• Sean Edmonson and Adam Deutsch | Transactions with Transparency and Trust
    POSTED 1.12.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Sean Edmondson and Adam Deutsch. Sean is Vice President at Tecum Capital, a middle market multi-strategy private equity investment platform, and Adam Deutsch is the Director, Co-founder, and CFO of NewHold Investment Corporation, a holding company and private investment firm.

    Sean says, “Let’s buy companies that truly fit the mold of what we’re trying to build, and not try to force a financial engineering situation.”

    We chat about upholding a family legacy, as well as:

    • Forming strategic partnerships
    • The precision manufacturing and machine market
    • Structuring responsibly for sustainable growth
    • Transparency and trust for better transactions
    • 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 Sean Edmondson, Vice President at Tecum Capital, and Adam Deutsch,  Director and Co-founder of NewHold Enterprises.  Now, as we record, this news of a vaccine for COVID-19, was just released. And that signals that at the very least, we’re at the end of the beginning of the pandemic. And we can now begin looking forward to getting back to business. To that end, I like to showcase how M&A deals may go forward by following a blueprint of a joint venture like the one Sean at Tecum and Adam at NewHold completed. And they did this in the height of the pandemic shutdown. Sean, Adam, welcome to the show.

    Sean Edmonson: Thank you.

    Patrick: Now, before we get into this particular deal that you guys did in the structure, and your respective firms, let’s set the table for our audience and get a little context here and tell us, Shawn, and then Adam, how did you get to this point in your career?

    Sean: Yeah, yeah, I’ll try to keep it short and sweet. But you know, I think I was thinking about this kind of from the get go. And I think kind of a key function with me is just always been a problem solver. And frankly, enjoyed interacting with people come from really humble beginnings as well. So really kind of learn the value of hard work. And if you want something, you can’t just have it, you got to go find a solution to a problem. So you know, through that, you know, I kind of started off in large bureaucratic organizations, if you will, and continue to work my way down, you know, kind of from upper middle markets, corner, middle market to lower middle market, and a big driver that, frankly, was just the people in the personalities, I just, I think you and a, you can have a very, you can effectuate change in a meaningful manner in a short amount of time relative to when I’ve been at big organizations, it’s tend tended to be quite the opposite. 

    And there’s a lot of bureaucratic rails along kind of decision making. And then I think kind of a key, you know, dynamic of you know, how I got to my point specifically to them was really kind of the personalities of the firm and kind of what we were going for, and we’re relatively young, firm, very entrepreneurial. And I was, you know, from the get go, always given kind of a lot, a lot of autonomy. And I think that kind of bleeds into everything we do. So I mean that it’s really kind of how I got to where I’m at. Now I’ll turn it over to Adam.

    Adam Deutsch: Thanks Sean.  So my trajectory. Look, bourbon, the benefit of a lot of people who are grisly enough to invest and take the time to try to make me better as a professional. My own background is I’m the son of a construction worker of the grandson of a construction worker, my great grandparents were in lumber back in the old country, so to speak, wherever that was, I think, somewhere between the Romanian Hungarian border, and they just kind of get moving around a little bit. So this is going to be in my blood going back very long ways. And I always knew that I wanted to work with small companies and to develop industrial and central services companies. And in keeping on my family’s legacy, I began doing that, like shown in a larger investment banking institutional context before moving over to lower middle market private equity, and the fourth the last downturn, and working strategic triage and turnaround on a basket of predominantly industrial, but also oil and gas and real property assets and portfolios and companies through the absolute worst of it. 

    With the primary takeaway from all of that being one of the lessons that my father taught me, which is that it doesn’t really matter what space you’re in, it matters. Are you a good manager? Do you understand the value proposition that your company brings to the table? Do you understand how to bring to fruition a coherent action plan that has some sensitivity to the affer mentioned, and even through very trying periods, even through periods like this, you see extraordinary managers and extraordinary businesses showing incredible resilience, and new hold enterprises myself and some of my partners are very fortunate to be able to collaborate with a lot of incredible people, people like Sean, people like JD and Mike at FNS, or Erie based precision tooling manufacturer, in order to take 20th century business concepts into the future and through the 21st century, even through these rocky periods in a way that presents a lot of opportunity for value creation, even through unique disruptive periods or things.

    Patrick: So let’s talk about Tecum Capital and NewHold enterprises. The your respective firms specifically now, and let’s start with sharing with us. I always like finding out about this is how did your firms come up with their respective names.

    Sean: So I’ll just, you know, jump in it, you know, t come in Latin means with you, I did not come up with the name, our general partnership did, what I would say is I think it’s very indicative of how we can conduct ourselves. And I was fortunate enough to kind of stumble into a situation where there is a lot of cross cultural alignment with how we go to market. You know, and what I would what I would tell you, I think kind of Adam had in the last, you know, kind of topic of discussion was, we just tend to kind of approach things in a very collaborative manner with with all of our partners, whether we’re lead sponsor, or we’re supporting, you know, groups like new hold, and Adam, I think kind of that’s part of our secret sauce is just walk into the room, you know, in a humble approach, and we’re gonna kind of lock arms and, you know, problem solve, frankly, and, and there’s gonna be bumps along the way, there always is. But I think kind of you come in and authentic manner, and you’re honest, you know, makes it really easy to drive good outcomes, when you have that level of trust. So I think that’s kind of a, you know, that’s at the heart of our business. And I think it carries in how we conduct ourselves out in the market as well.

    Adam: And then for NewHold’s part, we mean hold not in terms of holding, in our holding time, unlike a private equity fund is indefinite, and we’ll marry the length of our holding time to whatever strategy we’re looking to underwrite whatever is in the best interest of our shareholders and our employees. And our managers, we mean hold in more of like a 15 16th century sentence, like an old fashioned hold, we could have potentially put new fortress, but that was kind of taken or Sentinel, but that was taken as well. So that’s new hold the origin of the name.

    Patrick: And both of you have a focus in the middle lower middle market, and I think it is interesting is that your target is on the industrial manufacturing construction area, which is a reflection of your background. So it’s a common fit. I think it’s important that people realize that the reason that I’m committed to working with the lower middle market, as well as with organizations like yours, and highlighting yours, is the value that you’re bringing to these owners and founders of the lower middle market companies where if they just default to brand names and large firms that they’ve heard of, or institutions they’ve heard of, they end up finding out and they know, no better, but they end up becoming underserved. Not being responded to, but at the same time being overcharged. And there are organizations like yours that love these types of organizations that you bring tremendous value at a much lower cost, and have some real not only positive outcomes, but happy outcomes. And so it’s a kin to your appetite that the more we highlight organizations like yours, the better it is for the community in general. So let’s talk about this particular venture that you guys came together on, you know, put you on our radar, okay, and this was a purchase of FSX tools or Fs tool in September of this past year. Either one of you just start off, walk us through the deal, how it started, how you guys came together, and how you saw it through.

    Sean: I’m gonna let Adam lead because I think it is a good kind of first stage into the progression of kind of how we got to where we are.

    Adam: This was a partnership. This was our forming a strategic partnership. With JD and Mike Faulkner of FNS tool, Faulkner and Sons of Erie PA, which is a several decades old precision tool manufacturer, which specializes specifically in providing tooling for high volume, high precision applications, things that you have to make a lot of, but they all need to be right things like contact lenses, things like laundry detergent caps, if any one of those you had an unfortunate experience with that might stay in your mind for a period of time sour your impression of the brand and producing those parts and industry leading efficiencies that had never been achieved before parts that you see all around you. That in some form or another in increasing evolutions you’ve been using throughout your entire life produced in a way that uses less time less water less power than had ever been produced before.

    And that is why a particularly new whole working in concert with our partners have to come first. began taking interest in this area, the precision manufacturing versus other things a little bit more conventional like plastic converting injection molding, compression molding, that are working on behalf of OEMs the space, while the great business has become a little bit commoditized. And we were looking at where can we play, where there’s defensiveness, where there were barriers that we can build around. And we can help? What has been a traditionally mom and pop sector gain increasing share with the value of patient capital? Sean would you like to kind of take over from there.

    Sean: Yeah, no, I’m happy to I mean, I think what I would add to that is the lower middle market that I in my mind, I kind of define lower middle market is kind of three to $10 million of evens up, you know, in terms of budding up into core metal market, it’s really challenging to find quality precision machining shops, within that size parameter, specifically, because you typically need some level of scale to win programs with large, especially when you go direct, you know, in the tooling side, and our business, specifically with cpgs are some of the medical OEMs. So you kind of always do this, you know, you walk this fine line to where we’re oftentimes seeing, you know, I would call them job shops, where maybe they’re really good at what they do, they have a greatly prideful labor force. And they’re probably some of the best in the country. But they’re often flex capacity, on maybe a drug program, that someone won. And they’re not large enough yet to win those programs. And, you know, it, ironically, we just, we hadn’t even met new hold before was an intro through a mutual connection. 

    And then they brought this platform, and he and we had the opportunity to work together on it. And we had, I personally have a lot of experience with precision machining space, you know, almost throughout my whole career, I’ve spent time in and around some type of, you know, precision manufacturing and machining capabilities across firms. And we were right at that kind of precipice that I wouldn’t say of a firm that is large enough and sophisticated enough, and has a demonstrated ability within its kind of lifecycle to go in when complicated programs with kind of global, you know, brands, which is really, really powerful, you don’t see that often in the market. And I think that’s one consideration. But a huge thing about how we got to where we are, and I’m on record saying this and other publications, too, is I personally, I don’t really believe in kind of the highly levered LBO buyout for precision manufacturing, because they tend to work like stairsteps. And you have to continually invest in your capacity to grow and scale and support these programs, even if you’re really good at what you do. 

    And immediately, you know, add them in their collective partnership, they understood this business and looked at it through a similar lens is that it is a nice business, but you need to structure it responsibly as well. And it was frankly, it was kind of it was just a marriage that worked out well, we had a lot of experience in this it was in our backyard. And we liked the way they were thinking about, you know, the structure of the transaction to support the sustainable growth. And, you know, we’ll get to this down the road. But you know, I think one kind of misnomer we’ll, we’ll kind of debunk is, I think there’s a lot of people going on saying, you know, they’re going to represent these buy and hold strategies as a way to entice, you know, owners to sell them their business, but I don’t know if it’s always authentic. And I personally, you know, we also in our control equity arm, you know, we represent family offices. And really, you know, in my mind, what that means is that you’re going to approach things in a more sustainable manner rather than a force manner. And there just was, you know, we checked a lot of boxes throughout the process. And that was, you know, that made it really easy for us to work together, work together. And they were very transparent. And just, you know, we just look at things in a very similar dimension, if you will.

    Adam: Just underscore briefly from the structural perspective, our approach to structuring the deal is effectively a joint venture with control is the only reason we were invited into what was a proprietary process on a company with double digit.

    Patrick: And, Shawn, when you had mentioned that they were quite transparent. Was that new home? Or is that the target company?

    Sean: I think it was both. I mean, I’ll put, you know, as we were joking about Adam, and you know, Kevin, when we first met, but you know, New Yorkers get a bad rap, especially through the lens of a Midwesterner. But, you know, Adam and Kevin and Charlie and their whole team, they just were not like that, frankly, it was just you know, from Got go, let’s do what’s best for the company. And we’re all gonna win. And it makes it really easy when you have, you know, strong entrepreneurs that are really passionate about their business and want that same outcome. And they were equally as transparent. And you know, a really easy example of this is, you know, sometimes you run into these battles of where you have these egos of these business owners, and I think some of its transaction fatigue and defensive them. 

    And they, they welcomed us with open arms, and when Adam and new hold to agree to kind of work together with us, and I brought one of our operating advisors out, and we went in toward the facility, and they were very transparent, open about things. And right out right from the get go, when you build that trust with people, it makes it much easier to kind of walk, what I would say, is a very emotional journey for someone that might only go through this once or twice, right, and you have to kind of be vulnerable as do we. And then all of a sudden, you get to the table. And when you’re negotiating, you know, with your attorneys and kind of working through the things I say aren’t always value add, but it’s kind of just unnecessary evil of going through these processes, you know, that everyone’s intentions are true, right? And that makes it a lot easier. So.

    Patrick: Yeah, well, I think you guys just validate my procession of, of M&A. But before I got experienced with mergers and acquisitions seven years ago, you know, I had the same view that a lot of other non m&a people have is that mergers and acquisitions is Company A gonna buy company be done. And what it really is, in reality is a group of people agree to work and combine forces with a another group of people with the objective being one plus one equals six. And you cannot bypass the human element where you have to have confidence, trust, be looking out for everybody’s interest. And you can’t shortchange that at all. And that’s, that’s the people element where these things are real successful. I like how you talked about how you work together? Because Is there a, you know, possible conflict, where you got one side is a longer buy and hold strategy, and the other one may not want to hold as long but I think it’s because new old has the controlling interest? Is that how you work that out?

    Sean: I’ll jump in on this one, because it’s probably more geared towards us, given we’re operating in a committed fund environment. But you know, the one caveat, I would say is, I think there’s been a misnomer. And it’s become more prevalent over the last, let’s say, five to 10 years, and you’re seeing a whole time of, of investments, even in committed funds extending from, I call it three to five to probably more like five to seven. And then you’re seeing LPA agree, you know, the LP agreements as well, their market extensions are kind of stretching out, you know, years 10 through 12. And so long as you’re getting money back, I mean, if you think about it, if you’re investing years, one through four years, one through five, and you’re still making quality investments, and each, let’s call it time tranche, you know, if you have if you’re building companies sustainable manner, and, you know, you’re just going to naturally have that role. 

    And I think historically, when the environment was a lot less competitive, you know, there is, I think, inherently, you know, less efficiency in the market, not saying that there’s a ton of efficiency in the market now. But it’s continued to get more efficient year by year by year. And I think, you know, sometimes you see on paper, these great financial stories, but then you go and you look at, you know, you know, what kind of makes what drives the numbers. And you might have an assimilation of five companies where the cultures aren’t the same, you have one executive, or you have a C suite overseeing them. And they’re coming together to drive, you know, this business and this brand, but they’re not an assembly, the business units. And I think there’s still a lot of buying build out in the private equity environment. But I think, you know, we tend to, you know, year on opportunistic tuck ins, and, you know, let’s buying companies that truly fit the mold of what we’re trying to build, and not trying to force a financial engineering situation, even though that might drive positive returns. At the end of the day, I don’t want to sell, I don’t want to be a part of selling someone, a business or transitioning out of a business, we work together with the C suite to build that looks good on paper, but in reality, they can’t move in an agile manner. So I think that just want to kind of debunk that because I you’re seeing a lot of personally in new holes, you know, an outstanding example of a group that really kind of means what they say, which is that opportunistic hold period, right, they’re gonna do what’s best. 

    And then further proof of that is you have the entrepreneurs who are rolling meaningful dollars in that transaction. So it’s not like new hold says They’re saying, you know, we’re driving the bus and you guys gotta listen, it’s let’s do what’s best for everyone here. And there’s a bunch of other line parties. But I would say, you know, seller should be aware that I think it’s becoming a, it’s I call it private equity group thing, you see it all the time. And people are trying to steal these authentic and genuine investment strategies, because the sellers, you know, believe it, and they think, Oh, you know, I’m passionate about my business, I’m a long term employee base. And I’m going to transition it over to this group. And the reality is, it’s the same thing as a committed fund, there’s just might be some family office behind them. But at the end of the day, they’re all capitalists. So, you know, you it really comes down to trust, you know, at the end of the day, people can tell you whatever they want, but you got to trust the people you’re working with.

    Patrick: Adam your thoughts?

    Adam: You know, I think I agree with absolutely everything that Trump said, as the private capital markets grow in size, and they grow a little bit in sophistication, what you’re also seeing is that the room for secondary transactions, the areas to achieve incremental liquidity without actually selling the business or selling control, or growing more robust and more diversified. When it comes to partnering with a group of individuals. It’s very much a marriage is founded on transparency, I think it’s founded on taking the time and trusting one’s instincts. But at the end of the day, I would look at a managers incentive structures. And as a seller, as an as a founder owner, I think you need to look at their incentive structures and how they are approaching negotiations and presume that folks will regress, if you will, to what their incentive structures would suggest that they would do, which is why new old and take them, try and achieve complete alignment in the way that we structure everything from our financials to the way that we’re wording the option programs to an employee that may have been with a business for over 18 months.

    Patrick: It’s I mean, to put an analogy was sports. This essentially, like you have a general manager getting players that has one set of objectives. And the head coach has another set of objectives. And they both, you know, say they want to win. But subconsciously, they want to make sure that they’re still employed and get paid. And so they you know, all of a sudden that winning may become secondary to Well, I want to make sure that my stuff was done right. And and I’m not worried about the others is essential, everybody’s going the same in the same direction. Shawn, you mentioned one thing about efficiencies that have increased with with mergers and acquisitions, I think one of those that’s a nice segue into one of the developments in processing and the logistics of actually executing these transactions is where risk financial risk is removed from the parties to an insurance company through an insurance policy tool called rep and warranty insurance. Both of you good, bad or indifferent. Tell me about your first respective experiences with rep and warranty.

    Adam: Go to take this first. Yeah, we’re employing rather than warranty insurance as a default, and it’s something that we certainly advocate for. It’s something that in targeted instances, the buyer is willing to share in the cost of depending on the nature of the transaction, that that’s a negotiating point. And it’s really more of a subject of what levels are appropriate given the size of the transaction. It’s something that we are certainly using as a way to seek additional comfort, but the relationship between the rep and warranty insurance, and the way that the rep and warranty language, which can be one of the thorniest areas of investigation and back and forth as you’re papering a transaction that can be one of the areas where, frankly, you run up on a percentage basis, the greatest surplus and legal expenses as you’re trying to work through the language and where an entrepreneur was selling a business or selling a part of the business is rightly scrutinizing that language can give all parties a greater level of comfort. The product, if you will, is also one that’s gained a lot of participants in a way that you can, with a really great broker price out some very good policies, and then it’s a matter of underwriting and again, you know, choose a good partner to help Shepherd you through that process, but in more instances than not. In very few instances, we are not using rep and warranty insurance in some capacity.

