data business, right? They’re dealing in a lot of numbers, are dealing and a lot of data points. They’re trying to draw out really unique insights from vast quantities of data. And I think what we see here, in some of the analysis is that the number of transactions in this space is somewhat limited. And I think there’s a number of reasons for that. I think you have to look at deal volume, in concert with deal value. And what you find is that, for many of the historical years, the deal value has been very volatile. So, multiples in this particular space have been very high and very low. And, I think that’s a function of the limited number of transactions that you see in a space. And so, it’s a common interaction right between supply and demand that when there’s an imbalance in the market, it’s going to drive values either very high or very low.

    Recently, we’re seeing a downtick in multiples in the data processing space. And I think there’s an argument to be made that as data is becoming ever more prevalent. And, I think there’s plenty of sources out there that say, we’re generating more data today on a daily basis than we were generating monthly, or annually, not that long ago. And, the rate of data creation is becoming such that to just be able to analyze the data is not becoming as unique, and it’s becoming almost maybe more— dare I  say— commoditized to take data points, compress them together and try and pull out some insights. It’s becoming much, much more difficult to find something that is truly unique and insightful, versus something that’s become almost a little bit more regular way. So, I think that’s driving down some of the values in that space. But there are so few transactions in that sector, that I think there is room for someone to come out if they truly have something unique, whether it be unique insights or a very differentiated data set that is truly proprietary to their business, that I think that drives meaningful value in that particular sector.

    Patrick: I hate to interrupt… On one thing, though, with the data processing, and just a quick question for some of us less tech-savvy folks. With the data processing, you’re processing… you’re handling raw data and organizing or analyzing that, does that then lead toward artificial intelligence? Or is AI a factor… a part of data processing?

    Colin: It’s a factor of it, I think it depends on how you. And that’s where part of the complexity with trying to distil down a large data set that it tends to get a little bit murky around some of the edges. And so, there are companies that are, are effectively both a consulting and advisory practice, but leverage AI and have data processing capabilities. So, if we think about it more in its pure form— I think the data processing itself tends to be more data collection, data aggregation, and data analysis, and less the true cutting edge AI. Now, the more technology-infused and the more cutting edge of the more advanced you are, certainly, that pushes you towards a higher value because now you’re talking about something that is truly unique. It’s truly differentiated, and typically has some kind of moat around it. In terms of it’s difficult to replicate, it’s one of a kind, right, it’s something that is not readily available across the market. 

    Internet services and infrastructure. This is really going to be when you think of e-Commerce when you think of online, and what I would consider information services businesses. So, this is going to be oftentimes a B2C model, and it’s really online-based, I think these businesses, again, from a volume standpoint, there are fewer trades that go on year in and year out. And, the range of size of the business is very, very broad. And so, that also creates a fair amount of volatility in terms of the valuation of those businesses.

    So right now historically, call it the last three years, these businesses have been trading high single digits, and year to date, we’ve seen actually a limited number of transactions to validate any sort of thesis around where they’re currently trading. They really tend to be predicated upon, what is the type of traffic the businesses generating? What is the type of service that they’re providing? What is the information in the case of online information commerce that they’re providing? And here, again, it blurs the line a little bit, where are they getting the data from? How are they aggregating it? how unique is it? Are there more proprietary insights that they’re able to pull out and then deliver to the consumer from their data set? So it’s, it’s a tends to be a bit more volatile space, just because there are fewer trades.

    Patrick: And then we have IT consulting?

    Colin: Correct. So IT Consulting… this is going to be the bulk of the market. And I think one reason being is that it tends to be more of a traditional consulting model. You have a high headcount, oftentimes there’s a little less technology development, there’s a little less proprietary technology. In this category, you might see companies that are considered the value-added resellers. These are called bars, or IT consulting businesses, that are truly doing what’s considered the lift and shift. So: helping businesses that are in more traditional industries integrate into the cloud. These are also managed service providers, which tend to be outsourced IT services providers. So if a company, maybe an industrial business, that is very tried and true, very traditional and its operations, but is now moving its back-office and ERP systems into the cloud and is looking to create a mobile application to empower its workforce out in the field, this would probably be an IT services or IT consulting business that is helping them to do the integration, and then build out that application and empower that workforce.


    Patrick: And even though, unlike the other two categories, you have a lot more people involved. In terms when you said the headcount which was striking to me. You are saving… an IT consulting firm is saving a business by doing the work of hundreds of people with only two or three, but you still have two or three, that’s two or three more people than a data processing company may have to engage. Is IT consulting as a business… is the value and also the cost-driven by the depth and scope of the headcount? Is it a lot more tangible with people, then  technology?

    Colin: It is, right, technology tends to lend itself to being highly scalable. You tend to see that in growth rates, you tend to see that in margins. And so, in the IT consulting business, there’s maybe a bit more stability… certainly in the valuations of the companies there tends to be more stable. Partly, because there are more deals to be done. There are, you know, there’s the argument to be made that there is a lower barrier to entry into the IT consulting space because practically anybody can hang up their shingle and say that they’re an IT consultant. What I would argue is that there’s a greater barrier to excellence, where there are a limited number of folks that have truly been able to differentiate themselves, and build that requisite skill set that sets them apart from everyone else when it comes to cloud integration, app development, managed services, and really providing something that is value add to the end consumer. So in this case, it’s a B2B model, where data processing or technology as a whole is going to be highly, highly leverageable in terms that it’s very scalable, you get a lot of operating leverage. The more you can build-in from a sales standpoint, typically the much more profitable, the business becomes. In IT consulting, because there is typically a larger headcount, that it’s oftentimes about billable hours. It’s oftentimes a story of a project versus recurring revenue. And, that has a huge impact on value as businesses are looking to go to market.

    Patrick: This is a little bit off-topic from your report, so I do apologize for this. But, in your analysis, I’m just curious… who was doing the acquiring of each of these categories? If you if you’re a data processing company, was it being bought by a larger data processing company? Or from others, some strategic buyer that says we need that capability, so we’re going to bring you in, we’re going to take you away from the market, and we’re going to bring you in the house? What percentage of the deals roughly involved that scenario where a strategic would go and take one of these three categories and bring it in the house thus removing them from the rest of the market?

    Strategic Buyers vs. Private Equity Firms

    Colin: It’s really been a mixed bag. And, I think as you go year by year, it changes. Whether it’s more of a financial buyer, like a private equity group, or whether it’s going to be a strategic buyer, like other operating businesses looking to bolt-on new capabilities. And I think what we’re seeing in some spaces, is you’ve got very large, very large operators that are creating platforms, right. Microsoft is one that comes to mind. And they’re creating an Azure platform. And, what they’re doing in many instances, is they’re out there buying businesses that have created unique technology or have captured large swathes of viewers, of users. And, they’re able to quickly onboard, either the capabilities, the technology, or the traffic, into their platform. And, that carries significant value for them. They’re not necessarily in the market of saying “we want to be a consultancy.” They have plenty of businesses out there that are able to do that on their behalf. And that’s where I think you see folks in the IT consulting space, where there are a large number of businesses that are operating with very good capabilities in the space: whether it be AWS, whether it be Microsoft Azure, whether it be one of the other cloud platforms. They’re able to cater to clients and operate on those different platforms. Whereas, you know, in data processing, in internet services… it’s less about whether or not you’re able to provide support services to a larger platform, it’s really more about your capabilities.

    And I think when you see the economy has been very strong for a number of years, you’ve got strategic buyers that have built up a lot of capital. And much of that capital exists not only just on the balance sheet in terms of cash, but in many instances can be equity. And that’s where as a seller, you need to be cognizant of what the consideration during the course of a transaction is going to be and how you’re going to be compensated. Because, in many instances, we’re seeing strategic buyers, and this is across all three buckets. They can be very acquisitive, and very aggressive. But, oftentimes, they’re using their own equity. Which may, or may not, be considered overvalued at the time. They may look at that equity and say “that’s actually less expensive to me today, then maybe cash would be”

    Patrick: Very interesting. So now with this report, what were the major takeaways you’d mentioned early on about a disconnect? What’s the biggest takeaway from this report?

    Colin: Yeah, so from the buyer’s perspective, we’re seeing there are strategic buyers that are very, very specific right now in where they’re looking to allocate funds and spend money. And so they’re typically coming out with very targeted investment theses. That is, they’re looking for a particular type of asset or many instances, a particular asset, one type of business, one business in particular, that will augment their existing operations. When they get excited about a business, they’re willing to move rather quickly, and they’re willing to pay up for it. Remember, strategic companies are typically going to realize some kind of synergy, some kind of benefit from making an acquisition that a private equity company may not necessarily if they don’t already own a business in the space.

    So strategic companies are able to be very aggressive, and typically pay a premium for a business that they love. But they’re going to be much, much more selective. Private equity companies right now are… they’re cautious. I think they’re looking at where we stand today in the economic cycle, and I think most if not all of them, when we start talking about projections and estimates, they’re looking at it from— I would even argue, a fairly realistic perspective— that is, there’s going to be a correction at some point down the road. Nothing goes up forever, right. Real estate didn’t, the stock market does not. So, they’re starting to bake in downside cases into a lot of their projections. What that’s doing is that’s changing their model that’s changing their financial return profile, to say that they maybe aren’t willing to get as aggressive. And so you’re seeing that private equity companies are struggling a little bit to compete in those cases where there’s a strategic company that’s getting very, very excited about a particular asset.

    Now, there are still plenty of private equity companies out there with capital that has raised funds in the last couple years, that are looking to deploy that cash. And so, they’re being more thematic about their investment style. And I think that’s where — again, in particular, I focus on the IT consulting space— private equity companies are spending a lot of time thinking about particular platforms, whether that be Microsoft, would that be Amazon. They’re spending a lot of time thinking about what is the difference between project-based businesses and recurring revenue types of businesses? Like a managed services provider, where there’s a contractual agreement, that they’re going to get a certain amount of revenue every month from their end client, right. That carries a lot more value to the operating entity, and therefore, to the private equity company, when they can project out that revenue. They know it’s coming every month, it’s much more secure. And it gives them a lot more visibility into their long term revenue, that has a significant impact on their valuations today. And that’s where we’re seeing transactions start to occur. I think more often, and I think with higher values, is when you can substantiate there’s a high degree of recurring revenue.

    Patrick: Well, I think another consideration out there is it really depends on the management or the owner/founder of the businesses that are considering themselves for an exit, to sell their company, would it be a strategic, or private equity. One of those things I recently learned about was that if you want to have an exit, you’re a founder, you want to ride off into the sunset… sometimes going to a strategic may make more sense, because a lot of times the strategic will bring you in, and they may be making some big significant changes in the short term with management. Whereas, if you come on board with private equity, they want to keep the existing management in place to help them as they add value and other areas. So that’s another consideration out there.

    With this, this view of, you know, the possibility of what particularly with the financial buyers looking at building in possible downsides down the road and so forth. What steps should owners and founders take? I mean, this is a perspective that is out there, you can’t guarantee outcomes across the board, but you need to plan for contingencies. What’s your guide to them on what they should start thinking about?

    Colin: So I think the first step that we always take, anytime we’re talking to a new business owner, is really to understand what is it they want to accomplish? What is their desired outcome? And you talked about a business owner whether or not you should sell to a strategic and sponsor based on his outcome… That’s exactly right. And so, is his goal to stay on and run the business for another five years? And does he want to transact in the next six months, or 36 months? And I think that’s an important consideration. When you think about what are the next steps.

    I think, first and foremost, I would— and maybe I’m biased— but, I would argue that maybe the right place to start is you start with someone like me, or Livingstone, or whomever that can offer you advice as to what’s currently driving the market, what’s creating value? And what are those things that you need to be thinking about?

    Because we’ve seen businesses to try to run quickly for a transaction thinking that the timing is right, something’s happened in their lives, and they want to go now. But the problem is, is that if their house is not in order, running that fast they end up stubbing their toe, they trip, and it creates bigger issues for them during the course of the transaction. Versus taking a step back, taking three months, six months, and making sure they’ve got their house in order.


    Now, Patrick, you and I both know that a time that time kills all deals, right? So it’s a trade-off between? Do you want to wait six months? 12 months? And do the work necessary to make sure that your finances are clean, you understand what all the data is? And that’s probably one of the biggest issues is that a lot of companies that we see, certainly that are privately owned, haven’t really thought about… What are buyers going to look for when they come in and due diligence? And do I have all of the data compiled? Reconciled? Do I have all of my KPIs in place? And, having a conversation like that with someone like Livingstone upfront, I think can go a long way to making sure that you have a smoother process, which shortens the overall timeline to actually getting a deal done, and ultimately improves the probability that not only you get a deal, but that you get the value you’re looking for.

    Patrick: I think one of the things is is that a mindset that sellers really should have is you should begin with the end in mind, what is the outcome you want? How are you going to get there? And, I think probably what really is a big killer, or time killer for deals in my experience has been, when you’re a seller, you’re disorganized, you don’t have the right answers, you’re not prepared for a serious buyer to come in. Even an unsolicited buyer comes in. If you are not serious and aren’t equipped to respond to them proactively, things can drag on and what the the biggest thing that happens with the time is those multiples, that valuation, just starts shrinking. And the longer it takes because you’re not prepared— and you and you may have the right answers — but that’s not formatted in a way that the buyer is prepared to receive them. It just kills everything. And I think that’s the great value you add, it’s almost like staging a house for an open house. You’re going to you’re going to incur some expenses to paint and furnish the house and get it all souped up and be cluttered and everything. And for every dollar that you pay an expert in doing that you probably reap $25 to $30 in return.

    Colin: I think that’s very fair. I think that’s very fair. And if you use that same analogy, you probably aren’t going to, accept the first offer that comes in off the street, unsolicited. You’re going to want to run an auction. And I think that’s again, a value add that folks like Livingstone, folks like my team and I can provide, which is we make sure that that not only is your house in order, but that it’s being presented correctly, in order to maximize value and help guide you through that process in that transaction.