    Sean: I’ll jump in, I echo what, what Adam said. I mean, I, I think a few key considerations I would throw out there on the product. I think it’s hyper effective when you’re looking at p2p traded deals, when inherently going back to one of, you know, atoms, you know, I call them, you know, kind of aha moments, frankly, is, people are going to revert back to how they’re incentivized If a If a manager is incentivized to get money back to his investor group. And they can utilize product like rep and warranty insurance to take more chips off the table, and, you know, drive the returns to their investors, I think it’s a, it’s a no brainer, frankly, I think a few considerations, at least from my perspective, and probably where we invest is, you know, a lot of our deals are, let’s say, 20 to $80 million of enterprise value. So on the low end, we’re kind of butting up, I call it kind of that, that cost effectiveness. And then you also kind of combine that with the fact that a lot of our sellers are not private equity groups, I’d say 99% of what we do is, you know, founder own entrepreneurial, closely held, you know, transitioning out, and for them, they’re not in a fund structure, we’re getting those dollars off the table really matters that much to them. 

    And in most cases, you know, people are very honest and transparent. So when you go through your kind of legal diligence, or your I call kind of your legal underwrite, if you will, there’s not really a whole lot of skepticism. Right. And I will say, that’s the one challenge we have come across when you kind of get sub $50 million enterprise value transactions when you have kind of key risk linchpins. I do think, you know, inherently, there’s that kind of battle with the underwriters that, well, you know, we want to be able to transfer that risk over to the insurance provider. But if you’re going to carve out our key risk, linchpins, you know, and then the seller, frankly, is willing to kind of, you know, increase their escrow and put in a fair and you know, indemnity cap, it there becomes kind of a compelling argument as to both sides. And I think, you know, Adam hit the nail on the head is the inherent legal diligence that goes into getting underwriters comfortable, as equally as consuming and drives a lot of fatigue. So I think it’s hyper effective in the industry, especially as you kind of look at the private equity model of working and growing businesses and then transitioning them to other private equity buyers, it’s a really nice way to transfer risk. And you know, both parties have a, you know, compelling argument as to why they should opt into it. But when you have non PD sellers, selling to some type of institutional investors, I do think, you know, you got to come to the table and look at the facts and understand what the risks are. So.

    Patrick: I think with the big developments since Sean, you and I met back, it’s pre pandemic, so it feels a long time ago, but the development in the marketplace, which is very encouraging for us as we now have a mature market. And so, rep and warranty, as you guys have said is proven to be credible, reliable, and now it’s sustainable. And what’s happening now is as as you’ve got a mature market competition is coming with new facilities, they’re usually what happens is you get underwriters to get to a certain point with one insurance company, and then they leave open up their own facility and get, you know, backed by another very large insurance company that wants to get in into the game. And what we’re seeing with competition, and this is universal is that products and services are improving, and costs are going down. 

    And the nice byproduct for that for for mergers and acquisitions is there is now a whole segment of the insurance marketplace that entertains transactions down at the 10 million to $30 million transaction value where they write a minimal three to $5 million limit policy, the total cost, including underwriting fees, and everything is under 200,000. And in order to attract that market and be able to qualify, they have to be eligible. Well, the underwriters down in that space realize that perhaps not all the thorough diligence that’s required on $100 million deal is is required here. And they have scaled down. And I would say they haven’t lowered standards, but they’ve simplified standards. And so things such as audited financials are no longer required. The quality of earnings reports, legal diligence, also if we’ve got a straightforward risk, particularly in the industrial sector, manufacturing and so forth. Very, very simple. 

    I can tell you with the legacy when we first got into rep and warranty back in the early 2010s. You know, it was a non starter for the tech sector because they excluded in intellectual property rights. I mean, if you’re excluding that key linchpin, then what’s the use of it. So we’ve seen the market mature and that’s been a Nice byproduct, because if you’ve got not only p2p, but you’ve got owners and founders that are used to this process, they may not have all that diligence, particularly if they’re not represented by a banker, you need to have a segment of the market that’s willing to work with those folks and be as flexible as as the buyers are. So we’re very, very.

    Sean: positive to it, I’d throw in there to add to that is, I think you’re seeing that be put into the toolbox of up and coming attorneys that are now probably young, and they’re in their partnership. Whereas more than mature attorneys, and when I say mature, maybe guys are coming to the, you know, the, after the fifth or sixth inning of their careers. They grew up doing deals without it, right. So inherently, they don’t have a bias one way or the other. And I you know, we see that manufacturing, too, right, with engineering capabilities with like, additive things. It’s the same thing. People get trained. And they know they have these tools in their toolbox to drive a transaction home and both parties are protected. It’s a win win for all parties. So I think, you know, I would echo what you said is, we are seeing that I just think inherently with the non p sellers, it there’s I really think it’s important for their counsel to get those reps and have that comfort that we can get it underwritten efficiently.

    Patrick: That’s absolutely, what I want to move on to is just to get your respective opinions in terms of trends going forward. And there are two areas that I want to talk about if you can give this to me. First of all, just because with manufacturing, precision, precision manufacturing, we’re seeing a renaissance in manufacturing in America. And thing, things that activities and services that were being shipped out, are now returning, and we’re realizing that you know what, we need to have this stuff in house. Should another interruption happen globally. And so I’d like your respective opinions on where do you see manufacturing going forward in 2021? And then also your your perspective, what do you expect to see in 2021, with M&A?

    Adam: This is a very unusual time to put it. And I think that there remains a phenomenal amount of uncertainty, even on a post election basis, as we carry this outgoing administration through over the course of the next couple of weeks. And with you know, certain COVID rights in the country where there are, you know, this is going to be a 2021 loosening. And I think that that is going to be manifest in a variety of different ways, with the m&a trends, certainly reflecting that, whether they’re doing that on a leading or lagging basis, I suspect they’re doing it on a leading basis, because capitalists are very industrious and maybe, you know, we are risk takers by nature. But I do think that that’s something that will come to color, the m&a environment as it relates to manufacturing in the United States. This is presenting a tremendous opportunity. 

    And I think that to to make it infinitely bipartisan point, this is an opportunity that we should all appreciate that we should be looking to capture. There is a lot of work that by necessity has been done in the United States over the prior period. A lot of that should stay here, not all of it, but a lot of it should. And as we are looking to in in so many areas, fortify supply chains, and evaluate those and to maybe make them a little bit more efficient, maybe make them a little bit more streamline. I think that there’s a variety of different businesses that sit on the vanguard of helping to drive that I think FNS tools are prime example of a business like that. 

    But as we think through what does manufacturing m&a look like particularly and particularly on the private side, particularly, you know, for those entrepreneurs who were across a variety of different businesses, not just precision manufacturing, but other services that were directly impacted by the goings on in the past, you know, 912 1415 months, and some people experienced that. And even longer before this all plays out, they may be looking to return to some point of normalcy before they go to market. And that is a perfectly fair position to take. I would also say that for those businesses that have demonstrated some resilience, maybe not come through this completely unimpacted it’s not a bad time to be beginning conversations with potential partners who may be constructive in terms of how they’re evaluating the business that would have otherwise been on a strong trajectory.

    Patrick: I hate to digress a little bit from there, Adam, but as you were talking about capital leading rather than being in line Heard I just had a flashback to Wall Street, the movie where Gordon Gekko says, Yeah, Money Never Sleeps out. And it’s just sad that there’s always that dynamic.

    Sean: That’s the third time I’ve gotten compared to Gordon Gekko.

    Patrick: In a good in a good way, Sean.

    Sean: Thank you. I would echo everything Adam said, I, in my mind, I think a huge driver of this, and you said it well, is there’s this Renaissance, and I think a huge driver of this is the increased costs of secondary education in this country. And there’s not a promise that if you get a college degree, all of a sudden, you’re going to get a school and make, you know, greater than, let’s just call greater than, you know, $50,000 and live this, you know, glamorous life. And it is cool to, you know, have some hard skills and know how to make some of these components and work some of these machines, and there’s some, there’s some really technical skills involved with this. And you can make a really strong living in the trades. And I think you’re kind of seeing this inherent Renaissance, where as, as the cost, as the cost of entry is gone up, and it’s become more accessible, more specifically on let’s call it traditional secondary education in this country, you know, people are taking a hard look, you know, in the mirror and saying, you know, do I, do I want to go do this? 

    Or is, or am I going to take on a lot of debt, frankly, you know, to go drink, and have fun in college where, you know, you can, you can have a very fruitful life in the trades. And I think you’re seeing, you know, that in pockets of this country, and that’s allowing some of these businesses to flourish. And then a, you know, a byproduct of that is, you know, when we go through these, I call them Black Swan events are where, you know, maybe security, national security or supply chains are challenged, you can come back to your home base, and you say, Well, you know, we’re starting to kind of see these growing trade schools and apprenticeship programs where we can access these labor pools, and we can, there is a strong base of cost effective manufacturing in the United States, and people pay for it. So, you know, we’re really bullish on it, you know, I think it’s us is probably, you know, one of the best, you know, I’d say, precision machining countries in the world, I, you know, I guess there’s probably, you know, your top two or three, Germany being one of them. 

    And it’s, it’s, it’s exciting to see, you know, kind of that, that, I call it onshoring shift back into the US in it not being looked at as a negative, you know, to work in the trades. And I think we’re gonna continue to see that. And then in terms of kind of m&a, you know, trends going into 2021. I think tax policy, I’ll stay out of the politics side of it, I think is going to drive a lot of expectations of sellers, and you know, what they’re looking to take home as a pertains of proceeds. I think, unfortunately, there’s been a lot of aggressive interest in the precision machining space, specifically. Because it’s a very durable, it’s very durable, there’s high cost barriers to entry. And especially as you kind of go up market, I mean, it’s really hard to replicate. And a short amount of time with these people have taught time is probably the biggest challenge, I would, I would, I would throw out there in terms of competitive advantage, because you can’t just build these things overnight. And I think it really depends on the goals of the sellers. 

    I mean, if your goal is to get out, and take as much money home as you can, and you’re, you’re late kind of in your career, and you want to retire and kind of you know, sail away, completely respect that. But I think, you know, if you’re, if you’re kind of finding yourself, you know, waking up every morning and saying, you know, I know I have something here, but I, I’m not in a position, you know, where I want to push the agenda anymore on the risk curve. You know, there’s really great opportunities for folks like Adam ourselves, and hopefully, you know, more in a joint fashion, you know, to where we can kind of come together help you accomplish some of your succession goals, take some money off the table, and then frankly, kind of, reinvigorate the energy within the company to continue to grow and invest in the business and then you’re able to kind of, you know, de risk some of the sweat equity, and, you know, personal time you’ve dedicated to building what you have. And that’s, that’s powerful, but it is going to be noisy, just inherently, you know, I think I saw there’s over 5000 private equity firms now in the US, and pretty much anyone can put up a shingle.

    Patrick: Most of them are on the lower middle market side, too. Yeah.

    Sean: Yeah. And it’s, it’s a little bit disheartening as well, because you see people, you know, trying to kind of replicate these great strategies that were really put in place in a thoughtful and genuine manner. And I really just think you need to do your due diligence on people and there’s a lot of value I would say is we as an example, typically don’t win deals because we’re paying top dollar, we win deals, because oftentimes the There’s a level of trust. And I think I’ve echoed that a few times throughout. And I would just tell people do your homework on who you’re partnering with, because it might feel good, you know, the first, you know, six to 12 months, when you get a check that might be 10%, higher. But in the grand scheme of things, you know, you probably have a lot of, you know, close friends and relationships, you’ve built pride in your business. And you want that to be transferred into good hands and people that respect that. And I think you just need to be diligent about kind of what that means and what you care about. So.

    Patrick: Well, I think that the supply of prospective target companies out there for private equity stands in the millions, as of today, there are probably about 70 million Americans that are baby boomer age. And so you’re going to see a lot, I mean, hundreds of 1000s of transactions, where you got owners and founders either looking to exit or to offload majority share of their organization. So I think there’s going to be plenty out there for everyone. And when you look at the options out there, you have not just private equity, you have other strategics out there, you have family offices out there, for the larger deals, you now have hundreds of new stacks out there. 

    So there’s this huge environment where buyers and sellers and it’s teeming with opportunities, and the most important message to get out there is to find the right fit. And I think that’s something that you guys have going along with you and particularly for the second year with manufacturing is really outstanding. And I strongly encourage organizations out there not only owners and founders, but other firms that are maybe holding on to some gems out there that they may want to go and reconsider what they’re going to do with those investments and leverage them up or something is to reach out to you too. So Sean first and Adam, how can our listeners find you?

    Sean: Yeah, no I mean, you can find you know, my information at our website, which is And then I think I have my contact info on my LinkedIn as well and always appreciate the outreach, and I’ll try to be responsive as I can.

    Adam: And for my part, I live in Sean’s ‘s basement, but you can certainly find my contact as well as on LinkedIn as well. And thank you for the consider request from Patrick.

    Patrick: Sean, Adam, thanks very much. And we’re gonna be talking again, okay. Thank you.

  • Sean Alford | Clarifying Strategies and Processes During the Pandemic
    POSTED 12.29.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we’re joined by special guest, Sean Alford, Senior Vice President of Corporate Development at J2 Global, an internet information and services company that includes IGN, Mashable, Humble Bundle, and more across digital media and cloud services segments.

    Sean says, “It’s pretty systematized when you handle the volume of transactions that we handle, you figure out what works and what doesn’t work. And through the course of the 180 plus transactions that we’ve done, we’ve figured out the playbook that works. And there are different playbooks that work for different situations. We’ve got these different playbooks that we’re able to slot into different scenarios, and it helps to have had the reps and to have made mistakes and learn from them and improve the process as a result.”

    We chat about applying strategies to various transactions, as well as:

    • The ideal targets for the different J2 global segments
    • Pressing pause at the start of the pandemic to clarify processes
    • Warranty policies on transactions
    • Fourth quarter 2020 and first quarter 2021 expectations
    • And more…

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. 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 Sean Alford, Senior Vice President for J2 Global. J2 Global is a leading internet information and services company consisting of over 40 brands. Sean leads J2’s m&a program which seeks to acquire and support internet enabled companies in a variety of sectors, including media technology and services. Since 2000, J2 global has completed over 186 acquisitions. That’s a lot of deals. Sean, as the first strategic acquirer to join our podcast, welcome, and thanks for joining me today.

    Sean Alford: Yeah, thanks for having me.

    Patrick: Sean. Before we get into J2 Global, let’s set the table and tell us what led you to this point in your career?

    Sean: Yeah, sure. So I started my career as an attorney at a law firm in New York. I was with the Proskauer Rose firm in New York for a number of years. And I got to know the CEO of Ziff Davis at the time, Vivek Shah through some investing activity that I was doing outside of my legal practice. And through conversations with him over a number of years, I ended up joining him at Ziff Davis to run the m&a program. And you fast forward to now. I oversee m&a at J2 Global, which is the parent company to Ziff Davis, where I’ve been for I think it’s three years now it’s it’s three years would feel like dog years because we’ve done incredible amount, from an m&a standpoint deployed almost a billion dollars of capital, actually north of that in that time, and done about 35 deals in that time. So, so we’re having fun, and we’re doing a lot of deals.

    Patrick: Well let’s talk about J2 Global here and its commitment to the lower middle market, which I feel very strongly about. Talk about why the lower middle market, what the philosophy is, your your your theme in just how you did because one thing is really impressive is just the sustainability where you’re starting at the dot com era, for those in our audience thinking, remember that period, and you’ve been going for 20 years, which really says a lot to the sustainability and the success that you guys have, have had.

    Sean: Yeah, and that 20 year, history clearly predates me, but J2 has, has had a history of programmatic m&a, and it is focused on that lower middle market, which we think is generally underserved. And I think you can look at the way that it’s underserved from two angles, it’s underserved from the business and operations angle, where small to medium sized businesses aren’t always served the same way that large enterprises are when it comes to software tools and applications and services that they need to operate their businesses. But then I think the the market, the acquisition market, the m&a market, for lower middle market businesses, small to medium sized businesses is also underserved without the same amount of capital in the system.

    So we’ve actually benefited from both sides of that. On the one hand, we buy businesses that serve SMB customers. So you look at a lot of our software businesses, the market for them is small to medium sized businesses, we see that as a huge opportunity that’s going to continue to grow and where there’s going to continue to be attractive acquisition opportunities. And then on the other side of it, that is where we spend a lot of our time on the m&a front, we we don’t have to compete with a lot of the large institutional investors, the the blue chip can have 10s of billions of dollars, private equity fund types, the large, multibillion dollar strategics don’t always spend time in the lower middle market, because they’re not set up to spend time on their market. And we are so that’s, that’s been something that’s differentiated us on the m&a front.

    Patrick: Yeah, I feel the exact same way underserved is probably the best description, I would say for the lower lower middle market, which is a shame because I mean, it’s a great opportunity for us, but it is a vast array of opportunities that there are, you know, literally over a million companies in America that would fit that lower middle market definition. And the from the m&a perspective as we see it. They’re at risk of being overlooked, underserved and overcharged for services from institutions and so forth. And so it’s great when you either have a strategic plan J2 Global or boutique firms out there that really want to go and work with with those companies owners in the lower middle market as with other places, they’ve got a variety of places to look for an exit. Okay, why would they think to come to a strategic as opposed to other other maybe non institutional, but other family offices, private equity, other other outlets?

    Sean: Yeah, so there, there are a couple factors that distinguish us from from the competition, if you will, when it comes to m&a. Number one, you know, I think you could compare us to private equity in the sense that we do buy businesses and let them to continue to operate independently. And a lot of sellers like that. They like the independence and we’re set up in a way that allows a lot of the businesses that we acquire, to operate with independence. The difference between us and private equity is that we are permanent capital. So we buy to hold and sustain and grow over time, we’re not under pressure to flip a business or not under pressure to dramatically change your business immediately.

    And we’re patient. So, you know, along with along with that comes our capital structure, private equity puts debt on to the companies that it acquires all of our debt is held upstairs at the parent level. And as a result, the businesses that we own and operate don’t necessarily feel the pressure of interest, service and payments. So that’s, that’s one distinguishing characteristic. A lot of founders like that model, where they can sell into someone and they aren’t banking on an exit five to seven years from now, they get true liquidity at the time of closed now, there may be some structure in our deals where there’s an urn out and certain performance metrics have to be hit. But it’s very different from a private equity model, where oftentimes founders are rolling more than 50% of their net worth into the next deal, and they don’t get the full liquidity at closed.

    The other thing that distinguishes us from a lot of folks is the domain expertise that we have in house. So in the verticals in which we invest, we have sector experts and domain experts who in some cases have been in the space, they were operating for 20 plus years, we have experts in cybersecurity. For our cybersecurity portfolio, we have experts in consumer privacy, for our consumer privacy businesses, when it comes to secure file transfer eFax, and healthcare communications case, again, sector expert piece, same thing goes for health and gaming and broadband. And all of our categories were set up in a unique way where we don’t necessarily have to outsource the diligence, and outsource the planning, and synergizing if you will have the opportunity that a lot of financial buyers have to because we’ve got the in house expertise.

    And I think, particularly when you’re talking about founders, it’s easier for them to have a conversation with someone who’s been speaking the same language for 20 years, but knows the same players who understand the industry dynamics, and doesn’t look at a raw p&l only focused on revenue and EBITDA and free cash flow. While that’s important to us, we’ve got a bench of professionals with deep relationships and sector expertise that then makes for an easier transaction.

    Patrick: I think also, because you’ve done again, 186 acquisitions, you’ve got a whole game plan or a process set up. So I think if if a owner or founder, they don’t do m&a deals every day. So I have a feeling that you’re used to having novices that you’re dealing with. And so your onboarding is probably I would think, as painless as possible. And that must be a great, great advantage as well.

    Sean: Was pretty systematized. I think you’re right. I mean, when you when you handle the volume of transactions that we handle, you figure out what works and what doesn’t work. And through the course of the 180 plus transactions that we’ve done, we’ve figured out the playbook that works. And there are different playbooks that work for different situations. So we know how to work with the bootstrapped founder who’s ready to sell, we know how to work with the private equity fund, who is just looking to exit from investment they’ve been in now for five plus years. We know how to work with the corporate who is trying to carve out a business that’s non core. We know how to work with the venture capital fund. We thought something was going to be a rocket ship and maybe maybe it is or it was but if for whatever reason they’re ready tax. We’ve got these different playbooks that we’re able to fly into different scenarios, and it helps to have had the reps in to have made mistakes and learn from them to improve the process as a result.

    Patrick: I can imagine with strategic acquires versus private equity, financial buyers, if you’re in management, the tradition is that well, if your private equity or financial buyers, they look to retain management, whereas strategics don’t necessarily they’re gonna, they’re gonna put their own management in j two is completely different. You are almost like private equity in that, that you’re going to go ahead and maintain management, I think that just helps them cross that chasm to get to the next level.

    Sean: That’s right, that’s right, we we’ve put a tremendous amount of value on the people, they’re going to join our ecosystem. And that is a critical part of our diligence. And our underwriting is understanding the people who are running the business and understanding the value that they can add to that business under our ownership. So it is important to us.

    Patrick: I was going to ask you originally about give us some examples of the value you’ve created for some of your acquisitions. But I got a pivot from that and ask you what’s different in doing deals. Now post pandemic, you’ve been able to continue doing deals, even though the pandemic, there have been changes. Let’s talk about that real quick. And then we’ll get into the success you’ve had. But what’s changed and what, what happened with you guys with COVID?

    Sean: Yeah, so at the beginning of the year, we were off to our normal pace. And pretty fast clip, we came off of 2019, where we closed 12 transactions came into 2020, with a very healthy balance sheet, ready to keep up that level of activity if not increase it. And then March happened, and the global pandemic happened. And we very intentionally and deliberately paused our m&a program. We believe in predictable businesses, we invest with very high confidence. And we just found ourselves in a position where we weren’t able to do that. We weren’t able to predict other businesses, let alone our own. We weren’t able to underwrite with high confidence. So we pulled back and the good news for us is we don’t have to deploy capital.

    We don’t we don’t have to invest. It’s not the private equity model where we have to put the cash to work we like to, but we don’t put cash to work for the sake of putting cash to work we we underwrite for a high confidence return. And in the second quarter, we couldn’t meet with people in person, we couldn’t conduct our typical diligence. And we had a hard time getting a clear line of sight to the performance and forecasting of any business that we looked at. So we pulled back, we shifted our focus internally, we went through a lot of exploration of our own portfolio and evaluation of our own cost structure and tried to refine where we could optimize internally. We got to the end of the second quarter. And we recognize that we may be in a new paradigm where you have to adjust the way that you evaluate businesses, the way that you do diligence, the way that you meet with companies. And we discovered a lot of the technology that’s in place today, has actually allowed us to do this for years.

    Data rooms are all virtual zooms are commonplace. And they were they were commonplace before, I think we didn’t realize that all of us had cameras in our offices before. And with a global organization like Jay to, I think 80% of the people that I work with are in different locations. So we discovered after some reflection that we are set up to be able to transact in a virtual environment. And we are capable of transacting in a virtual environment, particularly in categories that we know really well, where there are businesses that we’ve known for a number of years, sometimes decades. So we got comfortable with that. And we also realize that, hey, maybe maybe the disruption that we’re seeing is going to be more V shaped than L shaped or U shaped and as we looked at our own businesses, we saw some of the rebound quickly and got comfortable, again, investing in sectors that we know really well and that we can have confidence in from a forecasting perspective.

    So you get to the third quarter, and we turn the machine back on. We have closed now. I believe it’s five or six transactions. Since the start of the third quarter, including one of the largest transactions that we’ve done in Jay to the acquisition of retail me not, which is in a space that we know extraordinarily well, a business, we’ve been around for a very long time. And we’ve we’ve even as a part of the reflection in the second quarter where I said, we shifted our focus internally, we decided to sell a business. We looked at a business, our ANZ, Australia, New Zealand voice business, and there was an interested party, who was able to put a competitive and compelling value in that business. And we decided, you know, what, we’re in the business of unlocking value. And if someone else can value this more than we can value it, then they should be entitled to a transaction.

    Patrick: Well, now you’ve come to this for the people that are listening, why don’t you describe exactly what your ideal target is.

    Sean: Oh, Patrick, that’s a hard question. You know, I think the the ideal target varies by sector. So we have we have operators in all of our different businesses who each have their own m&a problem. And they would each answer that question very differently. And and they really are the folks who answer that question, what makes the most sense within the sector that they operate. Now there are there are also parent level deals. So at the J2 parents, there is another m&a program, which is typically looking at larger deals, they would stand on their own, where there would be an entirely new operating team, those of us deals, we’re really talking north of $500 million of enterprise value.

    So it’s really the once once every few years type of deal, not the bread and butter m&a. But, you know, I think that the question is really more appropriate for our operating executives. You know, I can tell you on the health side, Dan Stone, who’s the president of everyday health is really focused on how to transition into a provider services model where he is acquiring tools and services that help serve the healthcare provider market, digitally enabled internet enabled tools and services, but, but that’s an area of focus for him.

    The answer is going to be very different for Steve Horowitz, who is the president Ziff Davis, is increasingly spending time around game publishing, we have this great business Humble Bundle, which is a distribution channel for PC games. And we’ve found some success in vertically integrating in that world and publishing games that we then distribute. So one of Steve’s focus along with Alan Patmore, who runs Humble Bundle is figuring out what game publishers we can acquire. And what game publishers what indie PC game publishers fit well within the Humble Bundle world. Now flip to the other side, J2 cloud services, the software side of J2, which is run by Nate Simmons. He’s the division president there. He comes from a cybersecurity background. So he is looking to build out the full suite of cybersecurity solutions that can serve the SMB market, which is we talked about at the top of the call is really important to us. Fanatically institutionally, it follows our playbook. That’s the market that we want to serve. So that was a long winded way of saying that they’re much smarter folks than me who can answer that question better than I can answer. Well, you’re spreading

    Patrick: Well you’re spreading over 40 brands already and all these different sectors. You did a great summary there. So that this has been the first time you’ve been asked that question. So well done. With the experience that you and J2 Global have had leading and all of these acquisitions, there are tools and processes and things in the business world that have either come to help or accelerate or enhance the whole m&a process. And one of those being the evolution of rep and warranty insurance where it was once a cumbersome tool for your $500 million deals to where it is now a real slick, efficient product that helps enhance closing. Now lower middle market deals that a year ago wouldn’t have been eligible, but they are now eligible in deals sizes of $15 million. You know, down at that level. Good, bad or indifferent. Share with me the experience that you and j two global have had with rebel warranty on your deals.

    Sean: Yeah, it’s really becoming very common. And we’re seeing an increasing willingness of sellers to pay for these policies, which was historically the realm for us. Why would we add expense to a deal for a policy, we’re finding more and more sellers, particularly financial sellers, private equity sellers, are willing to pay for the cost of the policy for the cleanliness of the deal. And we’ve found that through several reps have this now we’ve done this several times over the last 12 months. It can be pretty, pretty formulaic, and pretty easy, particularly with the underwriters, who we’ve now dealt with on a repeat basis.

    They understand our program, they understand the way that we do diligence, they’re comfortable with our process, which makes these due diligence calls and their own diligence that much easier. And I think it helps also that there’s a very competitive market out there of underwriters who are willing to lean into deals and to, to do, as you said, smaller deals that maybe they wouldn’t have done 18 months ago. So we have, we have found the product to be helpful. You know, I guess we haven’t done enough of these to really get through the full full window, the full back into it. So I think the next call of 24 months, will really tell whether we’re more or less comfortable with this versus a more traditional escrow. But indications so far are that this could become just part and parcel of every deal the same way that escrows were 10 years ago, you just have an escrow, you have a rep and warranty policy, the way deals are done.

    Patrick: Yeah, that’s what we were striving for, we were hoping with the sustainability of rep and warranty is that it’s just check the box on the list of items that need to be done for closing. And I would argue that probably the debate has been settled whether or not to use rep and warranty, it’s now recognized as a must have, unless there’s some element of the deal that’s so problematic, it would be eligible for insurance, but we’re very, very happy with it. Also, just because, in my opinion, m&a is the most exciting business event out there. And to the extent that we can contribute to the success of that life changing event for a lot of people, I mean, who wouldn’t want to do that. So we’re very excited about it.

    We like the competition, because that does two things, as you know, with competition, it improves products or services, and it lowers costs, win win win for everybody. So the next thing is, now as we’re recording this, it won’t be there too later. But we’re at the eve of the election, we’re going through another spike in karate, Coronavirus, tests, and so forth and diagnoses. You’ve been emerging from a quiet period in your m&a and now you’re getting back up to speed, you’re probably at full speed. Look through your window. What kind of trends do you see either an m&a in general, or J2 Global for 2021?

    Sean: I think it’s going to be a very busy year for us. And I think we’re going to see certainly in the fourth quarter, which will probably bleed into the first first quarter, some volatility in the public markets. But that’s not where we spend most of our time on the m&a front in the private markets. I do believe there will be a bit of a pullback in terms of valuation. I think we’re still riding on a high, you know, in part because of what the federal government has done appropriately in propping up the market. So I think we will, we’ll probably see some correction in the private markets that may not make their way into the public markets, which is interesting. I mean, there in my view there is there’s a disconnect between public markets and private markets right now where the same math doesn’t apply from one to the other.

    So I expect we will be very busy, we’re in some categories that are white hot, we are in cybersecurity, which is I think, going to continue to be a very attractive investment category. Now my my hope is that the big players won’t creep down into the lower middle market and create more competition for us but they might on the gaming front again a white hot market where we spend a lot of time with IGN and humble bundle, I think will continue to be busy there I think that sellers will take advantage of the market. And the same thing goes for health. The hcit market is is another really hot market where a lot of companies will will be looking for an exit and be looking for liquidity.

    I expect that to continue into 2021 we are oftentimes opportunistic buyers, and I believe that there will be many others opportunities for us to buy car companies at great prices. In 2021, I think that the wave of available capital is still going to be there. But I do think that companies could run into some challenges if this second wave persists and turns into a third wave. But I do think overall, the disruption that we’re seeing in this pandemic is going to be short term. And by short term, I mean, a couple of years. And we are long term investors, at J2. So we take a much longer outlook on the durability of a business and the sustainability of investments.

    Patrick: Do you see a lot more distressed, m&a acquisitions, or as the pendulum’s swinging back in favor of the buyers then?

    Sean: Not yet, not yet. I have been really blown away at some of the valuations that that we’ve seen since February, in the face of a global pandemic, and unemployment numbers that we’re seeing. The valuations that are sustaining are really remarkable. So we have not seen it swing back yet. And we’re not, you know, we’re not really itching to see the economy crumble, nobody wants that. But I think we are patiently waiting for a buyer friendly market to come back, which I believe that it will, in 2021.

    Patrick: Would there be just a lot more earnouts and provisions like that. So you can kind of as a buyer, in in light of these, you know, frothy valuations maybe go to the target and say, well, we we understand the one Why don’t we see how we get forward once you put your money where your mouth is, and and agree to some some more milestone agreements. Do you see that trend happening more?

    Sean: Absolutely, absolutely. And that’s the way that we’ve been able to bridge the gap in a lot of situations. There There are, we are oftentimes the preferred buyer. So again, through this network of executives, we have in relationships that we have, a lot of times sellers want to sell to us, they really want to sell to us, but they have someone else whispering in their ear about a higher price. They don’t necessarily agree with the plan of that other buyer or trust the other buyer, or whatever the case may be, they really want to sell to us. And the way we’ve been able to bridge and say, Look, we can we can get close to this, this frothy number that someone else is whispering to you about. But as you said, Patrick, you got to put your money where your mouth is, if you’re going to execute on this plan, and you’re going to make this business worth what you’re saying it’s worth, we’ve got to we’ve got to prove it. And where the relationship is strong and where there’s a good level of trust, we’re able to do that. And we’ve got a good track record of paying or else because we set them at levels that we expect will achieve.

    Patrick: Well clearly you’ve got offers that are compelling enough for people to say yes, with 186 acquisitions in 20 years, like I said, it’s still really, really impressive. Tell our audience how they can find you and J2.

    Sean: Yeah, sure, I would encourage you to check out our website, And there is an m&a section of that website and a link that you can click on to get in touch with our m&a team. And we’re always open to conversations with companies in the lower middle market. Happy to to have conversations with founders and sellers and others who you may be interfacing with.

    Patrick: Well Sean Alford thank you very much. Very great story about you and J2. Congratulations for all the success and here’s to you and hopefully you can help keep propping up the economy with these lower middle market companies. So thank you again.

    Sean: I appreciate it. Thanks Patrick

  • Suzanne Yoon | Using Technology to Compound the Effects of Good Capital and Great Operations
    POSTED 12.15.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Suzanne Yoon, Founder and Managing Partner of Kinzie Capital Partners, a private equity firm based in Chicago. Mergers and Acquisitions Magazine named Suzanne 2020’s most influential woman in mid-market M&A, and she’s also been recognized by The Wall Street Journal as a top female dealmaker, shaping private equities both present and future. Just recently, Kinzie Capital Partners was honored by the Private Equity Women Investor Network (PEWIN) as the North American female-founded firm of the year for 2020.

    “Really the start of Kinzie was based on an investment thesis around taking companies that were necessary for the economy, were going through some type of transition, and maybe had some age on them with regards to operations and technology, and being able to handhold, and through governance and technology initiatives, create more efficiencies, and also make sure that the infrastructure is in place to really take a company to the next step and think about growing. That was really our thesis,” says Suzanne.

    We chat about Suzanne’s journey in the financial sector, as well as:

    • Kinzie’s commitment to the lower-middle market
    • The Kinzie Formula: av=f(K+O)T© — wherein accelerated value creation (av) is a function (f) of capital and operational improvement (K+O), compounded by technology (T)
    • Her experience with rep and warranty insurance
    • Her perspective on the future for women in finance
    • And more

    Listen now…

    Mentioned in this episode:



    Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. 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 Suzanne Yoon, Founder and Managing Partner of Kinzie Capital Partners, a private equity firm based in Chicago.

    Mergers and Acquisitions magazine named Suzanne to the 2020 most influential women in mid-market M&A. She’s been recognized by the Wall Street Journal as a top female dealmaker shaping private equities present and future. And just last week, Suzanne’s firm, Kinzie Capital Partners, was honored by Private Equity Women’s Investor Network, PEWIN, as the North American female-founded firm of the Year for 2020. Suzanne, welcome to the show.

    Suzanne Yoon: Well, thank you very much, Patrick, for having me today. It’s always really fun to be able to tell our story.

    Patrick: I gotta say you’re probably going to be the only guest, and this is a rarity, but probably the only guest that doesn’t want 2020 to end. Congratulations on all the accolades. I think that’s a … all the great work.

    Suzanne: I do want the Coronavirus to end. I will say that. I think it has obviously been a very challenging year for anyone who’s been in investment business, particularly if we have ownership and fiduciary responsibilities to not only our investors but the companies and our employees and their safety. I’m not confident that will all happen in 2020. So in a lot of ways, I am kind of looking forward to 2020 being over so that we can move on.

    Patrick: Suzanne, before we get into Kinzie Capital Partners, let’s set the table. And why don’t you tell us about yourself and how you got to this point in your career?

    Suzanne: So I am the daughter of Korean immigrants, and they really came here with nothing. I was very fortunate to have parents who both loved what they did and were very entrepreneurial. And were extremely focused on our education. And I was reminded every day that we had to work really hard. When I was coming out of school, I really was interested in the financial sector. And probably initially because I had been surrounded by my family, my parents were both in the medical field, but I had a lot of friends whose parents were in business, investment banking, CEOs of companies, and I was really interested in what they did. So I graduated from school and I went to go, I went to work for a large bank, ABN AMRO and then La Salle Bank, which is headquartered here in Chicago, and with a big global presence, went through their analyst training program. Worked on senior and debt financings for middle market companies initially, and then large global companies as well.

    Ended up in a group called Special Assets through my rotational program at the bank. Special Assets at the time was also a place where they, when banks were able to do this in the mid-90s, where they held off-balance sheet private equity positions, so debt that had been converted to equity. And now the bank was managing that. So that was my first taste of, really, what it meant to be the fiduciary responsibility, of being an owner of a security or an equity security.

    And so from there, I worked on a lot of different types of companies, very large restructurings and in bankruptcies, and really what we saw there was what happens when things go wrong. And it was a great, great learning experience for me, particularly as I was very young and had an opportunity to work directly with senior credit officers of the bank at the time. Having long term capital and having control over where your capital is coming from and not relying on the public markets was really important to me.

    And so that was my entree into private equity, where we had more long term commitments from our investors. And we can have the time and the flexibility needed to work our way through issues if we ever came to them. So, that’s really what started my private equity, my pure focus, on private equity. And then from there, I was with an East Coast-based private equity firm. I worked with incredibly talented and smart people. My former colleagues and partners, I have the utmost respect for them. But I am from Chicago.

    And during my time at the firm, I moved back to Chicago as the only managing director outside of the East Coast. And I was traveling quite a bit. And so that was a factor for me, really thinking about where I wanted my roots to be. And being a mother, I’m also a mother of three boys, I felt that I had one foot in Chicago, one foot in the East Coast, and I couldn’t really be in both places at once all the time. So that was a factor in terms of thinking about where I wanted to be. So I knew I wanted to be back in Chicago eventually, and with a team in Chicago.