    Patrick: One other thing I was thinking about, and this is because we’re based here in California, and I’m a Silicon Valley, and you’re down in Southern California. But the M&A community, particularly in tech, is not that huge. And so I think another value you probably add is not only do you know the market out there, but you know buyers, and which buyers are serious and which buyers are kind of grinders and wheel spinners. And that can be particularly helpful.

    Colin: Correct. So we maintain… Livingstone has been around for more than 20 years. And all of us have been at prior firms prior to Livingstone. And so, we’ve got a very good sense as to who’s serious versus who’s just tire kickers. We know how people behave in the course of a process. And, I think that goes a long way to lending value, when you’re in the throes of a deal and you’re trying to compare different types of bids. You know which one has more teeth to it, has more meat to it. And you have a sense as to how people are going to behave during the course of the process. I think that’s that’s your point, right? That’s the value of having a more seasoned team behind you guiding you through the process.

    Patrick: Well, what’s what’s the ideal profile for an ideal client for you, and for Livingstone in general, but for you and your practice in California? I know you’re not limited just to stay in the Golden State, but give us a quick profile.

    Colin: Yeah, so Livingstone has offices across the US, Chicago and LA. And then we have offices throughout Europe. And so, a fair amount of our deals are in fact cross-border. I spend most most of my time working on sell side transactions. So, typically business owners that are looking to exit their business or bring in capital, whether it be private equity, or whether it be debt financing. And so, generally they’re they’re located in North America, I tend to look at businesses that have EBITDA between call it $5 and $25 million. That typically translates to enterprise value. We have a strong restructuring practice out of our Chicago office for companies that maybe need a little bit more help, have a little bit more of a story to them. Those businesses are probably in the $20 to $25 million enterprise range. And then, once we get healthier sell-side, you know, we’re typically looking at businesses that are $50 million upwards to $500 million in enterprise value.

    From a sector standpoint, I’ll add, I think where I spend most of my time, is, as I said, the IT consulting and services business. And so, that tends to be anything in the IOT space, managed services providers or MSP space, anything that is cloud-related, those tend to be where I spent a lot of time thinking about, talking to buyers, talking to sellers, and tend to have a pretty good grasp of what’s going on in the day-to-day. We’ve got a number of transactions that we’ve completed here recently that have been in that space, that have gone a long way to helping inform, I think what it says in the article, but just again, our sort of industrial knowledge of of the space. 

    Patrick: I also think just your initial background, being in wealth management and estate planning, you definitely convey a perspective of looking for the welfare of the owner/founder or investor in this transaction and helping them transition either to short term or long term. So, I think you have an experience of beginning with the end in mind, which is very helpful. Colin, how can our listeners find you?

    Colin: Yeah, Patrick, so you can email me at Campbell, spelled like the soup,, or you can reach me in my office 424-282-3709.

    Patrick: Thanks very much. This has been a great insightful look into the possible outcome with a slowing tech space, but just how diverse it is. And, there are ups and downs throughout. And the best way to do this is navigate with a professional who cares about your outcome. Colin, thank you very much for joining us today and we’ll talk again

    Colin: Thank you, Patrick.

  • Jacob Whitish | Getting a Piece of the U.S. Pie
    POSTED 7.23.19 M&A Masters Podcast

    Acquisition can be the ideal way to experience fast growth as a company. But there’s no need to stay within your home country when looking at potential target companies.

    Jacob Whitish is the San Francisco-based vice consul for financial services for the U.K.’s Department for International Trade. And he doesn’t just work with U.K. companies looking into the U.S. but also American companies looking to expand in the other direction.

    We chat about the unique challenges – and benefits – of these sorts of cross border acquisitions, including…

    • Why Silicon Valley is an attractive market (and why Boise or Boston could be a better fit for certain companies)
    • The most attractive U.S. acquisition targets for companies looking to accelerate into new markets quickly
    • What win-win deals in multinational expansion look like
    • Matching resources and business goals to a geographic region
    • And more

    Listen now…

    Mentioned in This Episode: and

    Episode Transcript:

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions, and we’re all about one thing here. That’s a clean exit for owners, founders, and their investors. Today I’m joined by Jacob Whitish from the United Kingdom’s Department for International Trade. Jacob serves as vice council for financial, professional, and business services.

    The Department for International Trade helps UK businesses export and grow into global markets. They also help overseas companies locate and grow in the United Kingdom. Now, when I think about business growth, business expansion, I see two ways to get there. Either slowly through organic growth, or instantly through acquisition. And since we focus on M&A here, we’re a bit more biased in favor of the instant growth approach to doing things.

    That’s why I asked Jacob to speak with me this afternoon to talk about opportunities for M&A. Not just with UK companies coming here, but also for US companies seeking targets in the United Kingdom. Good afternoon Jacob, welcome to M&A Masters.

    Jacob Whitish: Thank you so much, Patrick. Great to be here and thanks for having me on.

    Patrick Stroth: And I promise today, Jacob, this will be a Brexit-free zone. And before we get into all the fun stuff for the Department for International Trade, let’s get a little context for our listeners here. Tell us what brought you to this point in your career.

    Jacob Whitish: Sure. It’s been a little bit of a winding route, but in all of the kind of weird different paths that I’ve taken, it all somehow added up perfectly to get me exactly where I needed to be. After college I worked in the state of Washington for the state level government, so got used to what it was like to be in these massive behemoth bureaucracies that is national politics and state level politics.

    And from there I saw a lot of friends that were jumping into the tech sector. They were having a great time with different startups. A lot of fun. And I was looking a little envious, decided that I wanted to go over and figure out what was going on on that side of the fence, so to speak. And so taught myself some different tech skills. Ended up as a kind of country lead for a Canadian startup that was trying to get into the US market.

    So ran all of the US operations, did all of our marketing campaign, and effectively was kind of the in-country CEO. From there went to another small FinTech startup as the very first employee after the founder, handling everything on the business side. And then after a little time there, went out on my own. Started my own company doing marketing strategy and advertising. Ran that for a while. Ton of fun. Ran it entirely distributed online. I was able to travel around the world with my then girlfriend at the time, now fiancé.

    And that was a lot of fun, but eventually was starting to get a little bit burned out on the just kind of endless cycle of finding more and more clients, doing everything myself, and wanted to find something little bit different, something more interesting. And just kind of stumbled upon this job with the Department for International Trade. And it was the right weird mix of background of government service, startups, self-employed, to be able to do my job here very well.

    I work for a government, but at the end of the day I’m out there interacting with companies, founders, executives, all day long. So it’s kind of an interesting mix of both public and private sector.

    Patrick Stroth: Well, when we think about international activity, cross-border M&A and so forth, we always initially think about it as it being instigated by a company A, usually a multinational or what could it be a multinational targeting company B. And it all stems from there.

    It was interesting and refreshing to see that you’ve got a government controlled entity that is doing what they can to accelerate the process or assist there in domestic companies in that kind of expansion. That’s a great set of services that are available. Tell me about the mission for the Department for International Trade for the UK.

    Jacob Whitish: Sure, absolutely. At the end of the day, my role is really to I guess primarily add economic value to the UK taxpayer. We’re entirely funded by taxpayers. We are a part of the actual government, so at the end of the day we have to be able to draw some line back to having provided value to the UK. Now, how we do that is a little bit more reform in terms of we can help companies expand internationally from the US to the UK, and thereby adding jobs into the UK. We can help UK companies grow into the US, and then therefore hopefully helping add more tax revenue back to the UK entity.

    A lot of kind of playing matchmaker, introducing different people, doing some kind of upfront market research to help companies even understand if this is the right decision for them. One of the biggest things that I don’t ever want to see is a company that’s gung-ho on coming out here, spend all of the overall CAPEX and operational expenses and time, and just all of this energy to try and get into a new market, only to find out that it wasn’t the right market for them.

    So hopefully upfront we can do a lot of things like helping out these companies just to figure out if this is even the right decision for them. And then if they decide it is, hopefully make that process a little bit easier through our networks, our connections, our just experience of watching companies do it over and over again.

    Patrick Stroth: Almost like being a liaison. It’s an extension of the ambassadorship where they’re coming into an unfamiliar territory, you’ve got a presence here, and you can guide them and mentor them through the process that are unique to that geographic location.

    Jacob Whitish: Yeah, absolutely. Absolutely. I mean, you could think of the ambassador as being the political side of what we do on the commercial side. And in fact the Department of International Trade operates out of several different consulates and offices all around the US under the purview of the ambassador. But then our kind of specific remit is the commercial side, whereas the actual consul’s general and the ambassador are a lot more about the political and policy side.

    Patrick Stroth: And it’s interesting too because you’ve got a much more favorable or positive view of overseas expansion, where in America we keep thinking about it as expansion means, oh, we’re outsourcing jobs, we’re outsourcing activities that we should be keeping here. Conversely, you’re looking at, well, if we can expand internationally then our UK domicile businesses can grow, and that’s how it will benefit the home country or the headquartered company there in the UK, is through growth in revenues.

    Jacob Whitish: Yeah, absolutely. We don’t see it as a win or lose scenario. There’s absolutely win-wins here. We can provide jobs for the home country, we can provide jobs in the new country that they’re expanding to. At the end of the day, we don’t care that much as to exactly what this line looks like from point A to point B, as long as somewhere along the way we can say, “Hey, we’ve helped out the UK taxpayers.”

    Patrick Stroth: So then when you’re describing what you do with providing information and mentoring services and informational resource, so what specific services do you provide to UK companies looking to come here? They’re coming on over here, they look to you for assistance. Specifically, what can you do for them?

    Jacob Whitish: Sure. I think I can also kind of give it a little bit bigger picture of an approach at the same time. So probing a little bit more context in my specific role, which is I specialize in all things financial services. So anything from a traditional bank asset manager, insurance, all the way up to these brand new cutting edge FinTech, InsureTech, RegTech, you name it. If it touches money or the compliance of money in some way, shape, or form that’s kind of my industry.

    Geographically I represent the entire Western US, so the 11 Western states. And then I have several colleagues across the US who cover different geographic regions. Now within all of those different regions, each of us kind of have our own specialties of things that we’re particularly just good at as individuals. The kind of standard sort of things would be like providing access to reports on the cost of real estate, or the cost of talents, or even the availability of talent and how it might be distributed throughout a particular region.

    So that would fall under that heading of helping companies figure out if it’s the right decision for them and where they should go. So a lot of times companies will come out, I’m located in San Francisco. Everybody wants to come out to San Francisco just because it’s the tech capital and people want to be out here and see the VC money and hopefully magic will happen.

    But it’s not always the right decision for everyone. For some companies Denver, or Seattle, or Phoenix, or LA might be better choices, just depending on where they are as a company, what industry they’re in, and really the resources that they have available. It’s pretty darn expensive living out here. So not always is it the right decision for a company to come here. So that’s kind of the advice and sort of research portion.

    In terms of just kind of like more softer sort of resources, I have my own personal network out here that I’ve built up. I’ve got different organizations that we’ve worked with to build out this community that we can help introduce these different founders and companies into to try and help make their transition a little bit softer. And then of course just a very extensive network of different service providers and experts that we’re able to connect people with for whatever their particular situation may be.

    Maybe it’s immigration attorneys, maybe it’s someone helps them set up their US entity, or insurance, or and M&A specialist, private equity, VC. You name it, we probably have somebody in our network somewhere that will be a good fit for connecting up those people and hopefully making all that happen.

    Patrick Stroth: So you’re not just providing services to startups or super huge company. You’re available for a variety of companies through whatever stage in their life cycle they’re in.

    Jacob Whitish: Yes, absolutely. It goes the whole gamut, and those different services change a fair bit as you go across that different spectrum. So we’ve got people from maybe 5 or 10 just random folks in a small little one-room office. They’ve got one round of funding under their belts and they’re eager to get into the market, all the way up to some of the biggest household brand multinational names that anybody would have heard of.

    At that earlier business stage, so the smaller companies all the way up to kind of the middle-sized companies or so, a lot of that tends to be more around that advice, resources, networks, things like that. That’s where it’s providing a lot more value to those companies. As companies get larger they have the financial resources, they have their own in-house specialists and experts. They don’t necessarily need us to tell them what the cost of a new developer is going to be in San Francisco versus Seattle.

    At that stage what tends to be a lot more valuable is having a voice in policy discussions. So it’s not to say that we go and stick these people right in the room with the ministers back in London, though it has happened. But a lot of times we’ll bring experts out here or we’ll bring different members of the government out here to do kind of a tour of different businesses.

    And they want to hear usually what are the current concerns, what are companies seeing, what are they liking, what are they not liking, what do they wish was different. And from having those different kind of open channels of communication, then they’re able to go back to the policy makers and the government officials. They’re able to then go back to London, and as they’re working on new policies or reviewing old policies, they’ve got these different connections to the larger institutions and have those kind of in-market points of view to pull from as they’re trying to determine what kinds of things are or aren’t important or what directions.

    So right now actually is a great example where we have just in about two weeks’ time a senior trade policy official coming out from the East Coast to do a tour of the West Coast, just talk with different institutions and see what kinds of things would be important to them in a future US UK financial services trade agreement. Now, of course they’re not going to be making this agreement in the room. They’re not going to be pulling these people in and saying, “We promise that we’re going to do this thing for you.”

    But they want those voices, and the companies like having their voice at that table also because these are massive decisions that are going to affect them pretty drastically. So having that opportunity is a really great resource that we’re able to provide a lot of these larger companies.

    Patrick Stroth: That’s absolutely a channel that can’t be found elsewhere. So that’s one huge benefit. As I think about, you mentioned with the expensive of San Francisco particularly, but the Bay Area in general, I keep wondering why companies overseas would look to come to the US, just because it’s prohibitively expensive. Less of a concern with regard to culture or language. But just the cost of doing business here, I can imagine the regulatory is pretty steep compared to other places. But what drives the demand or drives UK companies to look to the United States for expansion?

    Jacob Whitish: You kind of nailed part of it all already in the question. Just in terms of language and ease of doing business to a certain extent are translatable from, especially in this case, from the UK. But really from a lot of different countries around the world. If you don’t have to change the language that you’re working in, that’s already a big benefit.