    This is where you make your own luck in some ways. On the investment side, I was seeing a lot of opportunities in the lower middle market. So some 50 million of EBITDA out of Chicago and the Midwest and really throughout the country that were really interesting opportunities but required a lot of operational improvements or help, because they were either going through some type of generational change or transition, and frankly, they were just too small for my previous organization.

    And so I had an opportunity to partner with my current partner today who is the founder and owner of a 150-person-plus technology and management consulting firm and really leverage them. It’s called Clarity Partners, but leverage Clarity Partners and their resources to be able to provide operational expertise to these lower middle market companies that were going through transition. So that was really the start of Kinzie.

    It was based on an investment thesis around taking companies that were necessary for the economy, maybe had some aging on them with regards to operations and technology, and going through some type of transition. Usually, we are the first-time institutional investor into a company, and through governance and technology initiatives, create more efficiencies, and then also make sure that the infrastructure is in place to really take the company to the next step and think about growing, right? Like, really growing.

    And so that was really our thesis. And that’s how Kinzie was started. My goals of being in Chicago, being part of the community where my family is, and then also establishing a firm that was thinking about the future, right? And how to actually maximize and accelerate value through operational improvements, specifically around technology and being able to bring technological expertise that would normally be reserved for much larger companies to lower middle market companies is very important to me. So that was how Kinzie got started. And I think we’ve been really focused on that since we started.

    Patrick: Well, what’s really striking about your past, and what led you to here, is that you came from a culture of coming into troubled circumstances and you avoided human nature, probably because you were coming in from the outside, but you’re coming in where there are problems. And instead of pointing fingers and bemoaning what led you to the problems, you’re coming and saying, “Right, okay, how are we going to get out of this? What steps are we going to take to do to fix it?”

    And that is consistent throughout your entire career. So I could see that, where maybe you don’t have problems, you’re just not at that next level. And so that’s what you come in with. Kinzie Capital Partners. Now, as we think about it, the one thing that is different between private equity and law firms and insurance firms out there is, they’re boring because they pretty much just name their firms after themselves, okay?

    They don’t even think about it. And you can always get a little insight into a firm if you found out how they come up with the name. So tell me about the origin in the name and then tell me about your commitment to the lower middle market you just mentioned because I think that’s a really underserved, vast opportunity out there.

    Kinzie Capital Partners’ Background

    Suzanne: So speaking of naming the company, I thought Yoon Capital Partners would just not resonate well with, frankly, a market that is dominated by white men. And even the CEOs, the sellers, everyone. I’m teasing about that. But … people ask me that all the time.

    Like, Oh, you didn’t name it after yourselves. And we joke that, my partner, we’re both immigrant kids and we get teased a lot about our last names, right? Even growing up. So why would we name our firm? We don’t want people to tease us, because we were always a little bit on the outside. And so with that said, what I really wanted was to build a firm, and I still want this, that is going to outlast me. And so I never thought naming a firm after me because then it’s all about me, right?

    Or our names were not the right thing, particularly because private equity is really a team effort. And I use a lot of sports analogies. So even within the team, I’m the coach. I think about myself as more of the coach and the strategist. But everyone has a really important role, down to our assistants, and I mean, everybody here. Because we have to manage people.

    And so Kinzie is a street in Chicago, and the street was named after, I’m sorry, it’s actually a bridge in Chicago. And it’s one of the most famous bridges in Chicago.

    So it was the first bridge that was ever built over the Chicago River, which is a really a main thoroughfare in Chicago. And it’s an iconic view, it’s one of my favorite views of the city. But if you stand on the Kinzie bridge, the original bridge was never torn down because it’s now considered historic. So you see the original bridge that was built and this ever-changing landscape of buildings.

    And it’s even very different. The view from the bridge today, looking into downtown Chicago, is completely different than it was three years ago. And so to me, that was very representative. And even 10 years ago, 15 years ago, is just very different if you saw the evolution of what the skyline looks like from the bridge. And to me, that was just the evolution of also thinking about keeping in mind the old and preserving and respecting, right?

    I think that is what is beautiful about tradition, keeping in mind that we are living in an evolving world. And having to keep that in mind. So it’s very personal to me. It’s Chicago, right? Everybody in Chicago knows, they always ask like, Oh, are you on Kinzie street? I’m like, actually, I think I was when I first started thinking about this name. But everyone outside of Chicago is like, what is Kinzie? Is it a person’s name? It’s a bridge. So that’s the story. It’s a bridge in Chicago.

    Patrick: So this is a homage to your Chicago roots?

    Suzanne: It is, It is an homage to it.

    Patrick: While still looking forward. So you’re not stuck in the past. You’re looking forward for the evolution. That’s very, very clever. Well done. With the lower middle market, and you’ve mentioned this earlier, you like to roll up your sleeves and get your hands on that. Tell me a little bit about that, where you see your role with the lower middle market. Because, as I mentioned before, I think this is a huge underserved market and is ideal because, unfortunately, a lot of these organizations, they don’t know where to turn for help.

    And if they go to the big institutions, they’re going to get underserved and they’re going to get overcharged and they’re going to get overlooked. And here you guys are, firms like yours that are at the ready with all the resources of the larger firms, scaled-down, that can deliver these great solutions. So tell me why you picked that as opposed to larger opportunities.

    Suzanne: Patrick, I mean, do I have to repeat what you just said? Because that’s exactly why I wanted to and why I like the lower middle market. I think there’s just a lot of opportunity to take all of the skills that I’ve learned over my 20-plus years of investing and working with different types of companies, much larger companies and the ones that we’re investing in, and then also having the resources to be able to bring to those companies and make very significant moves that these companies would historically not have been able to make because they don’t know how to get to the resources that they need.

    And so, I would say that’s probably the biggest factor for me is it’s very gratifying to work with a management team, or a prior seller, right, that is partnered with us and bring our expertise to the table and really partner with them to think about the future and execute on a vision, a joint vision.

    And a lot of times, the people that we’re talking to or that we’re meeting within the companies that we get excited about, there is a vision already in place, they just don’t know how to execute it. So the idea is there. And so that’s really how I see our job, to make sure that, if we have a collective vision, that we make sure that we execute on that vision.

    Patrick: Let’s get into what’s really unique about you and Kinzie, and that’s the Kinzie Formula. And I’m going to give my observation on this, and I’m not saying this to flatter you or anything, it’s just what struck me about it is the term is a formula, okay? A lot of organizations, they’ll have a process or they’ll have a system or a model and those may or may not work. I love the subconscious feel of a formula.

    A formula is literal, it’s reliable, it’s repeatable. And it’s just a great sense of comfort that you’re coming in with a formula. And we’ll have it in our show notes and it’s on your website, but explain the formula and how it works, where you guys came up with it and how that’s pretty much your core right now.

    The Kinzie Formula

    Suzanne: Thank you. We take a lot of pride in the formula because we spent time really thinking about how we could articulate best, in a formula, what our investment philosophy is and why we think that we are going to be the best fit for the companies that we choose, right? And vice versa. And we really thought hard. And our formula is just this, for the listeners out there who don’t know our formula, it’s accelerated value equals a function, or is a function of, capital plus operations, compounded by technology.

    So what does that mean, right? It just means our goal as investors is outsize returns, alpha, and how you get to outsize returns in alpha is we have to accelerate the valuation of that company. And the way to do it is to make sure you have the right capital structure in place. And add in operational excellence. And we think of the compounding that you have with those two things in place, and you add technology to compound the effects of good capital and great operations. And that’s it.

    Patrick: Yeah, very contrary to the cynical view of private equity, which then I have a formula, it’s just minus, okay? We’re gonna cut, cut, cut, cut, cut until we’re adding value by cutting.

    Suzanne: You know, sometimes that is part of the operational excellence portion, right? Is that you do have to upgrade talent. Sometimes you have to, and especially in long-time family-owned companies, there could be, you know, dead weight, and it’s not good for the culture. It’s not good for a culture to have people who are underperforming and everyone knows that they’re underperforming. So I agree that private equity has this reputation for cutting but I think a lot of times there’s a good reason why that cutting is happening. It’s not just because of costs, it’s because there’s fat.

    And you need to replace certain areas with other people. And every company is as good as their people. So it’s unfortunate that private equity has that reputation because we do it a lot. And I say we because I include myself. We certainly have done that in acquisitions, but we also add people. If you want to grow, you also have to have the right people and sometimes a lot more people. So I think if you look at private equity as a whole, the net add of jobs is probably much higher than the cutting that we all hear about.

    Patrick: Well you actually save companies, because if they don’t change, and if they don’t adapt, their lifetime is finite, and they could be gone, and then everybody’s gone.

    Suzanne: Exactly.

    Patrick: And then as you talk with, in the Midwest and where you’re probably investing, these are companies that could be the lifeline for the community. And so if the company goes, community goes with it. So I mean, there are some very, very important roles there. Suzanne, give us a quick case study, give me an example of where you come in on opportunity and just where the formula came in and magic happened.

    Suzanne: Oh, I actually have one more recently. So, we have a portfolio company called Colony Display. 37-year old-company, the two sellers were actually the founders. One of the founder’s sons had taken over as, essentially the chief operating officer, and then the CEO and he grew up in the business.

    The business had been run a certain way, the knowledge is incredible. And this was a company where the customers loved them because they are so service-oriented. So when we look at a company, their product was excellent and had a lot of customer concentration. But there were no strong financial controls at the company. So we had to make some changes within the financial team and improve financial controls.

    Again, family – it was started 37 years ago, so the infrastructure wasn’t at the point, and I would say, management and executive infrastructure wasn’t at the place that it needed to be in order for the company to continue to grow. So we added. We hired a new CFO, new controller, a head of HR, which never existed at the company prior, despite the fact that they employ anywhere between 250 to 1000 people a year across three different manufacturing plants, manufacturing and assembly plants.

    We made some pretty significant investments into the systems. Communications, new website. Partly through increased sales, the production has improved significantly through some operational improvements we’ve done. But also with the new people hiring, there was also another head of engineering that we brought in.

    And the company will double its EBITDA in a very short period of time through pricing, discipline, and production discipline. And now, I feel the company’s in really good shape to continue to grow on the top line and they could support that with the right infrastructure, right? And human capital and an actual infrastructure. So a lot of work within the first six months and continues to be a lot of work. We haven’t quite owned it for a year yet and we’re north of double EBITDA already. And so that’s great. It’s really fun when all the work you do actually shows up on the bottom line.

    Patrick: So for anybody that’s considering a transition, they really need to talk to you. I know you’re not going to guarantee to double EBITDA in six months, but that is very, very impressive. Well, well, done.

    Suzanne: Thank you.

    Patrick: So, tell me again, one of the elements that’s in mergers and acquisitions that’s come along and is now available for the lower middle market companies is rep and warranty insurance. Used to be a product available for $100-million-plus transactions, it now can come all the way down in terms of lower pricing and simpler underwriting and eligibility rules to where a 10 or $15 million add on can be insured with rep or warranty. I’m just curious, good, bad or indifferent, tell me about your experience with rep and warranty on any of your deals.

    Suzanne’s Experience with Rep and Warranty Insurance

    Suzanne: Well, it certainly cuts down on the time that we are negotiating, right? Reps and warranties and indemnifications and other. And I would say the likelihood of a deal blowing up over those issues is pretty high, generally. And if you spent six months to a year working on a transaction and it comes down to reps and warranty, I think the beauty of reps and warranty insurance is that it puts, in some ways, it’s not that there’s less diligence done around those issues or there’s less concern, right?

    The concern is always there. What it does do is it puts in some time, in a way, a middleman in between you, us as the buyer, and the sellers so that everyone doesn’t feel like, both parties don’t feel like they’re trying to screw each other. Because there’s a high degree of skepticism on both sides around those negotiations.

    Patrick: Yeah, that’s natural, particularly because the timing. The sellers, they’re never prepared for this but they’ve just gone through at best an “intrusive” due diligence process that nobody’s ever prepared for. And then they thought through that, they said, “Well, we’ve told you everything.”

    Suzanne: And then imagine that it’s exponentially worse for a first-time seller. When you say they’re not prepared, that is really an investment banker’s job, in my view, with a first-time seller is to make sure they’re prepared as possible for the incredibly intrusive due diligence process that is going to happen and continue to happen. Even with that, they’re never prepared. Especially with a first-time seller. And so, imagine getting to the reps and warranty insurance, or reps and warranties, not the insurance, but even before the insurance, the negotiations around indemnities and reps of warranty.

    The beauty of that, having reps and warranty insurance, one, I think makes people less skeptical of each other. Do you have a third party really taking a, that has seen everything and really has to underwrite everything? The second is it certainly gives everybody more comfort that if anything goes wrong, we have this, the insurance in place. But I also think the reps and warranty insurance is generally a good process for private equity firms because it does require a lot of third party due diligence, additional third-party due diligence, which we probably should be doing anyway.

    Patrick: Suzanne, tell me, what’s the profile of your ideal target now? What are you looking for?

    Kinzie Capital Partners’ Ideal Target

    Suzanne: So, our profile is 5 to 15 million of EBITDA in the consumer manufacturing or business services spaces. We have a lot of focus on manufactured products. So we do consumer, but not branded consumer. Really, it’s more consumer B2B products. And we like companies that are going through some type of, I think we’re the best fit for companies that are going through some type of transition.

    So either a generational shift, or, where a company’s stifled to grow and they have objectives to grow, but really don’t know how to do it. And then some of the tenants that we really look for are a strong management team or leader within the management team that we can partner with. And really I would say, and we do our due diligence with culture quite a bit, so that they’re the right cultural fit with our team.

    Patrick: Based on your recent successes this year, with the recognition of PEWIN and your status as one of the top women in private equity for the middle market. I did have one other question for you, as a father of two young teenage daughters, I am now more and more aware of opportunities for women in and around not just private equity, but mergers and acquisitions in general.

    And I assess now, again, as a father of two daughters, women are seriously underrepresented in M&A. And there are leaders like you that are coming through that are, I wouldn’t say paving the way, but you’re just showing excellence in this area. And I think nothing is more appealing than excellence and something that people can appreciate. And so, I’d like to get your perspective of the trends that you see for the future for women in, either in finance in general or M&A or private equity in particular.

    Suzanne: So I’m very bullish about women and more women having more leadership roles because I think part of what we really need to do is make sure that women and people of color are represented in leadership roles so that the next generation see that and know that it’s possible for them. And that we talk about it, because there are differences, right? I mean, I’m a mother of three and that has challenges too, being a mother of three. And just like it is to be a father of three. And I know you have daughters, I have sons, so I’m learning a lot about them.

    I’ve learned a lot about men through having three boys. And I appreciate that very much. And so I’m really bullish. I think girls today are more confident. They know they have a voice and a lot of it has to do with their fathers and men who make sure that they know that, right? That they want to be more independent. And I’m very fortunate. I had a dad who never made me feel like I couldn’t do anything that boys could do. And so it’s important not just for women to support each other, but men to support women. And I certainly will say, my whole career, as you mentioned, there were not very many women.

    I did not have a lot of good experiences with other women cause I didn’t have them. They were mostly with men. And I’m really fortunate that I had mentors, advisors, bosses, both men and women who were incredible champions for me. And so I think we have to continue to do that, right? For underrepresented people in general, but especially in industries where it’s very clear they’re underrepresented.

    Patrick: Well, I also believe that women just, people coming from different perspectives, but particularly women, there’s a different skill set that you bring to the table. And that diversity and different diversity and approach and everything avoids groupthink and gets other perspectives as you look at opportunities. And there are opportunities that could have been missed had it not been for different viewpoints.

    Why Diversity in the Workplace is More Than Just Filling Quotas

    Suzanne: I think diversity is, we talked a little bit earlier about trends, right? In the market. And diversity is a trend, but it’s not a trend to be trendy. It’s a trend because the statistics, right? That show that if you have a diverse board, companies outperform when they have diversity in their leadership ranks and when they have diversity on a board. So that’s both gender and ethnic and experience. You can’t have everybody thinking the same way. So I actually attribute some, a lot, of our success at Kinzie to that and not because I’m a woman and I have an ethnic background, but more when you look at our entire team and you see the different experiences we’ve had.

    So me having grown up within the financial sector professionally, my partner who grew up in technology consulting and fixing companies, my colleague who came from a corporate finance background and really worked inside a large company as an operator. And then in just the various backgrounds we have, we all bring very different perspectives that help us think through issues at any of our portfolio companies. And I’ve never operated a company before, except for Kinzie. And I was always a deal person.

    And so having those different perspectives, we have like accounting, we have to deal with honors or we have an accounting issue or we have to figure out how to make a project management software work properly so that it’s communicating across this lower middle market company because the larger the companies are, a lot of those things are fixed and they’re set because there’s a lot of professionalism. So we’re professionalizing an organization. And it’s very difficult to do that if you don’t have different perspectives and experiences. So we really take diversity, we think it’s very important. We know that it’s important for results.

    Patrick: Well, I think the other element of diversity is you need to be flexible, you need to be able to be nimble and not reactive, but proactive, in every phase of operating a business. If you’re set in your ways and you’re monolithic, you’re doomed to failure. Well, diversity is just one of those other elements there that’s being brought to the table. And it’s also, I mean, the thing about mergers and acquisitions to me is it is not one company buying another company. It is one group of people choosing to partner and join another group of people. And the expectation is one plus one equals six.

    So, or whatever the Kinzie Formula is for that, but one plus one Kinzie formula is going to go, a multiple. That’s what it’s about. And so this is just another part of the human element that comes in. So Suzanne, been very, very informative. Thank you so much for joining us today and sharing your thoughts and congratulations with you and Kinzie and hopefully, the successes of 2020 come follow you into 2021 and COVID stays behind. How can our audience members reach you? How can we find you?

    Suzanne: So we’re on LinkedIn. And we actually are pretty active, or we try to stay as active as possible on LinkedIn. And also go to our website, And you can contact us through there. And then our whole team is accessible again on LinkedIn. We have a Facebook account and a Twitter account. We try to do it, we try to stay relevant. So we’d love to hear from you.

    Patrick: Suzanne, it’s absolute pleasure. You have a good afternoon. Thanks again.

    Suzanne: Yeah, thank you very much, Patrick. Appreciate everything.


  • Peter Lyall | The Role of Marketing Communications Within M&A
    POSTED 12.1.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we’re joined by special guest, Peter Lyall, Group Director of Strategy at Fifth Ring, a marketing-communications company with locations in the Americas, Europe, and Asia. They promote the ultra-simple message of helping B2B companies sell more stuff and build better brands. Peter’s goal during this episode is to shed some light on the role of MarComm during M&A transactions and to explain why this is often a blind spot during the acquisition process.