    On top of that, the US is a massive market. Most companies will eventually find their way to either doing business with someone in the US or full-on opening a new office or trying to get access into this market. It’s just such a great opportunity. And then likewise for US companies looking at the UK, business laws are very friendly, corporate tax rate is pretty darn low and falling. It’s one of the largest economies in total investments behind the US and China. So there’s just tons of great opportunities around the markets themselves.

    But then on top of that, when you’re looking at especially UK company coming back to the US, access to capital is a massive driver. Most tech startups, I think, at least the ones that are going to be larger names eventually, always find their way to Silicon Valley or New York, or for some other sectors. Like life sciences going up to Boston, or the payments industry out to Atlanta. These companies will make their way out to the US to just try and get that growth capital to really fuel their overall growth as a company.

    I think one of the kind of gaps in the market for the UK that’s also a great opportunity is that there is a pretty good amount of early stage capital around, but not as much later stage capital. In terms of like the CDE plus rounds, these massive rounds that take a lot more kind of institutional capital and knowledge to really be able to drive those sorts of deals.

    There’s also a really good component, it ties into that in terms of talent. Tons and tons and tons of talent that have been through the entire life cycle of a company out here. They’ve gone from two folks in a room all the way up through IPO, exited, and started over again. The UK has a great tech scene and still growing. But they don’t have just as much of that sort of multigenerational founder and institutional knowledge of how do you go from this small company in one room all the way up to something like an IPO.

    They have a great amount of talent that is kind of going up through mid-stage, and then going through different mergers, acquisitions, or other sorts of liquidity events or exit. Not as many that have taken it from that sort of mid cap to massive company. So, yeah, a lot of companies.

    Patrick Stroth: The pool of … Yeah, I think the pool of serial entrepreneurs every year it gets deeper and deeper. And one thing that’s unique about being out here in Silicon Valley is that I keep seeing these people become enormously successful, enormously wealthy, and think to myself, “Well, they’re going to get their clean exit, which we try to do with the insuring their M&A transaction, and think they would ride off into the sunset. Buy an island, go shopping for yachts, and all that fun stuff.”

    And what do they do? They get bored. They turn right around and open up another firm and start participating in that. And that’s been going on now for the past 20 plus years. And so, yeah, there is definitely that talent pool has gotten much, much deeper.

    Jacob Whitish: Definitely. Definitely. So you get a lot of people that will bring their companies out here just to try and tap into those kinds of networks and resources that come along with all of that. They’re getting better. They’re starting to very slowly move in that direction. I’m seeing a lot more founders in the UK network go back and start to do that next generation of businesses. Not as mature as say West Coast US, but it’s getting there.

    In the meantime, you’re still going to see a ton of these companies coming out here to the US for either that access to capital, access to talent, or just access to market overall.

    Patrick Stroth: What about the talent on the entry level, and I’m thinking about this just from your opinion, slightly off topic. But if a US company were looking to expand into the UK, and there would be a need for entry level tech talent there, I’d imagine that talent pool in the UK is broadening and deepening as well.

    Jacob Whitish: Oh, absolutely. It’s actually some of the best minds in their industries are coming out of the UK. Things like DeepMind and some of these great artificial intelligence and deep learning companies, they’re coming straight out of that Oxford, Cambridge areas, right out of the universities. Overall, the UK definitely has pretty much anything that you’re going to be looking for. If you want the financial talent, London has it, as well as just kind of a nice mix of a little bit of everything.

    The Manchester Midlands area has some great kind of back-end, back-office talent. Scotland has the financial and asset management experience. Northern Ireland is starting to become this really interesting tech sort of little paradise. In fact, they’ve got some really great programs out there where they’ll … Actually, the government will go out to … Or I guess lack of government, sorry. Will go out to universities to work with them and create custom programs to train individuals specifically for companies, if a company is willing to put a large enough investment into their local economy.

    And so there’s some really interesting little sub sectors. And you look at it, Wales, or you get this awesome hardware talent in the semiconductor space. And so there’s a little bit of everything all over. And you can find pretty much whatever talent you want somewhere within the UK.

    Patrick Stroth: Well, on the US side we’ve got this huge market. It’s not only large, it’s wealthy. And it’s deeply wealthy, which attracts a lot of suitors here. But it can’t be all great. What are some of the challenges that companies face coming here? And don’t just list the challenges for me, but support that with what can you do to help companies overcome these challenges?

    Jacob Whitish: Sure. I mean, I can kind of actually play a little bit off of that last question even and say that talent is a double-edged sword. Out here you have a ton of great talent, but it’s also really expensive and in very high demand. So for a smaller company coming in, especially if they’ve maybe only got a couple rounds of funding under their belts and not terribly deep pockets, might be shocked at what the total comp packages are for, especially like really hardcore development talent.

    But really anybody out here in the Bay Area is going to be a lot more expensive than somewhere else. Which is kind of also then why a lot of times I’ll be working with these companies and kind of pushing back a little bit to say, “Is this the right place for you? Maybe you should look at Phoenix and go check out Arizona’s new FinTech sandbox and see what you can do with that. Or go up to Seattle and-

    Patrick Stroth: Idaho-

    Jacob Whitish: … find out what’s going on up there.”

    Idaho. Yeah, there’s tons of great kind of second-tier cities that have lots of opportunities, lots of great talent. Maybe not quite Bay Area level talent, but still great talent. And even that’s changing. People are getting sick of living here in the Bay Area and they’re moving out. So those people are still looking for jobs, and they’re still great talent. So that’s definitely one of the bigger challenges.

    Within the financial services sector specifically, I would say one of the biggest things is just the regulatory environment. It is absolutely insane for companies coming out here that are used to having one overarching regulatory regime for the entire country, and then they get out here to the US and see that there’s 50 different states, which are basically 50 different countries, even though it’s all one massive country.

    And all of a sudden they just kind of get paralyzed and don’t know what to do. How do you handle 50 different regulatory regimes? And not to mention just the paperwork involved in all of those sort of applications and compliance measures that are required for all of that. So that’s definitely the number one thing that I hear from anyone within the financial industry, is just trying to figure out that sort of environment.

    Now, on that side of things there’s all kinds of different opportunities like working with private equity groups to find things like reverse merger opportunities, or even just straight-out purchase opportunities to basically find a company in the US that is maybe not doing so hot financially but already has those licenses in place. So that’s a great opportunity for companies coming into the US to be able to, I won’t say circumvents the rules, because it’s not circumventing it. It’s all perfectly legal. But sort of accelerate the process of getting into market quickly.

    There’s also different strategies like just saying target New York and California, go after the biggest economies, or find local partners that you can just partner up with on deals. All of these are different things that we would bring in a lot of the experts from our network to help identify these opportunities, or to just try and figure out what opportunities are available for a particular situation.

    Patrick Stroth: Great. So you’ve got not only the network of service providers that you probably, just in addition to the service providers you’ve got the law firms, you’ve got other advisors. And then you’ve got relations with private equity firms and other organizations such as that.

    Jacob Whitish: Absolutely, absolutely. If you are a service provider out there or any sort of firm that works with other companies, frankly, we want to have you in our network. We want to know who you are, what you’re doing, where you’re at, and what kinds of companies are you looking for. And we may or may not have a lot of referrals for you, but maybe we will.

    That’s just kind of part of our game is knowing who’s out there, who’s doing what, how we can be of help, so that when a company approaches us or gets referred into us and they say, :Hey, I have a problem with X,” hopefully we’re going to know someone who can fix X. So that’s at the end of the day the biggest value that we can provide.

    Patrick Stroth: Yeah. I mean, the analogy I have with that and the importance of having a good network like that and the value you add there, it’s no simpler analogy than if you were to leave your home or your work and move across the state or to another country. You just want to find somebody who says, “Well, where’s a good pizza place? Where do I go shopping, and where can I get my hair done?

    Jacob Whitish: Yeah. Exactly

    Patrick Stroth: And they’re really mundane things, but everybody needs them. So I think that’s a great source. And you’re a trusted advisor in this because your objective is to help out the taxpayers and add value for the UK companies. And so you’re a real credible resource because you’re looking out for their best interests.

    The idea on the reverse mergers is real interesting, just because it’s nothing more than a workaround. But it’s also, if you’ve got owners and founders or investors that have a company that is maybe not doing well financially, they can leverage an asset that they didn’t realize they had, which are their licenses, that maybe they did not have as great value in them. Now suddenly there’s some great added value in the licenses and so forth to facilitate a reverse merger.

    So with that in mind, who’s an ideal candidate for UK companies to partner with? On the reverse merger in that scope?

    Jacob Whitish: You know, it really depends a lot on the company that is … So like the UK side company that’s coming in and what sort of services that they’re doing. It wouldn’t make a whole lot of sense for an insurance company to try and partner up with a bank because they’re not going to have the same licenses. So a lot of times it’s going to be kind of the smaller to midsize regional institutions. Perhaps they’ve been around for a while and maybe it’s a generational shift sort of thing.

    There’s this great opportunity right now where there’s this massive shift from one generation to the next of assets and businesses. And sometimes the younger generations don’t necessarily want to step into the family business. So you have this older generation of maybe the founder who they want some liquidity to be able to go off and fund their retirement, and they just don’t really want to operate it anymore as the day-to-day person.

    So maybe this is a great opportunity for a company to come in and partner with them, reverse merger with them. All kinds of different creative arrangements that you could find. But in the end of the day, then you have this UK company coming in being able to relatively easily get access to these licenses. Perhaps even to built-in clients. And then for the merging company, then they have a liquidity event. They have the ability to, maybe if it’s this kind of generational issue, walk away to a nicely funded retirement and not have to worry about it anymore.

    Or there’s a lot of kind of fun, creative ways that companies can approach this and find different partners that maybe they wouldn’t have even expected. Maybe it’s a card issuer looking to partner up with a small regional bank and be able to cross promote each other’s products into each other’s clients. The opportunities are really just very wide open.

    Patrick Stroth: I was thinking just that the small regional banks as being one of those ideas or candidates out there, because there are fewer and fewer of those out here. But they don’t want to get rolled up by the major banks. They’d prefer to have something else happen. But what’s usually the situation is one regional bank is acquiring another regional bank.

    So I think that would be an ideal opportunity for a UK-based financial institution who wants to get a foothold where they don’t have to be in New York, where they can be in a couple of other regions. I think that would be an ideal place, particularly in the South, and in some parts of California.

    The other idea I was just saying off the top of my head, accounting firms.

    Jacob Whitish: Accounting firms, wealth management, anything that has some sort of licensure or governmental oversight, great opportunities.

    Patrick Stroth: Okay. I can see that both in the insurance agency and brokerage business and in the accounting space you have a lot of independent small regional organizations. They are going through this very specific generational change, and you’re not having the next generation coming in, stepping in in the shoes of the predecessor. So those opportunities are going to be around for the next several years. What trends do you see in UK expansion to the US going forward?

    Jacob Whitish: You know, kind of overall, I’ve seen companies coming out a lot earlier in their life cycle. Used to be waiting a little bit longer, getting a little bit more mature in their home market. More and more it’s been a lot of companies coming out earlier and earlier wanting to not quite necessarily shun their own market, but they want a piece of the US pie earlier and earlier in their life cycles.

    So a lot of times they’ll be coming out, maybe even too early at times. And I’ve had that conversation with companies before of saying, “Do you really think that right now is the right opportunity for you to come out?” Of course earlier and earlier for funding, as the overall funding climate is changing. And I know we said we weren’t going to go there, but I think this fall the political situation in the UK is going to probably decide a lot of what the future direction of those different trends are going to be looking like.

    Patrick Stroth: Is there also just a byproduct, not to pump you guys up too much with you guys, but I mean is there a growing awareness of the services that you’re providing in the Department for International Trade, where your resources are clearly providing some benefits. And there’s got to be more awareness. So if you’ve got somebody who’s going to help you out, I mean that could probably speed up the decision process too.

    Jacob Whitish: I mean, that would definitely be … I wish I could say that. I’m not sure what the kind of overall volumes are. But based on just kind of our own internal metrics, there’s definitely been a growth in the number of companies that have started to figure out that we’re out here and we exist. I know we’ve, as the Department for International Trade specifically, only been around for a few years. There have been some other incarnations in the past. But as far a name recognition goes, it’s definitely a growing trend. But I think we’re on the right track.

    We’ve got some really great leadership in place that’s not tied to politics, so they’re going to be around for a little while. And it’s definitely a great resource. I wish that more companies knew that we were out here. Almost everything that we do is absolutely free. And we are all sworn to secrecy. We take actual, have to get our actual security clearances and everything to be here, and everything that we do is considered commercially confidential.

    So unless the company tells us that we can talk about them publicly, or they have said something publicly themselves, we keep tight-lipped on it, everybody’s plans.

    Patrick Stroth: Well, I’m new to the knowing about what the Department for International Trade does, and it’s a shame that you are one of the best kept secrets out there in the UK government. And the more we can advocate for you, and the more people learn about the services you have, both here and abroad, I think the better it’s going to be for a lot of organizations and a lot of people. Because one of the thing is just really unique and the reason why Silicon Valley is the epicenter for all this great tech innovation and growth and so forth, is unlike generations past where in order to succeed you had to literally do it yourself. If you couldn’t steal it from somebody else, you did it yourself, and you grew bigger and bigger and you did it on your own for yourself. And you wouldn’t because of competitive reasons or envy or fear, you wouldn’t share the secret sauce with anybody else.

    That’s how what happens here. This is probably one of the most a collaborative environments out here where there are always people looking to provide some kind of support, some kind of assistance, mentorship, whatever. Sometimes for obvious profit motives, others for altruistic because they have the vision that you know the rising tide lifts all boats.

    So from accelerators, to incubators, to mentors, to angels, sources of funding and everything. There are so many resources out here getting founders from zero to one, and then from one to two, and then from two to Google. You know, this is just another great resource out there, and it’s been an absolute pleasure learning about this. And Jacob, if there are people out here that would like to just benefit from all the things you have, how can they get ahold of you?