    “There are quite a few skeptics about the role of MarComm within an M&A transaction, even to the point of saying that the brand isn’t important,” says Peter. “So, I did a little experiment: In a room of 50-60 people, I asked everybody to put up their hands if they had chosen their wristwatch because of the brand. They all had. Then I asked them if they’d chosen their car because of the brand. They all had. These people were very brand savvy, but couldn’t quite transition this thought, this appeal, this attraction of a brand, from the consumer environment to the B2B environment, which is where they’re living on a day to day basis.”

    We chat in detail about:

    • Legacy issues and the challenge they pose to marcomms post-acquisition
    • Implementing cultural values and brand messaging
    • Utilizing employees as brand ambassadors in messaging
    • Why cultural integration is a blind spot in M&A
    • Structuring multi-brand portfolios
    • The power of 3— Where 3 words can change everything
    • The future of energy
    • New tools to measure the intangible
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. 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 Peter Lyall, Group Director of Strategy of Fifth Ring. Fifth Ring is a Marketing Communications Company, which today we call the lingo is MarComm. So Fifth Ring is a MarComm company with locations in the Americas, Europe, and Asia. They’re ultra simple messages. We help B2B companies sell more stuff and build better brands. And at essence, I can’t think of a clearer message to be out there for B2B companies. I’m pleased to have Peter join me today to discuss what I believe is a true blind spot in M&A, which is marketing, brands, and cultural integration challenges pre and post-acquisition. Peter, welcome to the program. Thanks for joining me today.

    Peter Lyall: Patrick, thank you very much for your kind invitation. It’s a pleasure to join you.

    Patrick: Oh, Peter, before we get into Fifth Ring and talking about this blind spot for M&A integration, why don’t we set the table for our audience, tell us about you. What got you to this point in your career?

    Peter: Well, it’s quite a long story. I have been in marketing services since about 1980. When I graduated from university, I started life wanting to be a journalist, but couldn’t find a job. So as a writer worked my way through advertising agencies in London, and eventually, with a few people, we set up our own agency. And actually, an early theme that came through for me was at a certain level, agencies are not considered on a par with professional services, companies. They’re nice people to be around. But when you’ve got really big important decisions to make that they can wait. So slightly tempered by that I went off to Henley Business School to do an MBA, which I did in the 90s. And then I came back to Aberdeen, where I’m from Aberdeen and northeast of Scotland, and eventually joined an agency here, which, as you say, has representation around the world. And that was really one of the attractions for me, was the international. In fact, when I worked in London, I kind of walked to clients. But now, well, not now, of course, because of COVID. But traditionally, I would be flying all over the place to service client needs. Armed with an MBA and an advertising agency background, I did a stint in management consultancy as well, in a firm just outside Oxford. And I’ve been at Fifth Ring for about 15 years, shareholder and director. And I think particularly interesting from the perspective of this audience. Our business was acquired in 2016 by a private family business media company in the northeast of Scotland. So I know what it’s like to be as an observer and a participant. And I think that gives an extra insight into the topic.

    Patrick: Well, that’s that’s something Peter, the helpful thing is, is you’ve been on both sides of the negotiating table. So I know you’ve walked in everyone’s shoes. So it’s great to have your perspective on this. Fifth Ring, tell me about that. What is it? What does it do? And I think the best way to kind of describe your firm is, and I asked this to a lot of my guests. How did you come up with the name? I mean, unlike other firms and insurance firms, most of them, just named them as the founder’s last names, which is really boring. There’s no creativity there. So go ahead and give us the story about Fifth Ring.

    Peter: Well, we certainly ought to have some creativity about that since that’s what we sell. I wasn’t there at the time. The business was set up in 1991. I joined in 2005. But the two individuals one of whom is CEO today, Ian Ord, and the previous owner, Cliff Kohler there. They came up with the name or classic agency founded in a kitchen table scenario. Ian was very experienced in the highly competitive individual and martial arts, martial arts, sorry. And in that sphere, there is a book by a gentleman called Miyamoto Musashi. It’s called the book of five rings. It is worth a read in its own right. Yes, it’s about martial arts, but there are lessons in there for general living discipline as part of that, but also Indeed, for management as well. And there are five books, ground wind, fire and water and you might say that they are acquainted maybe to the left brain side of one psyche, which is that the organized things that you have to do, you have to have a sharp knife, you have to know your competition, you have to be prepared, you have to be properly fed and watered. These are the things that any martial arts exponent, any businessman, any human being has mastered the basics in place.

    But then there’s the fifth book, which is called the void. And this is about intuition and flair and imagination and perhaps going against the trend and, and perhaps putting that to one side, all the sensible things to do, and taking a flyer. So he and Cliff decided, it’s the fifth book that matters. It’s the void, hence Fifth Ring. And so that gives you an insight about where the name came from, in terms of what we do. And we’ll come back to your comment on building brands and selling stuff later. But so we were Scotland’s first integrated marketing communications agency, which means that instead of just being a creative agency, or a media buying agency, or strategy, or planning or digital, we actually have all the services in house, which was a first, so I run the consultancy bit, but the front end piece in terms of establishing at a high level what businesses want to do.

    And then in house, we have designers, we have writers, we have digital experts, we have PR people who can take an idea and then distribute it through all the various channels. And that service, of having the integrated offering doesn’t appeal to everybody, we do sell bits of it, for those that just want bits of it. But not only can we deliver it locally, but we can deliver it regionally and internationally. And that’s what gives us our edge.

    And the second thing and the significant thing is, knowing what you do is doing it selectively, and we set out our stole very early on to focus on the energy sector, Aberdeen being an oil and gas center, but also our bases in Houston in Texas, Singapore, in Southeast Asia, we were in Dubai, we moved out of Dubai, we just find it too difficult a place to do business. But we have a discreet offering for a select marketplace. A marketplace, it has to be said that goes through peaks and troughs. And we’ve followed that ourselves as well. But when it’s up, it’s up when it’s done, then a diversified portfolio is essential. And so we do move outside the energy space at times as well.

    Patrick: Let’s talk about marketing communications and consultancy services. Because this is where we can touch on the blind spot that I saw, because of direct your services toward mergers and acquisitions, that activity where you’re engaged by companies that are looking to buy and what you provide, because there are all types of service providers out there providing tangible, measurable items, valuation, accounting services, compliance services, you know, legal services, all of those things out there. And on paper, all of those services added up could make a deal look really good on paper. And yet the best deal on paper with hundreds of millions of dollars at stake doesn’t work. And this is you know where you come in. So let’s talk about that those types of services that you do.

    Peter: Yes, it is fascinating. And, and to some extent, it’s by happenstance, but we are very experienced in the M&A field, primarily because of the energy industry, and by that, I’m fundamentally talking about upstream oil and gas is the sector that spends a lot of time buying and selling companies. And we have benefited from that.

    Because of course, as they buy and sell companies, so they buy and sell brands. And what is fascinating about this, and I have yet to get a great explanation from the financiers is they will pay a premium price for a brand. And yet when you quiz them and say so how are we going to manage that brand? Or how are we going to look after? How are we going to care for it? How are we going to nurture it? How are we going to look after the people that created it, it’s almost dismissed as “Hang on a sec, don’t worry about that we’ve got the numbers to worry about.” So there is this fascinating dichotomy between paying a premium for something I’ll give you a little insight into this we rebranded an organization, a global organization based out of Southeast Asia many years ago. And there are quite a few skeptics in the audience about the whole role of marketing communications within this M&A this within this transaction. And they even to the point of saying the brand isn’t important. Let’s not worry about that right now. And I did a little experiment I asked everybody to put up their hands if they had chosen that wristwatch because of the brand, no, about 50 or 60 people in the room, and they all had, and I asked them if they chose their car because of the brand. And they all had. And this is a mix of financiers and engineers. And then I asked them about their clothing, what kind of suits were being worn. And they were all branded suits.

    And so actually, as human beings, these people were very seriously brand savvy, they wouldn’t be seen dead in a Skoda when they could actually have an Audi. They had to have a Gucci suit, most of them are wearing Omega watches. But they couldn’t quite transition this thought, this appeal, this attraction of a brand, from the consumer environment to the B2B environment, which is where they earn their living on a day to day basis.

    And once we were able to convince them that that’s where it actually matters as much, then we got some real advocates and supporters to the process. So there is the environment in which we operate, the services that we provide there for our and usually, it’s after the event, and we’ll come on to that, why it should be before the event later. But after the event, people say, “Well, we’ve now got an extra half a dozen brands in our portfolio, how should we manage them? Do some actually compete with brands we’ve already got? Don’t quite know how that happened. What should we do about that?” We have several stories to tell the old story, the new story, a story for our staff, our story for our customers, our story for our suppliers, how should we evolve that story? How should we tell it? So this idea of coming to the event afterward, is always fascinating for us? Because we will then start asking questions such as so when you started thinking about this deal? What sort of story did you have in mind? And quite often it is? Well, we weren’t really thinking about that. We were just thinking about doing the deal.

    Patrick: Buying spasm?

    Peter: Yeah. And it’s like, well, Wasn’t there a strategy which said, We need market expansion, or we need to kill a competitor? Or we need market penetration? Or we need new technology? Or we need that hotspot of technological or innovation? Wasn’t there something? Yeah, yeah, yeah, Yes, there was. Okay, can you articulate it simply? No, but we’ve got a 200 page due to diligence document as to why we’re going to increase market share in Kazakhstan or wherever happens to be.

    So that this is the fascinating bit we then have to pick up the pieces that they are there, the pieces, we have to pick them up and say so you did this because, because, because you saw an opportunity here, there’s a new audience, an expanded audience, perhaps you can bring more products to your existing customers, whatever it happens to be, we get it now. Okay, there is a rationale there. Right, we will help you articulate that story into something meaningful.

    So that’s a good case scenario. For us, it’s not the perfect one. Because the perfect one we’d like to be in before the deal is made advising people saying, “Well, if you’re going to buy that brand, you realize you’re going to complicate your existing story, you’re going to actually have complications within your brand portfolio.” Again, I’m sure we’ll come on to that later. But that gives you an insight into the role that we play.

    And of course, just to supplement that we have to be perceived as peers at this point. Because we might be giving some pretty strong, no admonishments, but pretty strong advice to clients, which is, you know, you’ve created a problem for yourself here, don’t you? And we do it with a smile. And we, you know, we’re advisors at the end of the day, and they can choose to ignore our advice, of course, but it’s this idea of taking the role of bits, which you might have expected to be better thought through, and then turning them into an articulate, compelling, interesting story, and then disseminating that story.

    And just to add to that, Patrick, an interesting bit is quite often you get a sense, they want to tell the world first, but actually, they forget to tell their own people that sometimes, and it is and seems like the obvious thing, but we stress in B2B marketing communications activity has to be from the inside out. And we learned this from one particular major international oilfield services company that was represented in 46. companies. It had 26,000 people working for it when we did this project. And the client said You know what, we have about 170 clients around the world that we’re interested in, and we have 26,000 people. So we’re here to make sure that we use our army of people to tell our customers our new story. Rather than going straight to the market, putting out press releases whatever it happens to be. So that’s, that, that gives you a bit of an insight into the role we play and the timing of that in the process,

    Patrick: From our prior conversation, you had a great analogy where you were talking about how most of the parties you deal with were 90% engineers, or very objective, tangible decision-makers, and so forth. And however, most of their decisions they don’t make on an objective basis. They make it from instinct. Let’s talk about that real quick.

    Peter: Yes, it is nice. And it used to irritate me, but no, I actually find it quite entertaining. But yeah, as you say, in the oil and gas space, the concept of having a marketing department is relatively new. And so and even if it’s well established, it’s probably populated with engineers by training. And certainly the C suite individuals, always the CEO, probably got a strong engineering background. And they take a meticulous and analytical and, you know, very thorough view of everything that comes across their desk.

    But if we put a creative piece of work, an advertising campaign or design of a new website, or whatever, and say, This is what you should do, because and we will base it on the data and the Allison, the discovery work that we’ve done, we may get feedback, which is why I don’t like it by Well, I don’t like red. Okay, well, that’s fascinating, but it’s irrelevant. So we’ve had to find a way of getting around this and, and it’s okay. And we and we do it with a smile and the clients do. But you’re right, that there is this sense that somehow when it gets into that creative space, the typical persona evaporates. And this somewhat more flighty and individual with personality and emotion. So it comes to the fore, and that’s fine. But it is, it did take a bit of getting used to that for sure.

    Patrick: I think you’re familiar with that you realize and appreciate that people are going to act, particularly when they’re stepping out of their comfort zone, they’re going to be acting on instinct, and dissipate that and you bring that through, which I think is always helpful. And that’s what you know, professionals do now is they realize the limitations of what they know and don’t know, and they’ll, they’ll reach out to other places. And that just helps them, you know, lower the learning curve. And flatten that out so they can get to, you know, proper execution.

    I again, I think this is, it sounds a little simplistic, but when you consider there are hundreds of millions of dollars at stake, that you want to get it right, and we’re on the insurance side, and we want to make sure that things, you know, go well, otherwise, we’re gonna have to pay a big, big claim check. If some of these issues are thought about and anticipated, then you’re gonna have a much more successful outcome down the road, that’s good for all parties. Peter, can you give us an example, you would mention one where you know the very large energy company, but give us a quick little case study on what you did with a particular client?

    Peter: Yeah, I think dealing with legacy issues brought about by mergers and acquisitions is very typical,

    Patrick: It’s universal.

    Peter: Yeah. And it’s often stimulated by leadership change, I would say or ownership, you investors, whatever it is, and they will look at a company which has grown up probably quite successfully by buying competitors by buying by expanding its portfolio, and it wakes up one morning and goes, this is a bag of nails. We can’t explain this to anybody. We’ve got this business, we’ve got that business, we’ve got the same service being offered in different territories, but with different names. We need to sort this out so that anybody can understand it quickly. Whether that’s a potential future investor, whether that is a potential new recruit new member of staff, whether it is a new customer, multiple stakeholders, of course.

    So we did a major exercise for a global exercise again, for an oil and gas contracting business, who had got themselves into this exact state. They’d been involved in many joint ventures over the years, they had allowed their local marketeers to be quite flexible with how the actual brand was presented when they started dipping their toes into renewables, and then they had a wind farm operation. The actual logo appeared in green in one place. So this is a major corporate and so it’s a mess. So our job is to tidy it up. And of course, with the mess, often comes internal territorial battles, you know, I exist, I have power because I have a logo, you know what I’m going to say, you are a member of this organization, you may be a head of a division, but it’s, it’s the corporate brand that matters.

    So you have to deal with that sense of taking away from people. So you’ve got a number of sides on it, you’ve got to do this quite subtly. You’ve got to engage people, we do a lot of interviews, a lot of focus groups, how did the situation get to be as it is? What was the rationale? What was the justification? How would you envisage change, because what we’re going to have, ultimately, is probably what we call a monolithic brand, which is just the brand, and no subsidiary names, no house of brands? And so it’s involving it’s collaborative. In this particular case of this company, they were very good at that. I think we did 70 interviews around the world, we did two quantitative surveys of all 26,000 individuals. So you really get a sense of how something happened, why it happened, what people would think about in terms of options for change, then it is our job as creative people to say to the client, this is what good looks like, in order to meet your corporate vision and your corporate strategy, you now have to present your brand in this way, in our belief, as experts in the field, that is always subject to some debate, you know, whether it’s logo style, whether it’s colorwise, whether it’s a visual presentation, whatever it is, people will have a view. And that’s fine. And we accept that.

    That’s a fairly standard process. Enjoys, you know, good success doing that. And then you get to a point of decision, which is yes, we are going to structure our brand portfolio in this way, we’re not going to have a mess anymore. It’s going to be clean, neat, tidy, structured, you can see at a glance, this company is endorsed by the holding company, for example, or you can see at a glance, because of the way the colors, look that we’re all part of the same family, there is a semblance that there is a unity. And it could be in all sorts of different ways. That’s all relatively straightforward. The next bit comes to the implementation. And this is, again, hard. Because and this particular instance, remember when we completed the implementation, the big boss said, but what about the ships? Weren’t we going to repaint them? And we said, boss, we decided, as you had 26 ships in your fleet, it might be too big a deal to repaint them. And his response was, Oh, no, maybe it would have been nice to repaint them.

    So, you never quite know. But anyway, getting back to the point of implementation, and there’s the hard side of it, which is uniforms, signage, anything that represents the organization can be rebranded physically, relatively straightforward. You can choose to do overnight and spend a lot of time and money on it. Or you can take a more of a replacement point of view. And behind that, is, of course, the culture of it. Those people that were in an acquired business that grew up being Company X, and know their company, why they have loyalties to what, where does their corporate story come from? Where does their understanding of what matters, what gets them out of bed in the morning, they’re suddenly being asked to package that away, forget about it, and think about this, and be really focused on something new and different? And of course, that’s hard.

    We talk about change quite glibly, I think as everybody hates change, which we actually fundamentally disagree with that a lot of people are crying out for change. But what they don’t like is a bad change. So are loosely implemented or half-done changes. So you have to have a really thorough way of internally managing the messaging. Going back to the focus groups, going back to the people you spoke to say, this is how it’s going to be this is why we need your help. To share the story. We need your help as brand ambassadors as advocates, as powerful, influential people to take the story and that cultural bit.

    It’s the bit that never gets discussed in the deal-making. At least they may do but not in my experience. It’s the bit where the people from different organizations are brought close together and expected to work together, they don’t even know each other. And they’re expected to represent an organization and work together. And so it’s fundamentally, it’s hard. And it takes time. And it has to be done in a very clear and concise way of people speaking to people and explaining and explaining and making no assumptions. And the best example that we’ve seen, of the clients that we’ve had over the years, is a business that acquired businesses regularly. And they had it so slick, they actually had an implementation team, it was made up usually about 8 or 10 workstreams, from the basics of integrating ERP systems, to you know, that the softer skills, a bit of cultural integration. And if, if there was a lesson that we’ve learned, and which I would share it is, that’s the way to do it. And be absolutely clear that if you want someone on the front line, to represent your brand, you better tell them what you want them to do, rather than just sending them an email and hope they pick it up. And just to conclude on this piece, the message that we’ve sent to clients over the years is, if you want someone in the frontline, to know your news story, to understand your brand, you got to tell them seven times, in seven different ways.