    Jacob Whitish: Sure. I am on LinkedIn is probably the easiest place to find me under my name, Jacob Whitish. W-H-I-T-I-S-H. Likewise anybody can feel free to email me directly at You can probably put that in the show notes or something.

    Patrick Stroth: We’ll make sure we have that whole mouthful in the show notes and so forth. And I would also say, unlike me from time to time, I may not be on my LinkedIn on a daily basis. Jacob is on it hourly. So if you put a connect request out there you’re going to get a response almost in real time. So I can personally vouch for that. Jacob, thank you. It’s been a pleasure speaking with you and we will speak again.

    Jacob Whitish: Absolutely. Thank you so much, Patrick.

  • Nate Gallon | How Well Do You Know Your Stockholders?
    POSTED 6.11.19 M&A Masters Podcast

    What happens when a minority of shareholders don’t agree to the terms to acquire or merge their company? The terms could change drastically… or the deal could fall apart completely.

    But, says Nate Gallon, managing partner of the Silicon Valley office of Hogan Lovells, there’s a way to avoid that fate… because the shareholders will be contractually obligated to vote “yes” on the sale. This provision is well-known in the world of Private Equity and Venture Capital but not elsewhere.

    Nate talks about how to lay the legal groundwork to make this strategy work, as well as…

    • Why you have to look at the Liquidation Waterfall
    • How to ensure that small shareholders don’t sabotage a closing
    • The best person to provide you with this provision (if you don’t have it already and don’t even know)
    • The dangers of appraisal rights claims
    • And more

    Listen now…

    Mentioned in This Episode:

    Episode Transcript:

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders, and their investors.

    Today I’m joined by Nate Gallon, office managing partner of the law firm Hogan Lovells, in Silicon Valley. Nate has spent his entire career here in the Valley working with the tech community, representing all flavors of entrepreneurs, from startups to the major corporations we know of every day. We hear about them every day in the media. As well as the entire ecosystem of the investor community that funds and supports these innovators. Nate, welcome to M&A Masters, and thanks for joining me today.

    Nate Gallon: Thanks for having me, Patrick. It’s a pleasure to be here.

    Patrick Stroth: There’s a lot of legal groundwork that needs to be laid way before owners and founders can even start thinking about an exit. And Nate, you were featured as a speaker in the latest Silicon Valley M&A forum, where you presented an informative briefing on the topic that needs to be brought to the attention of owners and founders planning an exit. And that’s drag along rights. Now, so the audience, I’ll let Nate explain this provision, which is routine in the venture capital and private equity worlds, but it may not be top of mind elsewhere. And that’s why he was highlighted recently, and why I wanted him to come on and share his knowledge with you on this. But before we drag Nate into that conversation, let’s start here with, Nate, why don’t you give everybody a little bit of context as, how did you get to this point in your career? Why did you pick tech, the law, and then tech law, and then ended up here in Silicon Valley?

    Nate Gallon: Yeah. So yeah, I’ve been here in Silicon Valley my entire legal career, which is about 20 years. It’ll be 20 years this summer. Prior to my time at Hogan Lovells, I spent 15 years at another local Silicon Valley law firm. But my whole career has been focused on working with technology companies and investors, and to a lesser extent, life sciences companies and investors, because I wanted to be part of the economy that was creating new ideas, creating jobs, and was really helping to expand the economy and provide novel products and services and other items to the community at large. I didn’t want to work in traditional industries. I wanted to work with entrepreneurs and wanted to understand and be a part of the new technologies that were coming into existence.

    And that hasn’t changed in my 20 years. I look back on what I’ve experienced, and it’s truly astonishing, the technologies and the platforms that we’ve seen come out of not just Silicon Valley, but the technology and life sciences community throughout the United States and in other parts of the world. So that’s really what attracted me.

    And in M&A, and my focus is on both M&A, and equity transactions, and venture capital, and strategic investments, as well as representing entrepreneurs. And that really gives me a firsthand look at the companies, working with entrepreneurs, working with major corporations to buy companies from entrepreneurs, and really get your feet wet and get to understand everything that’s happening within the community, while also being able to act as a business advisor and help from a financial perspective for both buyers and sellers in M&A to achieve their goals. And in venture capital to help investors achieve their financial goals when they invest in new technologies and platforms.

    Patrick Stroth: Well Nate, you and I share a common passion, and that is we have an affinity for people out there, the entrepreneurs that start with nothing and create something. And go from zero, to one, to two and help marry them with other parties that will get them from two to 10. And so it’s a great, great place to be in, and there’s no better place in the world than right here in Silicon Valley, while it is spreading elsewhere.

    But let’s get to the topic here. What are drag along rights, and why are they so important?

    Nate Gallon: Yeah. So drag along rights are something that’s been in the venture capital and the private equity community for certainly as long as I’ve been practicing, and I’m certain before that. A drag along provision, it’s a provision that’s usually located in stockholder’s agreements, occasionally in the bylaws, whereby the stock holders of a target company agree to vote in favor of, and not oppose or hinder a sale of the company. And to take any other action that’s reasonably required to consummate a sale transaction, including, if it’s structured as a share purchase, to sell their shares to the third party in the transaction.

    So in other words, at the time that the venture investors make their investment in a company, well in advance of, sometimes years in advance of an M&A transaction or exit, the venture investors will often require that the parties to the stockholder’s agreement, essentially all the preferred stock holders, and typically most if not all the common holders sign on to an agreement. A stockholder’s agreement that says, if in the future, the board … and so either majority or super majority of the stockholders vote in favor of a sale of a company, to sell the company to a third party, then the other investors that are parties to that agreement, whether or not they agree with that sale transaction are bound, contractually, to vote in favor of the transaction, not oppose a transaction, and if required to tender their shares or take other action to ensure that the sale transaction takes place.

    So it’s a way of ensuring that potential dissenters, or those who would challenge or oppose an M&A transaction will be contractually bound to vote in favor of, and go along with the transaction.

    Patrick Stroth: So you can’t have the tail wagging the dog if one, lone dissenter wants to hold up … one dissenter can’t gum up the deal.

    Nate Gallon: Exactly. Exactly. And that gets into kind of the priorities, and why would investors, or why would companies agree to such a transaction? And if you think … or a such a provision. If you think about it, there are reasons why the investor would want it, and there are reasons why a company founder might want it. Especially if you have a dispersed shareholder base, or you expect that you’ll have a dispersed shareholder base, there are oftentimes competing interests that look differently on a sale of the company depending on the liquidation waterfall. And by that I mean the, the capital structure, and which series and classes of shareholders get paid first versus last in a sale transaction. There may be competing interests and competing visions as to whether a particular M&A transaction is in the best interest of the shareholders.

    So what this does, is it ensures that that kind of debate doesn’t happen at the time that the sale transaction’s in front of you. Essentially, it forecloses that debate, subject to the parameters that are actually negotiated in the drag along. And that’s often where the devil meets the detail.

    Patrick Stroth: Yeah. So the benefits really on this are, this will make the decision a lot cleaner with the major shareholders. And you can’t have one party who may have an opposing viewpoint, or see things differently for whatever reason, they’re not going to slow this down. Are there any other benefits along with that?

    Nate Gallon: Correct. Correct. So if you think about, let’s take the merger structure, which is one of several different acquisition structures we use when buyers are acquiring a company. The merger agreements will have a condition that the stockholders approve, some specific percentage of the stockholders approve the transaction as a signing condition. And as a closing condition, so in order to actually close the transaction, there will typically be a condition that no more than a small number or small percentage of stock holders have dissenters or appraisal rights under law. And those are, depending on the state, whether California, Delaware, or otherwise, dissenters or appraisal rights are creatures of state law that provide a judicial mechanism whereby shareholders who do not believe that they are getting fair value in the transaction in a merger can … if they adhere to a very specific time schedule that’s prescribed by state law, can have their shares valued in a court hearing, can have them valued as to whether or not the shares are more valuable or less, potentially, than the deal value.

    And there are a number of headaches associated with that, because that is something that can happen following the closing the transaction. So buyers want to know that there are very few, usually under 5% of the shareholders of the outstanding shares, are eligible to have dissenter’s claims. If you have a drag along, it allows the sellers to much more easily, the target company, to more easily satisfy that closing condition. And that’s something that, for a founder that wants a deal done, or that venture capital investor, or strategic investor that is a preferred holder that wants a deal done, it allows those who are in favor of the deal to ensure that those small holders can’t gum up the closing by having the company fail to satisfy that minimum appraisal rights closing condition.


    Patrick Stroth: You could actually …

    Nate Gallon: Go on.

    Patrick Stroth: I’m sorry to interrupt. You could have a situation then, if you don’t have drag along rights, where a small minority could really harm the deal post-closing, which now everybody gets harmed.

    Nate Gallon: Right. Right. And what happens is if there are post-closing appraisal claims, typically a buyer will require that the company shareholders, former shareholders, the target’s former shareholders have to indemnify the buyer for any claims arising out of those dissenter’s claims. So to the extent that the buyer has to hire counsel to litigate an appraisal rights claim in Delaware court, those costs would ultimately be borne by the former target shareholders. And so through the indemnification process, and those former target shareholders will ultimately receive less deal consideration because essentially they are funding the legal fees of the buyer’s counsel in defending that appraisal rights claim.

    Patrick Stroth: So that’s insult to injury. You’re the seller, you want to sell, you have a buyer that wants to buy, you’ve got these small percentage of dissenters that are going to hold this up. And if they’re successful in slowing this down and causing legal action, then you, the seller get to pay for all this, whichever way it goes. So that’s a real negative. That’s a real negative out there.

    Nate Gallon: And that’s the outcome. If the buyer ultimately chooses to close in spite of there being a significant number of potential … or I should say, of shares available to press appraisal claims at the closing.

    The other is, if the closing condition is not satisfied. So for instance, if the closing condition says, no more than 5% of outstanding shares of the target are eligible to bring appraisal claims at or after the closing. If that closing condition’s not satisfied, the buyer can walk away from the deal. So it’s not just if the buyer closes the deal, there’s an indemnification risk where the seller’s ultimately receive less total consideration because of indemnification claims. It actually can be a deal risk where the buyer could walk away. Hopefully that wouldn’t happen, but that is always a risk. So you have not just financial risk, but actually risk of getting the deal done if the closing condition’s not satisfied.

    Patrick Stroth: Yeah, that’s Armageddon for sellers, is getting a deal … getting it signed and then not … and failing to get a close, and failing to get across the goal line. Then you have to go after all that time, energy, and passion has been used up, you’ve got to go back to the marker, back out. That’s just worst case scenario on the sales side.

    Are there any limitations to drag along rights?

    Nate Gallon: Yes, that’s a good question.

    Patrick Stroth: Or is this is just a great magic bullet?

    Nate Gallon: No, that’s a very good question. Typically the standard negotiated drag along rights usually have exceptions. So the drag along can be triggered by a vote of some majority or super majority of the stock holders, but they are usually conditions to enforcement. And the conditions vary depending on the deal you’re negotiating, but typically there are a number that you see, and I would say are generally customary in venture capital transactions. And you can actually find a lot of these … you can find all of them in the National Venture Capital Association forums, which are available online at The NVCA has model venture capital investment documents for the entire suite of documents you’d use, including the … what we call a voting agreement. Which is a form of stockholder agreement that typically include the drag along.

    And the types of conditions are, for instance, that the proceeds in an acquisition are allocated to the stockholders of target in accordance with the liquidation waterfall in the target certificate incorporation. That there are limitations on the scope of representations and warranties that a target shareholders must personally give in the acquisition agreement. And if the scope of the reps and warranties goes beyond that, then essentially that can frustrate or negate the ability to enforce the drag along.

    There are other provisions around caps on liabilities for … on the liability of a stock holder of a target. And depending on the type of transaction, when and if at all a particular target stockholder can be liable for fraud or other claims by another stockholder. So it’s a fairly detailed set of exceptions, and you really have to look through them and navigate them closely to make sure that the exceptions do not frustrate … the exceptions, when you compare them to the deal you’re negotiating, do not invalidate the ability to enforce the drag along.

    Patrick Stroth: All right. Now, in a practical sense, how do the drag along rights … how do they work, or how are they triggered? Is it just … if you have them set up, if you’ve got a competent attorney that helps you get your bylaws set up, you’ve got them in your agreement, and everybody’s aware of them, but they’re in there as you go forward on an acquisition. Who can trigger the drag along rights, or is it an automatic provision that just … they’re here, they work, move forward. How does it, in a practical sense, work?

    Nate Gallon: Right. So the drag along would be in the voting agreements that I just mentioned. And you would have all of the preferred investors typically, and many, if not most, of the common investors signing on as parties to the agreement. As the company goes through successive rounds of financing, round series A, series B, you would continue to add parties to that agreement to make sure that you’re capturing the universe, so that you have 100% or close to … as close as possible, hundred percent drag along coverage.

    When there’s an actual sale transaction before you, there are different ways it plays out. But usually the company has a good sense either through normal communications, regular communications or otherwise over whether stockholders have been on board with the company, whether they’re friendly, whether or not they’re not friendly. So that’s kind of just, know your stockholder base.

    Second is, typically you have the major investors sitting around the board table. And oftentimes they are, or some subset of them, is sufficient to trigger a drag along. So if you’ve gone through successive rounds of financing, you may have three, or two or three, or maybe even more venture capital firms or strategics on there that collectively can trigger the drag along. So what you would do is you would have the board approve a transaction. You’d have the specified or required shareholders approve the transaction that triggers the drag along. And then between signing and closing, you would go out, reach out to the other stockholders with an information statement, with disclosure of the transaction, solicit their consent to approve the transaction. And it’s through that solicitation process, is usually where … that interim period between signing and closing, is where you would really start to shake out those who are in favor versus those who are not.

    And oftentimes, if it’s a deal where people are making a relatively good return on their investment, it’s not so much people opposed to it as it is logistics. You often have people who are out in a boat for a month and you can’t reach them. That can often be a problem. Where the brass tacks are is when it’s a deal where not everybody’s making money, or not everybody’s getting the return that they expect to get. And that’s where you start to have challenges. And where, between that … you want to know before you do the solicitation, how enforceable is the drag along relative to the deal that you’ve cut with the buyer? But once you go out and do the solicitation, then you really have to kind of look at your drag along and figure out against whom you need to enforce it.

    And a drag along is enforced because one of the key practice points is, a drag along has to have … should have a proxy and a power of attorney whereby the proxy in the agreement will state that if a shareholder opposes a transaction but is subject to the drag along, that shareholder … if that shareholder is obligated under the drag along to vote in favor of transaction, even if he opposes it, the proxy is granted typically to the company CEO or a member of the board. The proxy holder, the CEO, can vote that reluctant shareholder’s shares in his place and in favor of the transaction. So you’d have a proxy, and it would be coupled with a power of attorney that which grants that CEO, the proxy holder, the ability to sign a consent on behalf of the reluctant shareholder to approve the transaction.

    So that’s the teeth of enforcement. And if there’s no proxy or power of attorney, enforcement’s much harder because you’d have to sue the reluctant shareholder in court to enforce the drag along provisions, which is a much more cumbersome process rather than relying on a proxy and a power of attorney.

    Patrick Stroth: Yeah, and it speeds it up too because if somebody just decides, well I’m just not going to vote. I won’t dissent, I just won’t vote, and I’ll try to slow you down there. They’ve got the proxies in place, and it’s been signed off on with power of attorney. So it’s well supported. Very well buttressed provision.

    Is there … I mean, is there a reason not to have drag along rights? The only thing I could ever picture is if you got a sole shareholder with one investor, and they’re both equal investors or something. But is there any situation where drag along rights shouldn’t be there?

    Nate Gallon: The only instance is if … the term I use is the dragger or the dragged. If you are likely to be the dragged, it obviously does not make sense for you to put a drag along in place. It’s often hard to determine, especially if it’s a later stage company, based on the capitalization table, whether you will be the dragged or the dragger. But typically the … it’s lead investors that want the drag along, and especially if you are a follow on investor, or maybe more likely a small investor as part of a larger syndicate, it’s more likely that you would be dragged rather than dragging. But it’s hard to say.

    And I would say, as a general matter, and as a general practice point, having a drag along in place is a good thing to have. I’d say nine times out of 10, the scenarios I see, whether I’m representing an entrepreneur or representing a venture fund, a drag along is a good thing to have in place.

    Patrick Stroth: Well, now in cases where a company … and this would happen with companies that probably haven’t had initial funding, they haven’t had a seed round, they’ve just pretty much opened up and been self-sustaining their entire duration, and maybe haven’t needed to look at their bylaws that often. They may not have the drag along rights provision in there. What can you do? They can be added on. How does that work?

    Nate Gallon: Yeah, so if it’s a non-institutionally backed company, if it’s self-funded or bootstrapped, we do see those a fair amount. And a lot of times it’s friends and family, so you’ve got a lot of investors, or you have a number of investors that may or may not be well versed in venture capital investing. That can present its own challenges from just an expectations perspective. But you can always put a drag along in place later on, after you have a stockholder base in place. The challenge is, you won’t be able to get anybody to sign up to … you can’t enforce a drag along on somebody who hasn’t consented to be parties to that agreement, or to be bound by those provisions.

    So if you don’t realize until after you have 30 investors that you need a drag along, well, you need to get each one of those 30 investors to sign up to an agreement that includes a drag along. You can’t force it on an investor without his or her consent.

    Patrick Stroth: Well it may be easier to do that if there’s nothing on the horizon, right then. So if you notice that you don’t have it, you think you should get it, and there’s no deal on the horizon. Might be easier to get agreement, to get all those bases covered. It’s just one of those things that you really don’t want to have to start chasing down when you’re on the clock to try to stage up your company for an acquisition. So that’s why I think it’s … this is just one of those issues where, again, it’s like if you’re building a house, and now thinking about where the rain gutters go. It’s a minor thing, because everybody’s thinking about kitchens, and roofs, and windows, and garages, and stuff.

    These are the types of things that, while they’re not right top of mind, they’re easy to address, I think, with a professional that can fast track you through the process, to check and see if you’ve got them. And if you don’t, get them in there. I think it just pays dividends down the road. If not in dollars, it does in time and quality of life because you’re not stressed out with one of these things that’s easy to overlook if you don’t have an expert looking at this.

    Nate, if we’ve got a lot of listeners out there that want to look more into this, and maybe just to see for themselves if they’ve got it, or what it would take to get it, you’re the guy to go to. How can our listeners reach you?

    Nate Gallon: Yeah, Patrick, the best way to reach me is, you can email me. And my email address is ngallon. That’s And you can also contact me through phone. You have … my bio’s on the web. You can always find my bio and contact information on the web. I am the managing partner at Hogan Lovells in Silicon Valley, and you can reach me here in the office here. You can come by anytime. We’re here in Menlo Park, and we are embedded in the venture capital and the M&A communities, and would certainly love to hear from anybody that has questions or would like to discuss this further.

    Patrick Stroth: Very helpful, Nate. Again, you took a real technical, legal issue and brought some life to it, which is what you did at the forum. That’s why I thought it’s great value to our audience. So thank you very much.

    Nate Gallon: It was my pleasure. Thanks for talking.


  • Gretchen West | The 3 Biggest Benefits of Drone Technology
    POSTED 5.28.19 M&A, M&A Masters Podcast

    When you hear the word drone, you might think of the military uses, the proposed delivery drones, or those jokers who shut down airports by flying drones around runways.

    But drones are serious business, says Gretchen West of Hogan Lovells in Silicon Valley.

    There are little-known commercial uses of drones that save time, money, and lives that will only expand in the near future… as long as government regulations can keep pace with development of new technology.

    The industry is maturing quickly, as is M&A activity in this space. We talk about that, as well as…

    • The many layers of technology integrated into drones… and how that creates opportunity for other companies
    • The growing list of unexpected industries that can benefit from drones
    • More than pictures and video – the ways drones collect data you’ve never heard about
    • Where the FAA and other government agencies stand on drones – and how it’s changing
    • And more

    Listen now…

    Mentioned in This Episode:

    Episode Transcript:

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in merges and acquisitions. We’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today, I’m joined by Gretchen West, senior director at the Law Firm Hogan Lovells in Silicon Valley. Years before the commercial drone industry was taking off, no pun intended, Gretchen was already at the forefront of the Unmanned Systems Industry advocating on behalf of the global community to reduce the barriers to enable operations and use. Now, Gretchen has been a key speaker and authority on all things drone for the past couple years and was recently featured at most current Silicon Valley M&A forum. Gretchen, welcome to M&A Masters and thanks for joining me today.

    Gretchen West: Thanks for having me, Patrick.

    Patrick Stroth: Now, the reason why I asked to come along today and talk to our audience is, when we think about drones, I want to go back and compare it to the evolution of the airline industry, which didn’t exist until 1914. That’s actually 11 years after the Wright brothers had their first flight ever. We compared it with the drone industry which didn’t really come to our public attention until 2001. That’s when we knew about military drones. It took more than 10 years later. The next time the public really heard about drones is when Jeff Bezos was featured on 60 Minutes talking about using drones for delivery. That was done in 2013. It just seems like yesterday. The reason why you were featured on the recent Silicon Valley forum and the purpose of our conversation is to highlight just how in the blue an industry we take for granted today just didn’t exist not very long ago and in a very short period of time became a wide part of everybody’s daily lives just like the airline industry.

    If you’re an entrepreneur out there, how can you take advantage of a trend that you see it coming? Because there are a lot of opportunities out there for things that didn’t exist beforehand. We look at the drone situation here and that’s just our latest example of something from nothing. Before we get into talking about all things drone with Gretchen, Gretchen, why don’t you give our listeners a little bit of context and tell us how you got to this point of your career and with drones in particular?

    Gretchen West: Sure. Well, I’ve been working in the drone and unmanned system space for about 15 years. Back when I first started, I was working for a non-profit, which my experience is in non-profit management, I worked for an association that focused on air, ground and maritime vehicles that were unmanned and so remotely piloted or autonomously piloted. Back then, it was really all military. Quite honestly, this technology dates back to the Vietnam war. Some would even say World War II. A lot of this technology was developed decades ago. It obviously evolved over the years into more sophisticated military equipment, but like you said, Jeff Bezos put us on the map from a commercial perspective but even a lot of the commercial applications were developing a few years before that. I really focused my work now.

    You said that this is a newer industry. There’s lots of challenges. My work is really focused on helping enable this technology because I’ve seen a lot of the benefits, the commercial drone technology can bring to the public and to various industries. The work that I focused on is really reducing those barriers so that we can see more meaningful expansion of this industry because there’s mostly a lot more benefits to all these different various companies and industries.

    Patrick Stroth: You mentioned barriers. I can imagine they’re the logical barriers of technology coming in, but there are other barriers out there. Why don’t you talk about those?

    Gretchen West: Well, I think anyone that’s involved with technology understands that policy does not match the pace of technological development. It’s certainly the case where we’re talking about commercial drones. The FAA is the regulatory authority that manages our air space. This is a new entrance into our air space. Obviously, we’ve been flying on commercial aircraft for years and general aviation has been around for decades, but this is a new entrance. It is much smaller. In the future, they will be flown autonomously. For the FAA, to create rules around the brand new type of vehicle, it’s then very challenging. The rules that are on the books already really relate to commercial aviation. It doesn’t make sense to have the same rules for a commercial airline to be implied on a very small five-pound drone. Over the last 10 years, actually, longer than that, we’ve been trying to work with the government agencies to help them understand what this technology is.

    Where we are today, we still have a lot of regulatory hurdles, but the FAA and the other government agencies have come a very long way in helping enable this technology, but there’s still a lot of challenges around public perception, there’s challenges around privacy. There’s just a lot of different challenges, but they are all things that we can achieve if we work together as an industry and these are all things that we’re working very hard to overcome. With any other technology in an industry, the policy making doesn’t match the speed of technology. We’re seeing that very, very clearly in the commercial drone space.

    Patrick Stroth: I get a sense when we talk about some of the regulatory considerations and how it’s trying to keep pace. There are a lot of examples where, particularly with the FDA and other regulatory bodies that the regulators work very hard to slow down approval. That’s the opposite, at least, from what we read in periodicals when we’re talking about regulatory issues and autonomous cars. Do you get a sense, the FDA and the Feds are doing what they can to accelerate or facilitate? Are they working with the industry to try to come up with some good rules?

    Gretchen West: They are and they have been for many years. I think, sometimes, the FAA gets a bad rep because they are moving slowly, but their whole mission is to protect the safety of the air space. No one wants to be flying on a commercial airplane and have an incursion with a commercial drone. I think we’ve all seen enough new stories about how drones have been flying around airports. That’s the number one priority of the FAA. I think we all agree that something we all have vested interest in. It’s not deliberately a slow process, but some of it is just the way rules are written in the government, that it takes time to go through an inner agency process with so many different agencies weighing in. That said, the FAA has said repeatedly, so has the Department of Transportation, that they are very interested in working with industry. They’ve made a lot of great stride. Their congress has passed, now, two re-authorization bills that has language around unmanned aircraft systems to enable broader commercial operations.

    Now, it’s just a matter of getting the rules in place to really enable that. It takes time, but I think we all know that we’ve all seen some of the benefits of commercial drones as has the FAA. I think they all know enforcement is the very difficult challenge. Rules have to come at a place because people aren’t going to stop flying drones. They understand the value of them. The rules need to be in place. The FAA, I think, is moving as quickly as they can as an under-resourced agency, in my opinion.

    Patrick Stroth: Well, it is peril, I would say, with the autonomous driving because I had never seen regulators more excited than the concept of getting drivers off the road and so forth and doing everything they can on that. It’s encouraging to see that government is actually working with that. When we look at the public perception of this and a lot of people have what limited views they’ve seen on using drones for taking pictures or if they’ve seen them on TV shows being used in brighter ways. There’s a perception out there. I would also think with commercial airlines, it took a lot of bravery in the early days for somebody to actually think to get on an airplane and fly across the country. Now, there’s got to be some courage and some knowledge of uses for the drone beyond what people can think right off the top of their mind. You had just referenced the commercial benefits of drone usage. Give us a couple of examples on how they’re being deployed and what benefits they’re bringing to companies or to the public at large.

    Gretchen West: Sure. There are so many benefits. We could spend several hours on this call, on this podcast just talking about the various benefits, but just to highlight a few. There’s the benefit of saving money. For example, in the oil and gas industry, when a human have to inspect a flares deck, that flares deck has to be shut down, which can cost a company up to a million dollars a day. If you’re able to use a drone, you don’t have to shut down the flares deck. You can use a drone with various sensors to monitor and inspect that flares deck. That’s just one example. There’s other examples of how, for example, saving lives and improving safety.

    The cell tower industry, you have climbers that carry about 80 pounds of gear and they can climb up to or higher than 1,000 feet in the air. You don’t know what changes in weather there will be. There are climbers that die every year from climbing these towers. It’s a very dangerous job. Why not use a done? You could get it up to inspect the tower in about 20 minutes. If there’s a problem with the tower, then you send the climber up to repair whatever needs to be repaired, but otherwise, you just potentially saved some time and saved lives by doing that. There’s so many other industries that are using this technology. For example, in the construction world, they have to measure stockpiles. The way you do that is, you have a human walking around the pile of whatever it is measuring manually.

    Well, there’s technology out there now, a sensor that you can put on a drone and it can map that stockpile and give you those measurements in real-time. It’s a time-saving. It’s a cost-saving. It’s not replacing the human worker because there are other jobs that have to be done within all of these industries. The drone is more of a … it’s a tool to help. You mentioned Jeff Bezos in delivery and I think a lot of people nicker a little bit when they hear about delivery, but I think one of the most important aspects of drone delivery is in the humanitarian area. Lots of companies are developing technology where you can deliver blood from blood banks to hospitals or organs from hospital to hospital for organ transplant. There is this testing and there are actual trials going on overseas, outside the United States, where the regulatory environment might be a little bit easier where aid is being brought to people in need. There’s countries, third world countries, where drones have flown after natural disaster, delivering water or medicine or whatever it might be.