    Patrick: So the cultural integration is one of those blind spots. And a lot of people keep thinking about that as an HR issue. And where you have clashes of cultures, where you may have a formally dressed office versus somebody that affirms that as everybody’s in casual clothes, and so forth. And that’s not just the dress, it’s just the people who have had a mission to accomplish. And they believe in their firm now that our mission is changed from an acquisition. And so always, you know, getting them to buy in because the most I think the most important thing with business is, it’s not the shareholders of a company. Now for the publicly traded companies. It’s not that is first of all your people. And then secondly is taking care of the customers, the people that are buying your goods and services. And if they’re not taking care of that, that’s going to kill you.

    And the best way, fastest way to do that is taken, you know, get your people on a mission, take very good care of them. So they have no fear, and then they move forward and take care of your customers. And then your customers end up buying more. It’s simple, but it’s not easy. You know, it’s one of those things for coming together. But one of the things you mentioned that I definitely want to touch on is, is giving a message a simple message to the people, you have to tell them seven times. Okay, and seven different messaging, I think what you guys do is essential, and I think is a great value add that you have where you make it ultra simple. And I’ll read back again what yours is. For Fifth Ring B2B companies sell more stuff and build better brands. No wasted words. They’re a very simple concept direct everything. Okay. Talk about not only just being creative, but why is so essential to have not just a message but a simple message?

    Peter: Well, it’s a great question, Patrick, and I’ll give you two sides of this, one from the front line. You know, I come from an MBA background, I read all the books, read Harvard Business Review, I speak the highfalutin language of the consultant. And I can tell you the difference between a vision and a mission and a strategy and a value proposition. And I can actually provide words for all these different things. And so can all my colleagues.

    And I think what was a real eye-opener for me is we’ve taken a logistics firm, which specializes in oil and gas, needless to say, through a rebrand, given them a new story, we’ve done the cultural integration, we actually used actors to do roleplay and scenarios, which was a great way of getting that cultural piece aligned. And as it happens, we ran an event where there are prizes given and as a supplier to them, we were encouraged to give a prize. And we were given a prize for playing golf. And I took three guys from the company to play golf. And these are pretty frontline individuals. They worked on the docks, shipping, you know, crane operators, loading ships, moving stuff offshore. And I asked them as we’re playing golf, so what do you make of the new vision? I don’t know about that. But what about the mission? Yeah, I saw I saw a video about that there was a book that wasn’t there. You don’t know anything about that. So what do you think of the three words strategic principle that we came up with? What was that? So it was called “Trust well placed”. “Oh, I like that.” Well, yeah. Why’d you like it? “It’s what I do. My job is to people trust me, and I make sure that things are placed in the right place, and then they go on the boat. And then they get to the rig. And that’s, you know, yeah, I can go with that.” And, and so we were able to succinctly, in three words articulate the entire strategy for this organization “Trust well placed”. It’s not, it’s not an easy thing to do.

    And that’s kind of one of the benchmarks out there. And you think, “Well, okay, it takes a hell of a lot of creativity and imagination to come up with these things.” But it has to be linked back to the strategy. So that’s why we think simple messages really resonate with staff. But the other area, which is pertinent to what we’re talking about today, of course, is M&A. And the investor community, God bless them, doesn’t have much time. So it, it believes it has to understand instantly, what a business is all about to make some kind of rapid decision as to whether or not this is an interesting opportunity. I actually think that’s a little bit unfair. And of course, they do have to do the due diligence and look under the hood and test it and poke it and all the rest of it. But if you can articulate quickly, and simply what your business is about, you’ve got a far better chance of resonating with the different stakeholder audiences that you have. And so the history behind building brands and selling stuff from a differing point of view was that we were just using this internally. You know, guys, what do we do on a Monday morning, we get up, we go build some brands, and we said, go sell some stuff on behalf of our clients. And we started using it in a quite lacs way in front of clients. And they quite liked it. They said, Well, yeah, yeah. Could you do that for us? And we said, well, yeah. But that’s it’s a bit casual, isn’t it? casual? Yes. But we understand what it means. So then we started using it externally, then it finds its way onto his website. And now we’re even thinking about what does that means for job titles and roles? and other things fundamentals within the organization? Could we have ahead of selling stuff? You know, would that be the right thing to do. So it is permeated right into our business because as you rightly say, it matters to customers, they get it. And of course, from a marketing communications point of view, we’ve never been in a better place to help people sell stuff because we have the strategies, we have the tools. But above all, we now have the technology to micro-target, to demonstrate return on investment, to show through all sorts of new modern, sophisticated marketing automation ways that if you identify the right people, if you approach them in the right way, you can actually turn them into a qualified lead. And that’s why selling stuff is so significant in B2B.

    I would say as a footnote to that, there is still a huge place for personal relationship-oriented selling. And, you know, some of the contracts that our customers are selling are massive, you know, 10s of millions of dollars, hundreds of millions of dollars. So they’re not going to do that online. But they can find new audiences new opportunities online.

    Patrick: Then, of course, they bring in the experts, the technical experts, the strategic experts to convince that particular prospect of why it’s a good idea. But we would like to take this even further and link our remuneration to our performance. So getting away from fees, and into well, we produce that amount of reward for that business, we want to share of that reward. And that we think is the way our industry will go. Right.

    It removes the risk. At least mitigate that mitigates the risk, because that’s always the concern when you’re making a spend on something as particularly creative marketing type expenditures, because there are too many stories out there of decisions made spend a lot of dollars and didn’t get the return that they had hoped. And I think if you link in a successful model there then you’re both working together. So I think that’s a great trend. Peter, what do you see in the M&A trends wise, from your perspective, how do you think things are going? Or what do you see from where you are?

    Peter: I think the interesting arena for us. And this week has been christened and “BP Week,” because of the amount of news coverage that they’re getting. But we’re in what we call the energy transition. Now, the reliance on hydrocarbons is changing the growth of renewables is obviously here. And now. Have we reached the tipping point, no? Will we start using oil and gas tomorrow? No. But from an M&A point of view, and what we’re interested in is, what will happen to those smaller businesses that are currently in the renewable space? How will the big oil companies, the big oil operators, manage to bring them into their portfolios? And we’ve already seen a deal done with BP buying some of Ecuador’s renewables assets in the last few weeks? So so things are happening? So the under-recognized brands in the renewable space at the moment, because it’s still a relatively new arena. What role will they play as they add value to the portfolio of established oil and gas companies going forward? Will they add anything? Will their brands have value as they transition over? Or will they fundamentally just disappear? That’s going to be really interesting to see for us.

    Patrick: One thing about Fifth Ring, you develop your reputation and your experiences in that sector, that oil and gas sector and I think it’s helpful that you were very, very focused on industry but you’re not locked into that certainly, you can get into other industries as well, I think was significant for credibility wise for filtering is you’re working with deals that were in the billions of dollars, and you had organizations with billion-dollar checks being written, they trusted you. So if they can trust you, a lot of other industries should have no problem with your credibility in delivering on on a promise. Talk about who your ideal client is, and what Fifth Ring is looking for?

    Peter: Well, that’s a great question. And we discuss it a lot ourselves of course, in terms of who that actual ideal individual would be. And I say individual quite deliberately because we like to deal with the CEO. So that means it’s not going to be a massive, massive organization, it’ll be big, this individual will be quite enlightened, they will have an open mind to marketing, marketing communications and branding, they probably have some experience of it already. They won’t consider themselves an expert in the field, but they will know that it’s important. It’s probably an international organization, it’s probably going through a bit of flux and a bit of change. And probably got some new investment, maybe even a new leadership team. It’s ambitious, it’s in a hurry. It’s not afraid to be challenged, it’s quite demanding. It realizes the value of people, it doesn’t look at our staff in any particular way, just because they happen to be young, or ethnic, or female, or whatever it is, they’ve got a very open, transparent view of diversity. You know, I thought, that’s really I know, it’s quite topical. And I’m, could be accused of just saying this, but actually, I’m not, you know, it’s quite normal for us to employ young people. And so we want senior people in the client-side, to take these young people seriously. So that so that’s important to us. That’s another thing in the ideal client, I think they also have to be willing to take a little bit of risk. And when we come to them with an idea, and we say, you know, you might want to think twice about this, but it really could work. And they all go on, you know, what’s the downside? What’s the worst that could happen? So we quite like that. And also, ultimately, and I don’t want this to be taken the wrong way. But there should be an element of fun about this. You know, the last eight months have not been particularly fun, worldwide for the obvious reason. But actually, if we collaboratively can have a bit of fun, creating a new position for a brand creating a new story, seeing it engage people seeing it drive new business, and you can look back on it later, you know, that we enjoy doing that. What why wouldn’t that be something that you would actually look for in the perfect client?

    Patrick: You know, I just think that you know, as a father of two, you never get your kids working harder or expending more energy other than when they’re having fun. They’re having fun. It’s Unlimited, that type of stuff. So I think that’s a great element out there. That that can be there. And while you’re based in Scotland, Fifth Ring has a US presence to multiple offices with headquarters in Houston. And you’re eligible for companies and firms worldwide. So across the United States, correct?

    Peter: It is. And I personally have done a lot of work in Houston. I know it’s a cliche, but cliches usually have a bit of truth. In fact, that’s why they become cliches. But there is an entrepreneurialism that we notice amongst the techs and clientele that we work with. There is a willingness to give things a try. They like process, of course. But there is a sense. “Yeah, okay, come on. Let’s see what we can do.” And I’m not saying that it’s not the case with our European business or Southeast Asian business either. But that there is a sense, it’s, there’s an informality as well, which we like, it’s often quite difficult at the first meeting to work out who the big boss is, you know, the dress code, couldn’t sell them be a giveaway, you know, that there is a sense of not necessarily equality, but collaboration and entrepreneurialism. But funnily enough in the M&A space, we have seen plenty of successes and failures in Houston. But that doesn’t stop people from trying. And being part of that. The business environment is stimulating to say the least.

    Patrick: Well, Peter, how can our audience members, many are in Houston, but they’re also across the country. How can our audience members and our listeners find you?

    Peter: We have, of course, a website, which is constantly evolving and changing, very simple address is And you will find a lot of good stories and information and background about us there. If you want to speak to me, and I have a very simple email address, which is We have a simple recruitment policy, which is only one Peter. So that’s me. I think we have lots We had lots of Stephanies for a while. So we do actually use surnames as well in our email addresses. But there’s only one, Peter.

    I think that that this is a fascinating topic is it really has meaning that you’re absolutely spot on of you Patrick to realize that it’s a talking point, I know deep down that the investor community, the financiers, the bankers, the lawyers, they know this, they just occasionally need to be reminded that the cultural aspect, the branding aspect, the communications aspect, really is significant.

    And if there was one thing that people did want to get in touch to talk about, because we know that this tangible, intangible dichotomy is something that matters, we actually created a dashboard to try and put some of these softer, intangible things into the mix in the pre-deal phase. And so we’ve got some insight and ideas on that, that could be helpful to try and say to people, there is a metric by which you can test culture, see how it changes, and turn it the way that you want it to be over time. So that might be a topic for further conversation.

    Patrick: I appreciate you being here today. Because when you think about the M&A community, and it’s not shrinking, you’ve got thousands of private equity firms, you have thousands of family offices, you have thousands of strategic acquirers out there. And now we have the emergence of SPACs, special purpose acquisition companies, and they are doing IPOs, at least 20 to 30 new SPACs are coming the last four months consecutively. So we have all these buyers out here.

    How is the target to distinguish other than price? How are they going to distinguish one buyer from another? And I think that if you really wanted to separate your organization from the rest of the pack, you come in with something that’s different and I think this is why if you can address blind spots and culture I think is really big, but this puts the dollars and the motivation with the culture there with the integration, the brand that the target is always going to want their legacy to move forward or to be elevated. And that’s something you deliver.

    And I think that you know, particularly for the SPAC market which we can embrace immediately. This is a great way to differentiate yourself from a lot of the other others out there. And so I really appreciate what you have. And I recommend anybody to reach out to Peter and his team, they’ve got a fabulous story. And what’s more importantly, they’re going to help you create your story, which will close deals that will save you 10s, if not hundreds of millions of dollars. So it’s a pleasure for me to be able to provide that kind of thing to the community. So Peter, thank you very much for that.

    Peter: Right. Well, that’s kind of you, Patrick, I would just conclude to add to that point that you made, we saw this opportunity quite vividly about a year ago. So we are now working with a management consultancy firm in Houston a company called Carnrite, jointly. So they help businesses through the hard bit of the M&A the advice, the transition, the transformation, the implementation, and then we support in parallel on the communication and brand matters that go with it. And so we’re working under the joint title of walk the talk, they, help you do the walking, we Fifth Ring help you do the talking. It’s resonating pretty well, but it does go into the heart of what you just said about finding a point of differentiation.

    Patrick: Well, thank you very much, Peter. You got to find a three-word slogan for the Rubicon next.

    Peter: Thank you so much. We’ll do our very best. Thank you, Patrick.


  • Heather Hubbard | Representation for Women in M&A
    POSTED 11.17.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we’re joined by special guest Heather Hubbard, Managing Partner of Valesco Industries, a lower-middle market firm based in Dallas, Texas. This past May, Heather was named D CEO’s Private Equity Investment Professional of the Year, and in a market like Texas, that’s no small achievement.

    “I think, coming in, we represent what we’re oftentimes looking at in portfolio companies and potential prospects. There’s a very diverse group of people working at the majority of these companies, so when we can reflect that back to them and relate to them each in their own way, I think that it gives us an advantage,” says Heather about the unique perspective of women in M&A.

    We chat about Heather’s journey from running a company to private equity, as well as:

    • What women bring to the table in M&A, specifically in private equity
    • Team dynamics with women in M&A
    • Why women are underrepresented in private equity
    • The future of Women in M&A
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there, I’m Patrick Stroth, president of Rubicon M&A Insurance Services. 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. There’s a saying out there, the bigger the challenge, the bigger the opportunity for growth. It’s hard not to see the obstacles we’re all facing these days.

    But I’d like to focus our attention in today’s show on an entirely different challenge and the real opportunities out there were business owners and private equity both stand to benefit tremendously. I’m not talking about the pandemic. I’m talking about how women are seriously underrepresented in M&A today and how this situation presents an unbelievable opportunity for those who want to take on this situation. I’m thrilled to be joined by Heather Hubbard, managing partner of Valesco Industries.

    Valesco Industries is a lower middle market president pretty firm based in Dallas, Texas. Now, for my regular listeners, earlier this year I profiled Valesco’s Bud Moore. I’m returning to Velasco because this past May, Heather was named D CEOs Private Equity Investment Professional of the Year. And in a market like Texas, that’s not a small market. So this is a real big get for Heather. So who better to talk about women in M&A? Heather, welcome to the program. Thanks for joining me.

    Heather Hubbard: Thanks for having me.

    Patrick: Now, before we get into macro issues, women, M&A and all that, let’s start with you. How did you get to this point in your career?

    How Heather Got to This Point in Her Career

    Heather: You know, I definitely didn’t sit out and say I want to be a female partner of a private equity fund or an SBIC fund when I was a little girl because I obviously didn’t know what that quite meant. But what I did do when I was a little girl was take all the groceries out of the pantry of my parent’s house, set them up on the kitchen island and take one of the two cash registers that I begged my parents to buy me when I was growing up and sell all their groceries back to them.

    So from that small business that I started, which had a great gross profit margin, I started a pool cleaning business, a gift wrapping business. And I knew I always wanted to be in business. So I didn’t know what I wanted to major in, in college but I did attend a meeting of the Collegiate Entrepreneurs Society, and they were interviewing.

    At the time, there were 12 kids in the basement of Business College and interviewing a local business owner in Oklahoma City who wasn’t doing anything bright or brilliant, just had a really cool business that he was operating. I think it was a data center or something like that. But learning about how he started his business, how he signed a lease, how he hired his employees, how he managed his accounting system, how he on and on and on.

    The questions that we would ask in diligence today, we got to ask in that setting. And I realized that I was hooked. I just wanted to know everything about what he was doing and how he was making that happen and all the little details and the fact that he could control his own destiny and he could chart his own path. That set entrepreneurship and really this idea of investing in entrepreneurs into a whole different plane for me because I didn’t want to just be another employee in corporate America doing corporate finance or accounting or anything like that.

    Not that there’s anything wrong with that. I just really love the entrepreneurial spirit. And so we get to, now fast forward all those years, back those really cool entrepreneurs who have a great idea and a great vision, and we get to support their vision and we get to learn about their vision. And it’s pretty much the coolest job that I could ever imagine.

    Patrick: Yeah, one of the things that can separate us in age and perspectives is, you know, some of us that are a little bit older, we were just at the dawn of going from the big corporate America structures out there where you had one job, you stayed with that firm for your entire career to now it’s a free for all where there are all these smaller, nimble companies where you get a whole wide variety of different tasks you can do and things you can focus on.

    So you get in there, you’re in this great positive pool and you’ve got the mindset for an entrepreneur. It is a particular mindset you have to have. What brought you from, you know, running a company to going into private equity?

    What Led Heather Specifically to Private Equity?

    Heather: Well, you know, I kind of stumbled into it in a way. I had an internship with the folks at Valesco in college. And they gave me an opportunity to learn what they were doing. And at the time, we were independent sponsors. So we were doing investments on a deal by deal basis. We didn’t know what this whole fund thing was all about. And when I started, we said let’s raise a formal fund. Let’s make a legacy out of what we’re doing. And so I got to be in on the ground floor sort of starting with everything from all of our diligence lists and making sure those were right to our models to how do you raise a fund.

    How do you portray a sort of track record? How do you do anything and everything? How do you hire an intern? How do you train that intern? Obviously, people have methods on those things. But we didn’t have a Valesco method until we started to do it. And so everything that we are today, I had a finger in developing which is also really cool because I feel like an entrepreneur amongst all these entrepreneurs we get to invest in. We created our own destiny at Valesco as well.

    Patrick: Well, it’s nice because it was just growing and so you were in the ideal position coming in at the ground floor, literally. And there were all these opportunities within there and you can try a bunch of stuff and probably stub your toe but you can at least get in and get exposure to that.

    Heather: I was told many times that all the things roll downhill and I was the only one at the bottom of the hill, so,

    Patrick: That’s how it goes. Now. I’m not going to take credit for the idea of talking about the topic of women in M&A. Actually, I was inspired by one of the law firms out here in Silicon Valley, which is very active in trying to attract more female attorneys to get into the M&A practice. And so we were looking, you know, when you look at a profile of private equity firms out there, it doesn’t take a lot of time to notice that there are fewer ladies in the pictures of the team members than men.

    Now, there are studies coming out that are listing all of these benefits and value that women bring to the table when they come in. They have a whole separate skill set and perspective. And that perspective can be harnessed to do a lot of great stuff that just, for nobody’s fault, just isn’t happening right now. Now, from your perspective, what do you see the women actually bring to the table here for M&A, specifically, M&A in private equity.