    I think some of those use cases really open up the door for delivery whether it’s consumer delivery, business to business delivery or humanitarian. I think being able to get something to you quickly especially after a natural disaster is incredibly important. I could go on and on about all the different benefits and all these different industries. You’ve got news gathering and mining and inspecting railroads, inspecting bridges, any kind of infrastructure, farmers using drones in their field to instead of walking a field to look for damage after a hailstorm or looking for areas of irrigation, maybe, or they can put a drone up in the air and have NDVI sensory imagery, all sorts of different types of mapping where they can immediately see what’s going on in their field.

    Public safety has been using this technology for a long time. They’re good for traffic monitoring from a security perspective, using a drone to monitor a facility such as a prison or pharmaceutical plant or a nuclear facility. There’s so many different great use cases where drones … Really, they’re a tool that can create efficiencies and they can reduce cost, and they can save money and save lives.

    Patrick Stroth: It’s whatever the limits of the imagination are. This isn’t just some funky little happy gadget. This is a real flexible, viable tool that’s going to be sustainable, I can imagine. Again, I keep going in the parallel to when they would think about the first airplanes where they were used. Before they’re carrying passengers, they’re carrying letters. They’re probably limited to about 30 or 40 pounds worth of letters that they could carry at a time. Now, you think about what FedEx delivers in a single day. I think that this is just amazing. Now, there’s going to need to be a couple of breakthroughs both on a regulatory and a developmental stage to really get this a little bit more mainstream. There were a couple areas that they may not be on the cusp of that, but what are the things that we should look out for that if these things changed or these thing gets solved regulatory or otherwise, then we’re going to see things open up wide.

    Gretchen West: Yeah. There’s a handful of really near-term pending things that are going to help. There’s obviously some other longer term challenges that we need to overcome, but last year, the FAA re-authorization bill was passed. I don’t remember how many pages, but there were pages of provisions for the FAA around integrating and enabling UAF technology, drone technology. DFA has now have their handful with all these task that they need to complete, but the first and probably most important thing that the industry needs to see now is remote identification. A couple years ago, the security agencies, DOJ, DHS and others were very concerned about the clueless, the careless and the criminal actors of flying, and how do you identify the difference between the three?

    You’re talking about a sports stadium where somebody is flying near a sports stadium or an airport where somebody is flying near an airport to Gatwick, for example. We’ve all read those new stories about drone flying around Gatwick and the millions of dollars that were lost because the airport had to shut down. Was that the person that was flying, which is just a kid that’s out flying with his dad just for fun as a hobbyist. Maybe, maybe not. Is it something that’s clueless that’s out there that doesn’t understand the rules or somebody that’s criminal? As of today, there’s not really a good way to identify any of the drones that are in the sky. Yes, there are some apps and some things that are baked into some of these drones, but it’s not a formal process.

    To be able to move forward with any of the other expanded operations that our industry needs to see, those remote ID, whatever remote ID is going to look like, whatever the rule is that the FAA comes up with, that has to happen first. That is a critical piece to satisfy the US security agencies and the FAA. That is the number one thing that we’re waiting for. Secondary to that is, I’ve mentioned expanded operations a few times. The law, now, permits commercial operations of drones, but it’s very limited. You cannot fly beyond visual line of sight of the drones. You have to have your eyes on the drone at all times. You can’t fly over people. You can’t fly at night. Now, some of these, you can get a special permission from the FAA to do, but it’s much harder. For a lot of the operations, the industries that I just mentioned, if you’re a real estate agent and you’re just flying over a house, you can stay within visual line of sight, not fly over people and not fly at night. You’re probably fine.

    If you want to monitor a big pipeline or a railroad, then you need to fly beyond visual line of sight. We’re waiting on some rules now to enable those expanded operations. One was just opened for comment which closed this past Monday and would be operating over people and operating over people in a moving vehicle. The way that the rule is crafted by the FAA, it’s going to hamper the commercial drone industry if it passes as it is. Not being able to operate a drone over a person and a moving vehicle is a non-starter for this industry and operate the restrictions around operating over people is, there needs to be more research and testing that’s done because it’s still very restrictive. Those are some rules that we’re waiting to see how they change in order to enable this community.

    I mentioned a security concern, that’s a big issue for the federal government, but it’s not just about remote identification. It’s also about this new industry that sprouted up. It’s called, Counter-drone Technology or Counter-UAS Technology. Think about a baseball stadium or a football stadium. They like to use drones to film practices and eventually, maybe even film games, but they don’t want drones flying into their stadium when there’s a map gathering, when there’s a game going on. A drone was just flown into Fenway Park the other day. This counter-drone technology, potentially, could help curve some of the careless, clueless criminal, but the authorities are very, very limited in the industry to use that technology. That’s something we really need to see develop with the FAA and with congress to figure out, how do we let more than just a few federal agencies utilize this technology, how do we allow private companies to be able to use it.

    I think, remote idea is the most important, but the fourth one is called, The UTM, the Unmanned Aircraft Traffic Management system. It’s basically virtual highways in the skies for drones to fly. It’s like air traffic control for commercial aircraft but at low altitude and it’s all automated. Now, the FAA have been developing this for years with a couple hundred industry partners. I think we’re getting closer to see some implementation of the UTM, but this is what is going to help our industry have all this operation. It’s going to enable delivery. It’s going to enable beyond visual line of sight and operations over people. It will be this automated system that will help all of this. It’s meant to be designed in a way that if you’re flying from point A to point B, you get your coordinates. If a medevac flies into your route at some point in time, you’re automatically diverted. It’s meant to be this automated system that’s very safe. It’s really going to enable the technology and this industry to grow. We’re still waiting for that to be implemented.

    Patrick Stroth: Yeah. Not only do you not have pilots in the vehicle, but then it sounds like you’re not going to help people in the air traffic control system or the automated, which you’d have to do with the volume of vehicles out there under this UTM.

    Gretchen West: Exactly. The current air traffic control system that the FAA uses is one of the safest in the world for man deviation, but think about adding millions of aircraft to that system. It will be impossible for the FAA to be able to monitor all of that in addition to man deviation.

    Patrick Stroth: That’s amazing. The ID of all the different uses for the drone brings up the idea because for an M&A conversation we’re having today, drone is a very interesting topic and people might be thinking … Yeah, but how does that apply to us in M&A because we’re not necessarily in the aerospace industry or the flying industry? How is this going to be applicable? I just think that there are a variety of different technologies that drones are using right now. They open up opportunities for all kinds of innovators. You’re talking about the UTM and the counter-drone technology. You could probably flush that a little bit, but what are the types of technologies that are necessary for this industry to grow?

    Gretchen West: Well, I think when a lot of people think of drones, they just think of this little, small toy aircraft that’s flying around in the sky. Really, that’s the shell of it. There’s plenty of companies that are developing the hardware, but it’s really the brains in the drone that’s the most important thing. You’ve got the sensors. There’s a variety of different sensors depending on what your application is, whether it’s agriculture, construction, mining, whatever it might be. There’s mapping technology that’s being developed. Communications, infrastructure technology. The software that comes a navigation software to be able to automate how you get drones from point A to point B. I mentioned remote ID. There’s lots of different companies that are developing technologies to satisfy what remote ID might look like.

    Obviously talking about UTM, I mentioned there’s about 200 partners that are working with NASA and the FAA to develop this. A lot of it is software. It is multiple layers of software that are going into what this UTM structure will look like. We’re at step one through a program, now that several companies have developed an app where you can get notifications and authorizations to find certain air spaces, but that’s step one. There’s all these layers of software and technology that need to go into a UTM system. Insurance companies are automating drone insurance for how operators are able to obtain insurance. Again, counter-drone technology which is similar but different but a lot of different technologies that are being built into how counter-drone technology is going to work. Basically, it’s air space security is what counter-drone technology really is.

    There’s so many different areas within this commercial drone space where innovators can develop different software layers to fit into whatever these different applications are. They’re all very different. There’s so much opportunity. We see startups that are developing these types of technologies every day. There’s a lot of opportunity to get into this space and start helping craft what the feature of commercial drone integration is going to look like.

    Patrick Stroth: Well, I think, also, if there’s the creation, again, from nothing comes something, lots and lots of new applications and new developers on that. We got to figure down the road and again, that focus on us is looking how it applies to M&A is that there are going to be a lot of M&A opportunities. Give us, from your perspective, what you’re seeing on the M&A front within the drone sector.

    Gretchen West: Sure. I think we’re going to continue to see increased activity in M&A including in this year. Back 15 years ago or even 10 years ago when these commercial companies were just starting to get into the space, there weren’t that many companies and they were mostly startups. Now, you’re seeing big named companies like Amazon, Intel, IBM, Goggle, Cisco, AT&T, Verizon, Ford, Mercedes Benz and all these companies that you wouldn’t think of as being in the drone space. All of them are starting to develop something around commercial drone. Intel, for example, has acquired a couple companies to help with what their drone solution is going to be. Goggle has done the same. Verizon has done the same. They’ve acquired a company called, Skyward, which is going to help them be a player in the UTM space.

    I think we’ll continue to see more companies interested in commercial drone technology. Some that you may not even think of today that will be interested in developing some drone program. Instead of going out and building your own hardware and software, which hardware is hard in a software, there’s a lot of companies out there that have been very, very successful in what they have been able to develop. I think we’ll see a lot of strategic M&A coming. Unfortunately, we’ve seen some companies that have failed in this space. I think we’ll continue to see that. I mentioned counter-drone technology. That’s a newer part of this industry. Two years ago, there were probably a dozen counter-drone technology companies. Now, there’s over 200. There’s over 200 systems that have been developed around counter-drone technology.

    It’s just not sustainable to have 200 types of technology out there in the counter-drone space. I think we’ll see a lot of consolidation in that space as well and probably, eventually, see more consolidation in UTM as we get closer to private industry being a supplier of this technology with the federal government and with the users of that air traffic management system. I think we’ll see more consolidation there to just build in all those layers under one company. I think that industry is very right for just an increase, a large increase in M&A activity. It’s been one of those industries for so long where it’s just … People are developing. There wasn’t a good roadmap from a regulatory perspective. Some people were developing technologies that may not fit.

    Now, we have a pretty clear roadmap. Even though it’s moving slowly and that has its own challenges, I think we are at a stage where the industry is becoming more mature and so we will be seeing a lot more M&A activity.

    Patrick Stroth: It’s early mature and it will continue to go. I think the biggest beneficiaries throughout all of this is going to be the public, the consumers, because we’ll get finer working finished products here that are both safe and reliable and less and less expensive to operate as time goes on. That’s why American business does as well as it does. Do you have any predictions for just what’s around the corner for the industry or any trends that you see coming that we should keep an eye out for?

    Gretchen West: Well, I think the counter-drone space is really interesting. Like I said before, there’s limited authority. A couple agencies within the federal government are allowed to actually use the technology, but there are things in play to create some new rules to allow for private companies to hopefully get approval to become a user of that technology. I think that’s very important. I mentioned before from a security standpoint using counter-drone technology around … anywhere there’s a map gathering or an amusement park or some critical infrastructure. I think counter-drone technology is an area that we’re going to see a lot more development and something to watch. I think the commercial drone industry as a whole and all these different amazing use cases that we can find benefit and save money, save lives, create efficiencies, I think … The industry is moving slowly because of the regulatory environment. I know sometimes that is a concern to investors. This is not an industry with quick returns at this stage, but we know that it’s coming. We’ve seen the value that this technology provides.

    I think if people just hold on a few more years, we will see more commercial operations and those returns will come back in. There will be a lot more M&A. A lot of startups, I know, were developing technologies simply to be acquired by a customer or strategic partner or something like that. I think this is coming. Even though there’s a lot of challenges, our team and the work we do are … We’re in Washington, D.C. all the time talking to the regulators and the federal government to help reduce these barriers. We’re going to get there. We are going to get there. I think it’s really important to keep an eye on this space from commercial operations of drones, to counter-drone technology. Even urban air mobility, the air taxi industry which is similar but different to commercial operations of drone, but all of these areas, I think, are fascinating areas and they are coming. It’s going to be a place where I think investors, investment thinkers really need to pay attention to.

    Patrick Stroth: Well, as you mentioned, we’re just scratching the surface of this topic. We didn’t even get in to talking about the types of investor’s funds, fund managers, opportunities and things like that. I think we’re going to leave that to our listeners that if they’ve got a particular question like that, I think they can direct that to you directly. Gretchen, how can people find you?

    Gretchen West: Well, they can find me via email at That’s

    Patrick Stroth: Thank you very much, Gretchen. Again, it’s a catchy topic, but it’s also right on point with what we want to do. Thank you, again, for joining us and have a good afternoon.

    Gretchen West: Thank you. You too.


  • Stephen Kuhn | A Solution for the C-Suite Talent Crunch
    POSTED 5.14.19 M&A Masters Podcast

    It’s a tight talent market out there in the technology industry. And that’s especially for all C-suite positions right now, says Stephen Kuhn, partner at Advantary. Yet companies, especially startups, are facing pressure from their boards to hire senior executives.

    And that means they’re sometimes rushed into bad hiring decisions.

    Stephen talks about a short-term solution to this issue that can have long-term positive impact on companies facing these challenges, as well as…

    • A strategy for getting breathing room to recruit the right people, while still achieving important milestones in the company’s growth.
    • The incubator marketplace that brings together corporate M&A and startups
    • What companies doing cross border deals need in their back pocket
    • A little-known decision-making processes to work through tough issues
    • And more

    Listen now…

    Mentioned in This Episode:

    Episode Transcript:

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here. That’s a clean exit for owners, founders, and their investors. Today I’m joined by Stephen Kuhn, partner of Advantary. Advantary provides interim CXO services across the entire C-suite, including CEO, COO, CTO, CMO, CSO, and wait for it, CPO. That’s a lot of Cs. Advantary augments a company’s management team long-term or short-term, full-time or part-time. Stephen, thanks for joining me. Welcome to M&A Masters.