    A Woman’s Touch in M&A/Private Equity

    Heather: So I think they’re, it’s interesting to ask this question because we’ve been working from home for coming on six months now. I almost forgot what the answer to this question was because when you’re in your own little world working with your own team and the situations that you’re familiar with, you stop getting that perspective of what it is to be female and what it is to be different. But we recently had the opportunity to start looking at deals again and get on the road a little bit and spend some time with folks.

    And I think there’s two things that women bring to the table. It’s perspective, which you’ve used that word over and over again, but we’re looking at things from a completely different lens. And it’s everything from we’re not really not interested in, generally speaking, talking about a football game or the baseball game or what happened in March Madness. We’re interested in other things. So we bring a different perspective on business models and product lines and what’s attractive to certain audiences and maybe how to approach diligence assignment in a slightly different way.

    Or maybe we’re interested in slightly different things and because we ask a certain line of questions, it gives us a different look or perspective on a potential target. And I also think we bring a lot of balance. We look at the world differently. It’s not universal, obviously, we’re all different human beings and we all are along a spectrum, right? But there, it’s not better, it’s not worse. It’s just different. And if we have a balance in different perspective that we’re bringing to the table, we’re investing in female entrepreneurs, minorities, different people that may not have had a fair shake. And it’s not because my male colleagues wouldn’t give them a fair shake.

    It’s just that they may not have seen a perspective that that type of investment would bring to the table or an opportunity that we may have seen. And we’ve certainly stopped a lot of bad cosmetics investments that have come across our desk. The guy said, Oh, that’s a pretty cool deal. And we’ve shot those down. So it gives good perspective because we are 50% of the population and we buy more than 50% of the products out there in the world. And so we have a unique take on that.

    Patrick: No, I mean that’s fundamental, particularly if you’re doing consumer products or whatever. You need the perspective from the target buyer, and you know who your customer is. And if you’re selling hockey equipment and the only people that are involved with that business have never played hockey before, you’re not going to be able to connect with the target audience there.

    Heather: That’s a great example, right? Because one of the things I said is so true. We represent way more than 50% of the consumer purchases, right? And yeah, one of the members of my team might have never played hockey before. But I’m a mom and a lot of the women I work with are moms. And you know what I do is I buy all the soccer equipment, I buy all, I sign up for all the gymnastics lessons. I buy a lot of the things that our family consumes and so I have a different look on that world.

    Patrick: Yeah, so he needs sporting equipment. Well, wait a minute, who’s buying it? So absolutely. Well, talk about real quick the team dynamics, because you would mention that where, we’ll get into later on reasons why there hasn’t been as much representation and we could be turning the corner. But let’s just talk about the team dynamics with women, but either in the company itself or in a deal team.

    Heather: And when you say team dynamics, you mean with females in the room?

    Patrick: Yes. Yeah.

    Heather: You know, I think that’s an interesting question because I think, again, it’s about perspective. A lot of times, it’s cultural too, right? When we get into a diligence assignment. I’m the kind of person, I want to know about the person that I’m engaging with.

    And I may not dive into, you know, tell me about sales by product line by gross profit margin by, you know, geographic mix right away, but I may ask about your family and your background and your history, and I might have different questions than the rest of my teammates and that might give me more insight or a line of questioning that might be helpful for us to understand and appreciate where that entrepreneur is coming from. And so I think I bring that to the table. My other colleagues bring, you know, maybe a different spin on the analytics to the table.

    And so I think us coming in, we represent what we’re oftentimes looking at, at portfolio companies and potential prospects. Because there’s a very diverse group of people that’s working at the majority of these companies. And so when we can reflect that back to them and relate to them each in their own way, I think that it gives us an advantage.

    Patrick: Well, on that softer approach, I’m just using that term, but that kind of human skills approach is one that is consistent with one of my absolute core beliefs about M&A. It’s not, mergers and acquisitions is not company A buying company B. It is a group of people agreeing and trusting to work with another group of people who when they come together, the ideal is that the whole is going to be much greater than the sum of its parts.

    And that’s people. And I think a perspective when people are talking about well, we’ve got great synergies and on paper, this all looks good. If you get under, you know, a couple layers down, you’re going to find out that well, maybe they have other priorities or other fears that we need to deal with. And that gives you an edge.

    Heather: Well, Patrick, Bud’s not gonna want me to tell you this, but our money is just as green as everybody else’s money. And our differentiator is 100%, related to emotional intelligence and being able to meet people where they are and to build that bond. And I can sit here and tell you all about my investment criteria, you’re probably going to ask about that. And it’s going to sound just as boring as next person’s investment criteria and exactly the same.

    And so it’s all about how we meet people where they’re at, and how we engage with them on a number of levels because we’re going to be tied at the hip. These teams, we’re three to five, seven years, at least. They’re going to be texting us on the weekends and wishing our kids happy birthday and also diving into some really hard topics. So we’ve got to meet them in a common place.

    Patrick: Let me circle around just on some stats here when you talk about your money’s as green as everybody else’s, and so forth. But let’s talk about just specifically with women. And this is from Venture Capital Magazine just recently, startups with one female founder hired two and a half times as many women as compared with male-founded startups. And exclusively female-founded startups hire six times as many women.

    So you’re going to have diversity right there if you’ve got female-founded companies. Now, companies with female founders generate, get this, 35% larger ROI compared with male-founded startups. Okay, this is a meritocracy, okay? and it is all about the bottom line and performance and execution. And when I hear that, that catches your attention real fast. And this is what’s real contrarian into that. And again, same survey from Venture Capital.

    Despite their success, a study shows that 40% of female-founded companies will not meet their fundraising goals this year. Okay, there’s the disconnect. There is great opportunity, if you’re getting a higher ROI, you’ve got more built-in diversity with a firm already this organic. Why not take another look at it? And so the thing that is just, it’s almost hiding in plain sight, which is why I think it’s a tremendous opportunity out there. Now, when you and I talked, Heather, you know, there was this lack of women in M&A. And I just want to get into the reasons because it’s not that they’re being held out.

    I think quite frankly, they just may not be aware of the opportunities that are there. And unfortunately, you could have some situations where maybe they’re not being encouraged or they may be actively being discouraged by people, you know, in authority, in education or whatever. You know, let’s talk about that real fast. And, you know, what do you see, what steps can be taken, what confirms do to say, you know, to people that weren’t even thinking about private equity or finance that, hey, door’s wide open and here’s some great stuff?

    Educating People About Existing Opportunities

    Heather: I think it’s a great question and it absolutely starts with kids that are my daughter’s age at six years old, teaching her about budgeting and business and getting her interested in those types of worlds. It goes to high school. Don’t let a girl think that she can’t be anything. We were talking about that the other day. I never thought I couldn’t do anything that I wanted to do. So I just kept going. So in high school, you know, getting that opportunity in college, educating about what the opportunities are that are out there.

    I was one of probably three females in my entrepreneurship major at all. Even in the finance classes, there weren’t very many females represented. When we go to hire, unfortunately, the pool of candidates is very low on women. My team knows that I’m going to ask how many female applicants we get for that job. And they go out and they hunt for those female applicants because they know that I’m going to want them to interview and just at least give that woman a fair shake at the opportunity.

    But they struggle to get the candidates that they need. And it’s not because those women don’t want those jobs it’s because they never were told they could. They were never told that they could major in finance or entrepreneurship or accounting. They were never told that this was an option. So it’s about education of the opportunity in the world and what we do, but it’s also about encouraging women to get into business because I think we can, we can knock it out of the park.

    Patrick: And when we talked before, it wasn’t just women working with other women, you’re enhancing teams that are mixed, men and women. And all of a sudden, and we can see this where suddenly if you’ve got a different person in your group, everybody seems to up their game a little bit. There’s less complacency.

    Heather: Absolutely. And you’re having to figure out how you relate to different people because you’re just inherently different, right? So if that starts internally with us, then how much better are we going to be if one of my male associates has to relate to me every day, he’s going to be way better at relating to that female CFO at our portfolio companies. We see a lot more, you know, CFOs and accountants that are females than we do in the finance profession.

    So, you know, there’s, we’re everywhere. We’re out there. We’re doing jobs at portfolio companies. You know, we’re heads to purchasing and heads of inventory management and heads of marketing. And so to think that a diverse team at bar level wouldn’t be the goal or the gold standard is just misguided because we’ve got to pair with those diverse teams that are popping up everywhere else.

    Patrick: Let’s look in the crystal ball real quick. And again, from your perspective, because you’re actively doing recruiting out there. I know the law firms are actively recruiting. If you want to look for a model or an analogy, look in the healthcare industry. Virtually everybody in management and upper management in larger institutions are all women.

    Now, presidents, vice presidents all the way through. The old days, 50 years ago, it was all-male because all the men were doctors. And you’re seeing now women are now outnumbering men in medical care, not only on treatment but in management. So it is there. But what do you see for the future for women in M&A?

    Heather: I think it starts with people like me. And we have a great responsibility to encourage that education and encourage the hiring of a diverse pool of candidates. And it’s not just women. It’s, you know, ethnic minorities, it’s people from different backgrounds, right?

    We benefit greatly from having people who grew up in rural communities on our team, and urban communities. And I think that difference right there is huge. So just keeping an eye out for those differentiators and people’s backgrounds and really getting to know their backgrounds so that you, you know, we’re investing in America. We’re a small business investment company. So our team has to be a reflection of that and it starts at the top.

    Patrick: I’m personally looking forward to just once the whole pandemic issue passes, and I will really appreciate this more as that human contact again. And I cannot wait to be out there. This has been nice technologically for me being able to reach out and meet people like you remotely like this. So we’re not forced to travel.

    But I think we’re all really going to appreciate being around other people. And I think that the more you can bring to the table, it’s only going to be a net benefit for everybody. Well, let’s not leave our audience hanging out there, okay Heather? Why don’t you tell us, give us your profile of what your ideal client is looking like right now. What are you looking for?

    Valesco’s Ideal Client Profile

    Heather: Well, I told you I wouldn’t bore you with our investment criteria. And I can leave that to the end. But we’re actually looking for entrepreneurs. I think that’s the first and foremost. we’re looking for people who have great ideas, great vision, and they started an awesome company based on a really cool product line or idea. And they’re looking to take their business. That, I don’t know, you’d rate it on a scale from one to 10, you’d rate it a seven, right? Great idea, great product line. Great start on marketing and sales and business development. You know, a solid accounting team, but they need that something to push them to the next level.

    They need somebody to invest in their growth. They need somebody to partner with them to understand them to really relate to them. So we’re looking for those really interesting and unique entrepreneurs, first and foremost. We’re looking for businesses in the three to $15 million EBITDA range in the ten to $100 million revenue range. We hope they’re not distressed when we make our investment in them. We want them to be kind of growth-oriented, really all over the US because we are a small business investment company. And we’re investing in minority and control equity positions.

    So that means that we can pair with entrepreneurs in a variety of different circumstances, whether they want to retain control and they want to really grow this thing and knock the socks off of it, great. We can be a solution for that. If they’re looking to exit and pass the business down to their management team or their family members, we can facilitate that. We can come in and a traditional sense as well and facilitate a buyout if that’s really what’s of interest, but we’re looking to be a good solid solution and partner for that entrepreneur to do whatever he or she is looking to do in the next phase of their life.

    Patrick: Bud’s comments about your investments have been real community-oriented, where you’re looking not just to enhance a portfolio company, you want to enhance the community that that company serves. And I think that’s broader and that really resonated particularly when we first talked was pre-pandemic. What do you see trend-wise in terms of business now for you guys? Is the activity picking up?

    Heather: It is. Thank goodness. We’re so excited. We’ve been really busy through this time just trying to make sure that we set our businesses that we are invested in right now up for success on the backside of all of the things that are happening in the world. But we are seeing the activity pick up. Our business development team, I have to give them a shout out because they are doing excellent work and the fruits of their labor definitely showing up in the activity. We’re interested in making investments this year. We’re engaged in that process. And we will be making investments next year as well. And we’re not slowing down.

    Patrick: Great. Well, Heather, how can our listeners find you?

    Heather: Sure. Well, we are launching a new website, which I’m pretty excited about. So that should be online soon. We have a lot of cool interactive videos to show people who we are. We like to highlight our team, which is really great kind of bringing this whole conversation full circle. We have a video out there that talks about our team and our culture and how we partner with people and how we partner with each other as well as all the things you’d want to know about why you should choose us, but our website is, and you can find us there and maybe check back a couple of times because we’ll have new updates.

    Patrick: Heather, thank you very much for joining us today and I encourage anybody that wants to learn more about just this whole subject, heather is truly an inspirational person to speak with. And it’s been a great time talking to you. Heather, thanks again.

    Heather: Great chatting with you.

  • Adam Cook | How M&A Can Create Value for Shareholders as Well as Customers
    POSTED 11.3.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Adam Cook, managing partner and Chief Investment Officer of Culper Capital Partners. Based in Norwood, New Jersey, Culper Capital Partners invests debt and equity in middle-market companies that seek true partnership solutions that go well beyond the capital deployed. Culper Capital Partners is also a newly minted private equity firm, which is indicative of the growing body of private equity out there.

    “At Culper, we’re investing in middle-market businesses. We focus on things that we can see and touch. We will make debt investments where we’re riding along with a BDC or a traditional lending company, but we really focus in on the platform equity side where we’re putting our own money to work, along with our business partners, to find bespoke opportunities where it’s well beyond the capital deployed,” says Adam.

    We chat about what led Adam to a career in private equity, as well as:

    • Why private equity is often viewed cynically
    • Incentivizing those involved in an M&A deal from a cultural and a value perspective
    • Culper’s ideal profile for an investment target
    • How COVID could affect M&A moving into 2021
    • 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 Adam Cook, managing partner and Chief Investment Officer of Culper Capital Partners.

    Based in Norwood, New Jersey, Culper Capital Partners invests debt and equity in middle-market companies that seek true partnership solutions that go well beyond the capital deployed. So I don’t want to steal Adam’s thunder here. I’m very glad to have him because Culper Capital Partners is a newly-minted private equity firm which is illustrative of the growing body of private equity out there. There is a real healthy market when new firms are emerging. And that’s good. So, Adam, it’s a pleasure to have you. Thank you for joining me today.

    Adam Cook: Thank you so much, Patrick. It’s a pleasure to be with you this afternoon.

    Patrick: Now, before we get into your firm, let’s set the table. Tell us what led you to this part, this point in your career.

    What Led Adam to a Career in Private Equity

    Adam: So, you know, in 1997 or 1998, I remember myself licking customer confirmation envelopes while I was working at an audit firm. And a few folks kind of scurried into the room and went into one of the manager’s offices and then came out about 25 minutes later and grabbed a few of us and said, hey, we’ve got kind of a new assignment for you. And while I can’t talk about the details of the deal, back then it was a very large transaction.

    And they had me working on a part of a team that was basically analyzing what is the present value of an underfunded pension plan would have to be funded at closing as fall day, a rabbis trust, that would have to be created. So I was automatic. I was kind of thrown in out of nowhere into this new universe of M&A, albeit a very specific portion. And I’m not sure how long that transaction went on but I was hooked ever since that time. So stayed in audit for a very short period of my career and then went into M&A and really never looked back.

    Patrick: And so you caught the bug.

    Adam: I call it the bug. Not that there’s anything wrong with audit, but it sure beats licking customer envelopes.

    Patrick: I would consider mergers and acquisitions is probably the most exciting business event out there. I’m sure there are people that really love the IPO world but I think for the larger business community because it happens to so many more people is such a milestone that that’s the big event out there.

    Adam: Yeah, and I’ve been very lucky throughout my career not only to, you know, kind of witness the value that M&A can create, not only for shareholders but also for customers, you know, bringing kind of a smaller target, you know, up to speed from a professional perspective and, you know, different revenue channels and products.

    Giving employees new opportunities, you know, with more opportunities as part of a, you know, larger-scale organizations, but also spent a bunch of time early in my career and throughout the latter part of my M&A career before we’ll get into what we’re going to talk about today in terms of how M&A, you know, shaped a lot of, you know, part of what I’m doing. But also on protecting the downside when a company is in trouble or there is an issue with a business, but it’s got true value.

    There might have been, you know, nothing that management did while the company is in trouble. It could be, you know, a, you know, a catastrophic event, it could be that their products were tied to some commodity that was spiking for a longer period of time and, you know, their product costs were out of control, you know, for macro issues, or it could be management.

    But M&A often serves as a function as well, not only to preserve the true value of a company, but to preserve, you know, jobs that would otherwise go away if consolidation didn’t take place. So, you know, and that portion of my career was certainly rewarding to see what the process could do for, you know, not only the creation of value, but at the employee level. I think sometimes there’s a misnomer that with M&A jobs go away. I saw quite the opposite in terms of kind of the aggregate amount of employment, M&A, allowing, you know, that employment to continue in distressed situations.

    Patrick: Yeah, I can’t agree with you more. I think there’s a cynical view of private equity. It’s summed up in four words, buy low and sell high. The way you bring things down is, the traditional view is well, you’re letting people go, so you’re cutting costs, you’re bringing cost synergies together. That’s not necessarily it. I mean, there are a lot of companies that are well-run, well-managed, but they get to a point, one author called it no man’s land where the management in place can only get so big.

    And then they need another skill set to go to the next level. And you’re not too small to run unnoticed. You get to a size where you got to take another level, another step up, otherwise you’re gonna have a problem. And who better than somebody that’s done that time and time and time again successfully, you know, to hold your hand and bring you there?

    Adam: Yeah. We’ll talk, it’s a good point. We’ll talk about the Glebar story later in the podcast. But when I bought Glebar, and I was also, I was kind of owner-operator in that situation, it wasn’t slash costs. It was quite the opposite, right? Move to a world-class facility, spend millions on capital equipment and building out, you know, that world-class base not only to have a place where our customers could come in and kind of fit the bill for that, but, you know, a nice safe place where our employees could work and feel proud. You know, doubled headcount, right?

    So I think we are certainly very growth-orientated at Culpers. Sure, if there’s waste, you know, I think that you’re robbing the entire company and all the employees that are there, regardless of what that waste is. But, you know, our mantra is to redeploy that waste into, you know, turn that scrap into gold, if you will.

    Patrick: Yeah. Well, you can’t save your way to prosperity is the way I always look at that. Tell us about Culper Capital Partners. And I always like asking people like you just where did you come up with the name? To give us an insight on just the angle you came and tell us a little bit about this organization.