    Stephen Kuhn: Patrick, thanks very much for having me.

    Patrick Stroth: Now before we get into all things Advantary and C-Suite, tell us what led you to this point in your career?

    Stephen Kuhn: I’ve been in the technology industry in Silicon Valley for the last 40 years. I was born and raised in San Francisco. Started programming professionally when I was 16 in 1978, and got the entrepreneurial bug. Sold my first company while I was at UC Berkeley. Went onto study Managerial Finance at Harvard, and have in total started nine companies. I’ve been CEO at seven. Seven companies were pure tech. One was a boutique tech M&A Investment Bank, and I subsequently ran M&A Core Public Software Company. And the last company, the ninth company was a PE firm focused on the wine industry, so decidedly not tech.

    Patrick Stroth: Well I’ve got to ask you, and this isn’t something that you and I prepared for, but coming from one native San Franciscan to another native San Franciscan, we’ve got quite a few in our audience. There’s a question we always ask each other is where’d you go to high school?

    Stephen Kuhn: I went to San Francisco University High School.

    Patrick Stroth: How about that? Okay, congratulations for you. I went to SI. That’s for our listeners who probably don’t care about that. Tell me about Advantary.

    Stephen Kuhn: Advantary is a partnership of 11 and counting. We’re adding new partners. Highly experienced entrepreneurs who have started dozens of companies, raised hundreds of millions in debt and equity capital, and had many exits. We provide interim CXO services across the entire C-suite with the exception of CFO. We engage full-time or fractional, long-term or short-term, but it is an interim engagement. We’re not a placement agency. We help companies prepare for and go through transitions, including capital raises, the loss or hiring of key executives, technology issues, stagnation, accelerated growth, and international expansion, which is a major focus of our group this year.

    We relieve pressure on companies as they look for CXO’s in this very tight talent market. We serve the small to mid-sized technology market, including SASS, Syntax, AR, AI, IOT, Blockchain, Cyber Security, Digital Health, and with the addition of our newest partner, Consumer Package Goods and Supply Chain Management. There’s a lot going on on the technology side of that these days.

    In terms of size, there’s no company that’s too small. It’s frankly only an issue of budget. And there’s no company too large. We have a billion dollar plus revenue public client. But our sweet spot is clients with revenues between 5 and 75 million. But we go lower including pre-revenue companies of course, and obviously higher revenues as well.

    Patrick Stroth: Well that’s one thing that is striking is that when we were kids dreaming about going into business or being successful, the idea of success was build a company, sell it, and then at a young age in your 30s and then go buy an island somewhere. And one thing that’s just more and more common in Silicon Valley, it’s not just here, it’s just concentrated, is people like you who are extremely successful, could have bought several islands out there. But instead of shopping for hammocks and boats and stuff, you’re going out and finding more challenges, more companies to help. It’s striking how this is what you live for and just being able to provide great services and add value to other startups. Back when you were starting up you’d get them moving on, it’s really a fantastic resource that’s out there.

    What’s the type of value that Advantary brings because I can tell you right now, finding talent, if that’s tough, finding management is even more so. What do you bring to bear for owners and founders that is not otherwise out there?

    Stephen Kuhn: Unlike a traditional consulting firm, think of McKinsey or Bain or PWC, we actually provide hands on operational services. It’s the highest, best value we can provide to our clients, given the length of experience, the breath of our experience in the technology market.

    So you mentioned talent at such a premium, it’s hard to come by, that’s absolutely right. And a lot of companies are forced into a high pressure situation where they need to find, locate, recruit, and retain senior management. And in this market, it’s extremely difficult. And making a bad hire is sometimes existentially costly. I’ve certainly seen examples of firms that have made bad hires in C-suite, and I can think of some in particular in the chief revenue officer role that have been unqualified, culturally not a fit, and culture is a really important aspect here as well. You need people who can really fit in.

    And so if a company is compelled under pressure from the board, pressure from their performance in the KPI’s on their business plan, to get someone in, just anybody who’s breathing, to find a CXO who can fill the role, that can be very challenging. And so we can step in on an interim basis, provide some real support. During the time that they’re out recruiting, the company can make forward process. It can achieve its milestones while taking the time, having the breathing space to actually find the right person for that role.

    Patrick Stroth: One of the things I was thinking of, is you’re bringing somebody in to a CXO position while your client company is out doing the longer term search for the longer term solution. Largely what you’re doing is shorter term. You can do the long-term, but I get the sense that more of your stuff is targeted, your service is targeted towards short-term, is that right? Because if it is, I think it removes a lot of conflict because you can get somebody who can plug and play and they’re not worried about preserving their job or their role. They’re into add value with the knowledge that this is not going to be forever, so you’re not playing defense. You’re just working forward, and you don’t have to worry about legacies or things to kind of build in as you take a position. I think that’s a nice, un-conflicted approach.

    Stephen Kuhn: Yeah. That’s absolutely true. And we work with firms, I think our shortest engagement has been probably six weeks or a couple of months and we’ve had, have a client for well over a year now. But we typically work from a quarter to a few quarters in length of the engagement.

    So sure, we can come in and solve a particular problem, work with the company through a challenge or a transition and stay on for a bit longer to see through the onboarding of our replacement frankly.

    The value we can bring is yes, the experience, yes, the understanding, we’ve made lots of mistakes ourselves. We can load balance as well. A lot of firms don’t need a full-time CXO. A classic example that most people are familiar with is a CFO. A lot of early stage companies don’t need a CFO. Similarly, they may not need a full-time Chief Product Officer, Chief Technology Officer. You’ve got a small firm that’s got a founder who’s a great engineer, who perhaps hasn’t been an entrepreneur before. Hasn’t run a team of engineers, doesn’t mean they’re not smart, they’re usually brilliant. But they just lack some experience and we can provide that mentorship, that guidance, and actual hands on architecture, scaling issues, security issues, so on and so forth, on the technology side, experience on the product side, the marketing side or revenue or business development.

    So coming in on an interim basis to provide support when support is needed, to step back when it’s not. It actually, and because we’re consultants we’re not employees so there isn’t the tax issue there as well, we can be very cost effective for our clients.

    Patrick Stroth: What does it look like to work with Advantary? I mean, describe types of engagements that you have available.

    Stephen Kuhn: So we, in addition to the interim CXO positions that we’ve talked about, we actually have five package services if you will, that we provide and they are briefly, pre-transaction preparation and execution, getting ready for a debt or equity transaction, whether that’s a capital raise or M&A event. A lot of companies aren’t properly prepared, and so deals don’t get done, they get done more slowly, or on sub-optimal terms. And here’s the situation with the old adage, an ounce of prevention is worth lots of pounds of cure here. They can really drive a lot of value out of Pre-Transaction Preparation, proper preparation.

    Second is around growth, strategy, marketing, sales, business development and cross border expansion. Cross border is a particular process as I mentioned earlier, for us because those firms outside the U.S. looking to enter the U.S. Market, are effectively doing a startup within a startup. It’s very risky, it’s very time consuming. It’s a real distraction from the core business.

    As a team of entrepreneurs who’ve started lots of companies here in the states, we can provide a tremendous amount of value there.

    Third practice is around technology and patent management, best practices, and implementation.

    Fourth is around designed thinking. Designed thinking methodology is a terrific problem solving framework. And we help solve companies strategic issues leading them through a design thinking process. It’s extremely powerful. And the fourth is really focused at investors or buyers. So perhaps some of your clients for example, or your audience on the M&A side, we work with investment banks, but also the principles, PD firms, family offices, and corporate buyers on their pre-transaction diligence. So we can go in and look at a company’s team, the technology and their pipeline, their product market bid, their strategy and so on, to help the buyer if that fits with their objectives.

    Patrick Stroth: That’s pretty comprehensive. You mentioned with the cross border so I don’t want to sound redundant here, but the services for Advantary are available not just California but what’s your service territory range? Entire U.S.?

    Stephen Kuhn: It’s global in fact. We’ve got clients, certainly across the U.S., but also in Australia. We have a French client we acquired last month. And we are working in Mexico and Latin America as well. So really it’s global. We have a natural center of gravity if you will in the Bay Area. If you looked at a heat map of the globe, there would be a bright red spot around the Bay Area. But you’d see hotspots around the globe as well.

    Patrick Stroth: Gotcha. Well now the biggest questions people have when they hear about services like this, well is it a fit for me, yes or no? And they can make that decision based on what you said.

    The next thing, and this is just true of life, is timing is everything. At what point if there are people in our audience or there are questions, at what point should they start thinking about someone like an Advantary?

    Stephen Kuhn: That’s a great question and it really depends on the nature of their needs. For example, if they’re thinking, even contemplating an exit in the next year or two, that’s a great time to be thinking about us to help in that pre-transaction preparation. A lot of things can be fixed relatively quickly, but there are a lot of things that take time. It takes effort to steer the big tanker in the ocean, to move in a new direction or to find the right person to fill that role. So we can be very helpful long in advance of those types of transactions, but then there are other things that are much more immediate. You need to hit your numbers this quarter, right. So you’re going to need some strategy, marketing, sales, and business development efforts.

    You are looking to raise capital. And we can help prepare the company for that capital transaction. And those usually aren’t done a year or two in advance, that’s usually the next few months we need to get that done. So it really depends on the nature of the engagement.

    Ranges from today, oh we need your help today. In fact I met with a client, a prospect yesterday who is launching here in the U.S., they’re a Mexican firm. And they’re looking to get launched in May. And they’ve got a tremendous amount of work to do before they can do that. So they needed immediate. So you can see it really depends on the circumstance, the context, and the nature of the services that they require.

    Patrick Stroth: Yeah. Stephen, of the services and the types of engagements you talked about, the majority of them revolve around or have an aspect of the practice of M&A and we do try to focus on M&A. You’ve been around companies and helped companies that are both scaling and exiting. And so you’ve got a great perspective with regard to M&A. What do you see in the trends going forward here in 2019 going forward for M&A? Just at any level from what you have seen.

    Stephen Kuhn: On the M&A side, clearly, historically, M&A has been roughly 90% of the exits. When companies exit, M&A is the exit of choice verses IPO about 90% of the time. I don’t see any change in that. If anything, despite some very large, very successful IPOs, I think the trend is definitely continuing on the M&A track.

    And I pause there only because several examples came to mind of firms that are providing, think of co-location spaces, and other accelerator programs that are creating essentially a marketplace of technology and entrepreneurs. On the one had they’ve got small entrepreneurial companies with brilliant technology. And those companies are really good at innovating, creating new technology, and getting from zero to one, from nothing to something.

    And on the other side of that market, you’ve got large firms, typically Fortune 500 firms, that are really good at scaling, but maybe not always so good at innovating. And so there are a number of incubators, an increasing number of incubators out there that are positioning themselves, as they say, a marketplace for large corporates to come in and get access and visibility to the startup world providing a key for them, which is innovation.

    And on the other side you’ve got these young firms that are really good at innovating, and are challenged with scaling and are looking for opportunities to partner, in the short-term, partner with the larger corporates, but really looking to those corporates as their exit path. And so with the lives of these incubators, these marketplaces if you will as I tend to think of them, there is I think increasing amount of M&A activity. And as I speak to my investment banking friends around the country, both boutique and larger firms, they are absolutely saying trends up and to the right on M&A.

    Patrick Stroth: This is a very good perspective to have. I appreciate that.

    Stephen, how can our listeners find you to learn more about Advantary for themselves, for their own entities, or for their clients?

    Stephen Kuhn: Yeah, thanks for asking. Of course there’s our website And you bring up a really important point which is that while we do work for the companies themselves, we’re often brought in and referred to those companies by, there’s other service providers. It could be one of our partners in the Fractional CFO space, it can be VC or PD or Family Offices as well. It could be an investment bank that needs help with one of their clients or prospective clients as they are going through or contemplating going through an M&A transaction.

    So encourage all of your listeners if they think they have a need, or suspect they might have a need for some of our services, just go to the website. Pick up your keyboard and send an email over to me or to and we’ll certainly get right back to you.

    I’m also available of course on LinkedIn, easily findable there. Yeah, looking forward to hearing from your clients and seeing if we can be of help.

    Patrick Stroth: Well it was a pleasure speaking with you today Stephen. Thanks very much. And if anybody needs to find out other ways to get ahold of Stephen, go take a look at our show notes at Hit the insights tab and you’ll find our interview there as well and you’ll have the show notes as well.

    Patrick Stroth: Thanks for joining us today Stephen, and have a good day.

    Stephen Kuhn: Thank you very much Patrick.


  • Matthew Hanis | Practical Improvements to Healthcare
    POSTED 5.1.19 M&A, M&A Masters Podcast

    The politics of healthcare is a mess in this country, as you know.

    But Matthew Hanis, executive producer and host of the Business of Healthcare, is more interested in practical measures for incrementally improving a system that is the most expensive in the world and doesn’t offer a great quality of care in exchange.

    We also talk about the M&A landscape in healthcare, including the trend towards increasing vertical integration, as well as…

    • How to balance profits with patient care
    • The key difference between a single payer system and universal healthcare
    • The 3 biggest upcoming regulatory reforms to keep an eye on
    • The largest contributor of waste in healthcare
    • And more

    Listen now…

    Mentioned in This Episode:

    Episode Transcript:

    Patrick Stroth: Hello there, I’m Patrick Stroth. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisition. We’re all about one thing here, that’s a clean exit for owners, founders, and their investors. Healthcare is literally a force of nature in our economy. It’s been in the news quite a bit lately and like it or not, as time goes on, everyone will be consuming more, not less of it.

    Today we’ll discuss the future of healthcare from a business perspective, and how mergers and acquisitions will factor into the inevitable changes coming to healthcare. I’m pleased to be joined by Matthew Hanis, Executive Producer and host of Business of Healthcare. Now in his 13th season, BOH is an online platform where Matt interviews senior leaders in healthcare. BOH estimates that 118,000 decision-makers are responsible of 80% or more of the buy and sell sides of US healthcare. Just about 20,000 of these very decision-makers participate in BOH’s audience. That’s about one in six, which is a respectable share of any market. It is for this audience that BOH was purpose-built to identify and help propagate proven innovations, elevating mission and margin more rapidly. Wow, one in six, that’s nothing to sneeze at. Matt, thanks for joining me, and welcome to the program.

    Matthew Hanis: Patrick, thank you so much for inviting me on.

    Patrick Stroth: Now, we’ll get into Business of Health in a moment. First, tell us how’d you get to this point in your career?

    Matthew Hanis: Well, I tried to make as many mistakes as possible, and this is the culmination. I’d spent about 25 years in healthcare, most of that time I’ve either worked on the vendor side, selling data solutions to health systems, larger payers of health plans, or working within a health system, Mercy in St. Louis, to have the experience of actually doing the work of healthcare. Ultimately, all of those experiences culminated in a passion for entrepreneurship and for finding the innovations that I felt could really transform our healthcare delivery system in the United States.

    Patrick Stroth: When we see BOH’s core statement, which is mission and margin, with mission, we get that because healthcare and doing good and providing care to people, there’s a passion, the mission. It’s the margin that people start looking at real quick. Why don’t you explain what you mean by mission and margin in the Business of Healthcare.

    Matthew Hanis: Healthcare makes up about a fifth of the US economy, and every sector of the economy is important, but healthcare one of our challenges though is the cost of healthcare has continued to rise at a rate faster than pretty much any other aspect of our economy. But when you look at the quality of healthcare as measured by access, patient satisfaction, survival, life expectancy, all the broad measures of healthcare, we don’t do very well in this country. We have a major portion of our economy, which is getting progressively more expensive, and on most measures of quality, it’s not very good.

    I believe that this is unsustainable. Now, the laws of physics tell us that all systems come back into balance. There’s a couple of different ways that we can see the US healthcare system coming back into a healthy balance in terms of cost and quality. One of the ways though, which tends to be the primary focus right now is trying to cut payments to physicians, and try to manage healthcare by managing how consumers consume it and managing how it’s provided. Our belief is that these approaches are unsustainable and that there are at the same time, very, very sustainable ways to improve the effectiveness and efficiency of our healthcare system. That’s what we try to bring to bear.

    Mission is really about all the things you and I can agree on, quality, access, patient satisfaction, physician and other provider satisfaction. Margin is recognizing that like any other part of the economy, the providers who deliver healthcare must be able to make a profit in order to make it a sustainable business. We just need to figure out how to balance that with the cost to the consumer.

    Patrick Stroth: The problem that you mention out there which is making a challenge for us is that cost of healthcare continues to go up, quality continues to go down. I would think that a lot of people would think well, the more it’s intuitive almost that if you spend more you should get better quality. Are there any specific reasons why the cost goes up and yet we’re not getting the value, the benefit?

    Matthew Hanis: Yes. There’s a couple of different reasons. One issue which is very microeconomics, is pricing. We know that one of the biggest drivers of the cost of healthcare is the price that’s charged for healthcare. There’s an enormous set of problems around understanding price. God forbid you should have to go to the hospital for surgery. It’s extremely difficult to understand what that’s going to cost you, and what the costs would be for you to go get that exact same procedure in other settings.

    Why is it so complicated to understand price and the cost of healthcare? Well, I believe that a big part of that is we’ve got a lot of intermediaries in our delivery system. Too many intermediaries can cause such a separation between the consumer of healthcare, the provider of healthcare and the payer of healthcare, that we create a whole myriad of complexity. I think a big aspect that we can look at is, why do we have so many intermediaries, so many people that handle healthcare transactions multiple times? Why is it so hard to get that data to be meaningful to the consumer?

    I think another cause that we face in our system is regulatory constraints. I’m not suggesting that healthcare should become an unregulated industry. I think we can all agree that just about any industry in the US, we want to have good regulation over healthcare to protect the consumer and protect the providers of healthcare. The problem that we face today though is that the regulatory environment that healthcare providers face is so confusing and so complex that it’s almost impossible to comply. I’ll give you a concrete example. A typical health system reports somewhere in the order of 4,000 different quality metrics each year. Most of those quality metrics, most of those 4,000 are actually redundant metrics that are being reported to different organizations in slightly different ways.

    Another issue in the regulatory side are the constraints of the Stark Laws. The Stark Laws were created to prevent or to discourage physicians from referring patients to treatment from which the physician would profit. The problem with that is if we ask a physician to take accountability for a patient’s total spend, and for that patient’s quality of care and their overall quality of life, which is the concept of fee-for-value, if we were to ask physicians to do that, unlock their ability to make those decisions and to be able to refer patients to the providers that they most want to work with and potentially refer them to themselves, for things like imaging, and other services that are adjacent or ancillary to the primary purpose of care, these issues of so many intermediaries and the regulatory constraints that are so confusing, create an enormous part of the enormous waste of our delivery system. Today we spend about a third of our healthcare dollar on waste, things that do not provide value. A decent chunk of that waste is directly related to too many intermediaries and enormous regulatory constraints.

    Patrick Stroth: Wow. I think when people look at healthcare, the only way you address this is, either you have the universal care, care for all, unlimited, which a lot of people would say, well that means care for nobody because the system would be overrun. Or, the other extreme is fear there would be extreme rationing out there, where some arbitrary person will dole out allocation healthcare by some abstract basis. You’ve got fear on both sides, but it’s really a false choice. It’s not all of one, all this or nothing. There are models that are being set up and there are ways that are being tried to go forward. Why don’t you talk about those types of models.

    Matthew Hanis: One of the fundamental trends in healthcare is the shift from fee-for-service to fee-for-value. The basic idea is that today, when a physician bills for a service they provide, or a hospital bills for a surgery that was performed in one of their operating rooms, they essentially are billing for units of work performed. They’re not charging for a knee replacement, they’re charging for all of the components that go into a knee replacement. The concept of fee-for-value is that you charge, or pay provider for the outcome that they’re delivering. The knee was replaced, no infection occurred, the patient came out of the procedure with a responsible period of recovery. Those concepts around fee-for-value create far better aligned incentives between the providers of healthcare and the payers of healthcare.

    I just want to touch on your point about, I think you touched on the Medicare for all concept. It’s important to recognize three things about our current US delivery system. First, we cost per capita somewhere between 30% more and 200% more than the rest of the delivery systems in the world, like that in Britain, Canada, Sweden or Switzerland. Before we toss those systems out as being un-American, or undesirable, consider the fact that they generally provide much better access to care. More people can get to care faster. They cost on a per capita basis, far less than our system does, and in general their consumers of healthcare report being better satisfied with the care that they received.

    Now, I’m not arguing that those systems are perfect, and I’m certainly not arguing the idea that Medicare for all is a particularly good solution. But I would want to differentiate between the concept of a single payer system versus the concept of universal healthcare. A single payer system essential says, we’re all going to agree that one entity is going to pay for healthcare. Doesn’t say what the rules are about that. It’s just saying that each of us that pays money into healthcare is going to pay it to one place, and that entity is going to be the entity that pays the providers of healthcare. That’s how most of the delivery systems in the industrialized world operate.

    In the United States we kind of have that, because 70% of healthcare provided in the United States is paid for by the government. Most people forget that it’s a relatively small portion of healthcare that’s paid for by the consumer and large employers. A single payer system does not necessarily mean universal healthcare. Universal healthcare takes it a step further and says, everybody gets healthcare and the government’s going to pay for it. Two really different ideas, but related.

    Patrick Stroth: Well, let’s focus on M&A on the physician side of the industry, because we’ve got the large health systems, and we’ve got the large institutions and then you’ve got the pharmacy development, medical devices and everything like that. Let’s just look at the physician provider side of the industry. What do you see for the future of physicians in healthcare as we try to change into this fee-for-value emphasis?

    Matthew Hanis: I think physician practices for the next 5 to 10 years are in a race for lives. What I mean by that is, if you take the concept of fee-for-value, which has generally pretty solid evidence to indicate that it produces better healthcare value for the consumer and the payer and the provider. If you agree with that premise, then that means that physicians are in a race to find ways to be in contractual arrangements where they have accountability. If I’m a primary care practice, it behooves me to try to enter into contracts where I take on the risk of a Medicaid population, a Medicare population, but I go directly to employers and contract with those employers to serve their employees and the employees families.

    Those sorts of arrangements, manage care contracting if you will, are the strongest position for a physician to be in to get a market. If I as a physician practice hold contracts, either for the bundles of healthcare, like I’m a surgical practice, and the bundle for doing orthopedic surgery for a large employer, or I’m in the primary care space and I’m going to contract for the quality of care for an entire population, I’m guaranteed to be sitting at the bird’s eye view of how the money moves in healthcare. If I don’t have the contract for lives, that means that I’m going be subcontracted to somebody else.

    I believe the essence of the M&A space for the physician world will be the race for lives. Those physician practices that have built the infrastructure and the capacity to take on population risk of various sorts, that can demonstrate their value in measurable ways, those organizations will continue to expand contractual relationships and exclusive network relationships with payers and ensure the flow of patients to their doors. That requires an enormous amount of work in infrastructure. Frankly, many physician practices are not spending those dollars. I think from an M&A perspective, I don’t think we’re going to see much more acquisition of physician practices by health systems. We’ve seen that market cool significantly. In fact, there’s signs of a number of physician practices unwinding their relationships with health systems.

    What I do think we’ll see is acquisition and merger between physician practices, specialty groups merging into multi-specialty. I would expect that when you look at the 4,000 largest physician practices in the country, those organizations will likely consolidate. In 10 years from now I would predict that we’ll have half of those practices that occupy the largest group of physicians.

    Patrick Stroth: You spoke awhile earlier about where we’ve got a big layer of intermediaries involved between provider and patient. If there was a way that if we had the physician practices moving toward this fee-for-value model than physician groups are going to be consolidating and one group will buy another, and so forth. Does that translate also to possibly them buying other facilities, imaging centers, surgery centers, physical therapy? Is there room for vertical integration and how would that look?

    Matthew Hanis: Yeah. I think you’re spot-on. I feel like the trend there is a combination for the race for lives. If I’m a physician practice, I can provide a much better Population Health solution if I’ve got pretty good control over lab, pharmacy, imagining, rehab, physical therapy, those sets of services that are ancillary to the work of a physician, but are critical to achieving a particular outcome for a patient. That vertical integration trend, I think is very likely. I think that trend comes in two different flavors. One flavor is the vertical integration of healthcare service, like I just described. But the other is vertical integration in a manner to dis-intermediate many of the non-value producing participants in the healthcare ecosystem.

    I’ll give you an example. If a physician practice had the ability to manage the total, all the healthcare transactions for one of their patients and they’re in a Population Health contractual arrangement, they probably are going have a much better understanding of the spend of that patient and be able to manage that spend more effectively. I can imagine, or I can see physician practices getting better at being able to do the data of Population Health and perhaps dis-intermediating stakeholders by directly contracting with employers, or contracting with employers in a manner that takes advantage of less brand name sorts of health plans, and more health plans that are designed to serve physician practice needs as much as they’re designed to serve large employer needs.

    Patrick Stroth: Is there going to be need for some regulatory reform in order to do this?

    Matthew Hanis: I think there is. We’ve already seen the Center for Medicare and Medicaid Services signaling that they want to soften or weaken the Stark regulations that prevent self-referral. We’re seeing several rulings that have come out of the Federal Trade Commission that solidify the ability for independent physician to contract together with health plans and other payers, without getting into anti-trust problems. I feel like from a regulatory perspective the three big things to be watch are Stark Laws, anti-trust law, and then a third area which is CON, certificate of need. Certificate of need constrains in about 20 states of the 50 states in the Union, about 20 states use CON laws to constrain the ability to create new imaging centers or add new surgery suites. Those constraints on the surface, make enormous amount of sense because they prevent the addition of unnecessary healthcare services, which often lead to an increase in utilization.

    The problem with CON laws is they often get in the way of a physician practice being able to add imaging and other services to their capabilities of achieving that vertical integration. From an M&A perspective, the loosening of those laws would suggest an acceleration in the merger of physician practices and the expansion of practices to this vertical integration process.

    Patrick Stroth: Could you see owners of medical facilities, I don’t know if they’re exclusively physicians as opposed to medical groups and physician practices by law, have to be owned by and run by a physician. But when you’ve got things like kidney dialysis centers, or labs, those don’t have to be owned by physicians. Could there be a situation in M&A where you could see a multi-state network of labs buying physician groups? Could that happen?

    Matthew Hanis: I don’t know that I’m aware of that particular example occurring, but I’m 100% sure that there’s strange bedfellows in the outcome of these acquisitions. For example, United Healthcare acquiring DaVita, the largest dialysis business. Well, turns out United Healthcare is currently the largest employer of physicians in the United States. That’s kind of a surprising number because we all think of them as a health insurer, but in fact, they’re a provider of healthcare.

    We also see retail pharmacy businesses moving aggressively into the providing of healthcare services. Being able to walk into a clinic at a Walgreens, to get your care taken care of. In those cases it’s not actually in most cases the entity, like the pharmacy is not necessarily employing the physician, but they’re contractually enabling the physician to practice care, and there’s movement of money. I would argue that, if it isn’t a merger on in fact, in many cases, it’s a merger in reality.

    Patrick Stroth: The great interviews you have and they’re in HD quality videos and so forth, on Business of Healthcare. Matt, how can our listeners find you?

    Matthew Hanis: Absolutely. They can find us on our website at, or they can search for us on the web. Search on Business of Healthcare and our red logo, you’ll see us pop-up pretty high on the list, both our website, our podcast channels, or LinkedIn and our Twitter as well.

    Patrick Stroth: Matt, thank you again for joining us, and we’ll talk again soon.

    Matthew Hanis: Thanks so much Patrick. Thank you for having me.



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