    About Culper Capital Partners

    Adam: So for Culper, we’re investing in, you know, middle-market businesses. We’ll focus on things that we can see and touch. We will make, you know, debt investments where we’re riding along with, you know, whether it’s a BDC or, you know, traditional lending companies where we’ll take, you know, more passive, you know, pieces of debt.

    But really focused in on the platform equity side where we’re putting our own money to work along with our business partners to find bespoke opportunities where, you know, it’s well beyond the capital deployed. If someone’s just looking for capital at a platform investment, we’re probably not the right partner. We are going to be more of, we’re not going to work at the company. So not be management, but we’re going to be more owner-operator than, you know, just strategic advisor. So what does that, you know, what does that mean?

    That means, you know, our team, you know, focused really on industrials. solutions, medical device, health care services, where we could put our M&A experience to work like traditional private equity to find add-on opportunities that will bring arbitrage and create additional revenue channels to sell through our market channel. You know, arbitrage, if you will, product synergies. We are going to evaluate whether the ERP systems are up to date.

    Often in lower middle-market companies, there’s so much low hanging fruit, you know, in that investment and albeit it takes a lot of time. We’re going to build a sales organization to create sales organizations that are measured, tracked, held accountable, are not just looking to maintain existing customer relationships, but to go out and get new ones, to foster new opportunities within your existing customer base as well, to consultative sell so that your customer is getting everything, maximum value out of what you’re providing, right?

    That ROI. So eventually, you know, their products are bought and not sold, right? So I think, you know, kind of our mantra is really, I would say, on average, we’re going to spend about, you know, 40 hours a week collectively as a group where we can add that expertise into an environment where we found a great company with great people and really good leaders, but that we can help professionalize it.

    You know, from a sales perspective, from an infrastructure perspective, you know, to, you know, really have, you know, employees kind of feel like they can grow as enterprise value grows and truly partner with them. Not that there’s anything wrong with the traditional private equity model. But just for us, I think we’re gonna look at two to three portfolio companies at any given point in time.

    I would extremely doubt if it would be more than that from a, if we’re the lead, and really focus on putting those resources in place. We just brought on a medical device expert that’s been in the industry for, you know, 25 to 30 years in leadership positions. He was actually a customer of mine when I was the CEO of Glebar, you know, because we’re, you know, kind of heavily involved in looking at opportunities in the medical device space, right? So we really want to be able to bring much more than that, you know, that check to the table.

    Patrick: It’s got to be real attractive for prospective targets out there, the management where you’re going to make them best of breed. You’re going to get them out there and have them excellent. I think they saying I heard, I’m stealing from somebody else, but nobody wants to buy or subscribe to the second-best software security system out there.

    They want the best. And that’s what you’re specifically offering out there is bringing them to the level, they probably are at a high level already, otherwise, you wouldn’t have an appetite for them. But to get to be that best of breed and stay there comfortably and move at that higher platform, it’s very, very exciting. There’s a great value opportunity that you guys are offering. You mentioned Glebar before. Why don’t you share that experience if that’s a case study that you could share with me?

    Adam’s Experience as Owner/Operator at Glebar

    Adam: Sure. So Glebar, not just because I owned it and ran it, but is truly a gem of a company. When I learned about the company. I said, Wow, what amazing technology. I’m not sure if these folks realize what they really have here. But to be respectful of the old owner, because he made a lot of money. It was run, you know, a bit like a small delegate, you know, versus a world-class organization. While they had such talented people, including the old owner, he’s one of the smartest engineers I’ve ever met to date and he’s 85 years old. And that’s an understatement. They didn’t know the definition of sales.

    It was, you know, if you build it, they will come, if you will. It was, well, this is the way we do things. And it was a whole lot of talking and not a whole lot of listening to the customer. And it was an engineering company. And that’s great. It still remains that intimate engineering company today. But what we really did was kind of turn that into a sales organization where go out and see your customers and consult with them. Become their partner, to where, you know, again, I use the term a lot, where your products are bought, not sold.

    That’s really the value proposition that your customers should demand of you. And we really turned that into a sales organization over time. We also really focused in on the customer and employee experience, right? We moved from, you know, two and a half, if you will, old facilities that were kind of, you know, beaten down, we had to walk parts across the street in the winter storm to, what we considered, you know, it was more indicative of the products that Glebar sold.

    The world-class facility, you know, where employees would feel good about going to, you know, it had world-class filtration, you know, everything was always kept up to from, you know, from a safety perspective, and they were really given the opportunity to thrive. So on day one, you know, we kind of decided, hey, we’re moving, and we did that. We also needed to, you know, play the part, if you will, in terms of, hey, if we’re going to have a fortune 500 customer base and then that level below that, not that we didn’t have smaller customers, but we need to practice what we preach here.

    So instead of telling the customer Hey, you can’t go back there. We’ve got some top-secret thing going on. You know, I think that, you know, we spent a ton of money on, you know, not only new capital equipment of our own, but really mapping out the facility logistically and having it be lean and safe and something where you could be efficient. But where our customers should say, yeah, we should really, you know, not just do business with someone. I don’t even like the word customer. They have to become a trusted partner.

    And I think that’s a, you know, real part of what we did. I think the biggest thing that we did, and certainly, we’re gonna do this at our portfolio companies here at Culper, you have to incentivize people. Not that people aren’t going to work hard for their paycheck. They are, but you need to align them with what you’re trying to do, not only from a dollars and cents perspective, you know, but also from a cultural perspective, a safety perspective, a, you know, an overall value perspective.

    I always often use the phrase, you know, if you’re not adding value anymore and you’re still sitting at your desk, go for a run or whatever you like to do. If you still come back to your desk that day and you don’t have any value, go home. If you don’t have any value to add that day, right? And that’s not because I was trying to be negative, it was a positive thing, right? Meaning, you know, we celebrated failures at Glebar, right? Because if you can’t celebrate failures, you’re never going to be able to take those risks to win. And I think with aligning employee incentives, you know, with where you’re trying to go, is uber important.

    I think the most gratification I got when we sold Glebar to our client, and I still maintain a minority position, was seeing the faces of key employees that participated in that transaction with the look of shock on their face, you know, when you told them, you know, what they were going to see, you know, receive in proceeds. So I think alignment, and not only alignment with your employees, but everyone. Your suppliers and seeing value in everything that you, you know, that you do in that ecosystem of that company that you own.

    Patrick: I’m very pleased that we’re having this on recording. And I’m going to encourage everybody to have a real listen to this. Those steps that you took are absolutely fantastic and very, very thorough. And took a little bit of faith or quite a bit of faith, I can imagine, because these weren’t small capital outlays to get the physical plant put together and everything else lined up.

    But it was great because you can tell clearly that you had it in your heart at your core, that this is the direction we’re going to go. We’re not going to worry about short term outcomes. We’ve got, you know, a long term goal here and I just cannot vision anything not embracing that approach.

    Adam: And I, you know, it’s fun, it’s a different parallel but, you know, I coach jr football and what I tell all the kids all the time is we have a philosophy here and it’s no different in anything else you’re trying to achieve in life, whether it’s business or, you know, being a good partner to your spouse. We’re raising your children but it’s effort, attitude that, you know, that I can attitude, and then the toughness. That doesn’t mean being, you know, brash or abrasive but being able to fight through the, you know, tough times knowing that the sun will come out.

    Patrick: Resilient. Absolutely. Yeah, you’ve got to be there. I mean, absolute words to live by, Adam, tell us what’s your ideal profile for a target now? What are you guys looking for?

    Culper’s Profile for an Investment Target

    Adam: Yeah, I mean, I think it’s a founder-owned business or a second-generation business that truly has a differentiating product, whether it’s manufactured or distributed is that they’re in the second inning, right? So think 20 million bucks a revenue, 4 million of EBDA, but that founder slash owner is saying, Hey, I recognize I’m in the second inning. I’ve done an unbelievable job with this business.

    But not only do I need money, but I need more than that, right? I need someone, you know, and when I say someone, a group of folks who could kind of come in, you know, and build for the future. To say, Wow, I’m listening to these ideas and they make a whole lot of sense. And, you know, I’m gonna roll X percent of my business and you know what, the next time we sell it, if we do sell it, my minority position, it looks like it’s going to be worth more than the entire enterprise value next time. That’s the type of partner I want that is willing to listen.

    And we have to be willing to listen too. I remember at Glebar, I had a 30-day plan 60, 90, 180, 365, three-year five-year and I went in. You know, I sat there and interviewed every single employee. I actually went to my first customer visit in Ireland and after we landed after a nine-hour flight, went directly to a company and actually pointed to a poster and said, Hey, what’s that? I said, that’s what you do, sir. I had no idea what even the picture was. Talk about humbling.

    Alright, so you have to be willing to listen. So those plans that I had put together after I went on those customer visits, did a lot of listening not only to customers but our employees and suppliers alike. Three months later, pretty much 75% of those plans that I put together had materially changed, right? So I, you know, I think that there really needs to be, you know, that openness there. And hey, look, you know, I think Glebar, for example, I got it from the second inning to the bottom of the fourth.

    And I think the next fire and that bottom of the fourth from, and this is not being boastful, but I think was pretty impressive. It’s an unbelievable company today that our clients going to do phenomenal with. But, you know, my belief as well is that, you know, you should only own a business as long as you are going to continue to drive that value. And you know what, there probably comes another point where, you know, I removed myself as CEO, you know, last June because I said to myself, okay, now is the time to bring in that professional CEO, okay?

    Which I did from Stryker, a gentleman from Stryker, but then in addition to that, we really needed to start focusing in on M&A which was my background and we went out and did an add on. That is, you know, really impactful for the business. Had we not done that, had I not recognized that that was time, we probably wouldn’t have been able to go out and get that deal done.

    There’ll come a point, you know, because we were a change agent in Glebar when we came in where we said, hey, look, we need a new fresh set of eyes. This thing now is a potential for it to go from, we got it from, you know, C to F, well, somebody else needs to come in now with a whole new, you know, thought process and, you know, disciplines, if you will, to get it from F to S. And I really do believe that. So we’ll never stand in the way of a company’s growth or their potential.

    Patrick: Outstanding. If you could, share with me your experience with rep and warranty insurance. Good, bad or indifferent if applicable?

    Adam: You know, so as I was thinking about this podcast and thinking of rep and warranty insurance, I thought back to approximately about 15 years ago, I forgot where I was and what I was doing, but I was talking about a rather large deal. And, you know, hearing more about rep, warranty insurance and back then, it was for really large transactions. And I remember I wrote a one-page article, I forgot where it was published, but M&A insurance with a big, you know, exclamation point. I probably still have it at home.

    It was probably very, very generic and, you know, probably didn’t get a lot of reads. But, you know, now it’s completely changed the landscape of transactions. I mean, we’re working on a deal now with enterprise value of, you know, 30 to 40 million and rep and warranty insurance is available. So, to me, why is it important to the seller? I think that, you know, it obviously limits the amount of, you know, escrow baskets that they have to, you know, put up for a year or more, so that’s great.

    They get to, you know, they get to extrapolate more cash upfront without having their money hung up in an escrow account, earning little to nothing, and get to go ahead and invest that. I think for the seller, certainly, you know, it provides risk mitigation. But I think more importantly than that, for the seller, I think it further illustrates, you know, that you’ve got to do your diligence, right. So the insurance provider is not going to underwrite the transaction unless you really dive deep in the areas that they’re going to give you protection for.

    So I think it’s really focused buyers, if you will, I should say, to really dive deep because the insurance companies require it. Not that they didn’t dive deep before but I think it’s further risk mitigation as it relates and correlates to purchase price. So I think it’s changed, you know, discipline a bit, and I think it clearly, you know, helps the seller in terms of, you know, that cash, you know, that cash being available. But, you know, that offers a level of protection to the buyer that otherwise wouldn’t be available, especially the lower middle market, folks.

    Patrick: Now, since that first piece you wrote 15 years ago, there’s been a lot of change. It’s almost as much change as online businesses. I mean, night and day. I think it did not get a lot of traction because the cost was very big in the early days. And also the coverage was very, very narrow. For example, in Silicon Valley, you couldn’t get past first base on rep and warranty because it excluded intellectual property reps.

    So it accelerates the process. And I think it, particularly when you’re trying to attract management over from the target over, avoiding hammering them into the ground over terms because you have a lot more leverage is really a good long term strategy. And you were talking about all the great things that you do for quality of life and trying to get people all on board with you. It starts, it can start there with management, and it’s just one way that eases it through.

    And I think what I’m very happy about for us is that it was a product that was reserved for the larger middle-market deals north of 100 million dollars transaction value. And there are so many owners and founders that don’t get to 100 million but they get to 20 and 30 million and they could really benefit from this. And that’s the one thing has happened in the last about 16 months is that a number of insurance carriers come in and they’re targeting those sub $50 million transaction value deals.

    They’re coming in with really competitive rates, their broad coverage, just as broad as larger deals. And the eligibility standards are easier. Now, Adam, as we’re in this period of the year, COVID-19 is still around, we were stumbling in trying to get our legs under us to open up a little more full and we’re having some roadblocks here. How do you see from your perspective, either COVID or non-COVID on the future M&A for, let’s say, you know, through the end of 2020 into 2021.

    M&A Primes for a Big Comeback

    Adam: Look, I mean, I think in the intermediate term, M&A is going to come back in a big way. I think, you know, M&A is obviously been hot for so long. But, you know, let’s face it, there’s going to be businesses that are struggling to come out of COVID on the other side, particularly lower middle market businesses where I think consolidation is going to be more important than ever before to save a lot of these businesses.

    So the intermediate-term, I think, you know, we see a volume, you know, that, you know, that matches 19 or even higher, okay? I think that in the short term, I think it was Blackstone, I saw someone reference the other day about M&A is, you know, gonna continue to slow until people could shake hands again. I believe that.

    You know, we’re the lead investor. I’m not doing a deal unless I could look someone in the eye. And I think that’s extremely important. So I think in the short term, people gonna have to get creative. You’re gonna have to travel safely, to be able to go, you know, walk the floor, see how the culture is at the company. How do employees look when they’re working?

    You know, all of these things are really, really important that go well beyond just the dollars and cents that you can see in a spreadsheet doing diligence or on a Zoom call where you can’t, you know, read body language. So I think people are going to have to adapt. I think sellers are going to have to understand that warp speed closings, you know, in 30 to 60 days, they’re probably not going to happen. Maybe for add ons, but, you know, service providers are going to need more time.

    They’re going to have to be able to get there and coordinate travel safely. You know, so that kind of new normal is going to exist until, you know, COVID is under control, in my opinion. But in the intermediate and long term, I think it comes back. You know, it comes back in a very, very big way. And I think it’s going to be a necessary tool to save a lot of these companies that at no fault of their own or in, you know, are in, you know, painful positions.

    Patrick: I can’t tell you how much I appreciate all you’ve shared with us today because it’s been very, very helpful. I’m going to encourage our listeners, I think they’re going to do it because you’re, it was enjoyable enough listening to this the first time to repeat this. Adam, how can our listeners find you?

    Adam: Best way to find us is to go to I think there’s, you know, it tells our story there. It tells a little bit about who we are and what our approach is and, you know, Culper’s tied basically to the Revolutionary War. And that’s really the story is kind of, we want to, not that it has any tie the Revolutionary War, but we want to revolutionize the way that, you know, the meaning of private equity and why, you know, why deals get done, you know, beyond just, you know, multiple on invested capital or rate of return. Not that that’s not important, it is but there’s much more to it.

    Patrick: Well, focusing on the basics of business is surprising how it can be revolutionary, particularly when you’ve got an engineering-centric thought process now. So I really encourage folks to go and check out Culper Capital. Adam, thank you very much. And it was a pleasure speaking with you. Thanks again.

    Adam: Thank you, Patrick. Appreciate the opportunity, sir.

  • Mark Addison | From a $30M Exit Offer to $100M
    POSTED 10.20.20 M&A Masters Podcast

    What motivates Mark Addison, CEO of X He’s seen too many entrepreneurs, especially first-timers leave money on the table when they exit.

    His firm helps optimize key valuation drivers during M&A negotiations to maximize the money owners and founders take home.

    In one case, he and his team were able to reengineer a $30 million offer… into a $100 million offer. We talk about the three things they did to make it happen and the audits they perform on clients, as well as…

    • The key metrics that predict higher valuations
    • Acquisition trends with PE firms you should be watching
    • Two insurance products you should have in place for any deal
    • The biggest misconception many founders hang on to
    • 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 Mark Addison, CEO of X Rocket provides valuation engineering for M&A exits.

    They optimize the key valuation drivers used in M&A negotiations to prepare companies for larger exits. Now, while personally, my focus is providing a clean exit for owners and founders, Mark’s goal is to get larger exits, which makes even more people happy. So I’m pleased to have Mark join me today. Mark, welcome to the podcast.

    Mark Addison: Thank you, Patrick. Enjoy being here.

    Patrick:  Now before we get into X Rocket and value optimization and all that fun stuff, and again, this is targeted toward technology companies, both hardware, software, etc. Let’s set the table and tell us what got you to this point in your career.

    Mark: Well, depending on how far back you want to go, a couple decades ago, I started as a data quad for SRI, that’s out of Stanford. And I was doing multivariate statistical analyses. It was sort of a precursor to what we call data science today. And I got swept up in the technology. And so I had an early career win where I help the online chat community go to IPO. I’ve co-founded three companies.

    One, a wine importer and direct consumer retailer. Two, a tech marketing company, which is the core of my business. And then three, the M&A business, which we’re talking about today. You know, I’ve been motivated, because I’ve seen firsthand entrepreneurs pouring their sweat and equity and tears and passions and lives into building companies. And then I’ve also seen entrepreneurs exit those companies and sometimes leave a lot of money on the table.

    You know, helping people understand the difference between financial valuation, which is a multiple of EBITDA versus strategic valuation is, which is really where you get the extra value. You know, we recently helped a CEO reengineer a company, they had a $30 million exit offer. And we reengineered that into more than 100 million dollar exit offer. So that was really where we got, where I got to today, where we decided to double down and offer this kind of hands-on consulting to help companies and investors increase valuation. That’s where we are.

    Patrick: Every company in Silicon Valley is for sale. And if you’re in technology, you’re not limited to Silicon Valley. You’re around the world and you’re ideally, looking for an exit. So owners and founders have an eye on an eventual exit, that’s in addition to what they’re already doing. Let’s talk about the difference from what owners and founders expect in reality. Why should they engage specialists to best position them for a larger exit?

    You Want to Be the Worst-Kept Secret

    Mark: And I think early-stage investors will probably tell founders, hey, don’t worry about the exit, just focus on building the company. If you build it, it will come. And, you know, that’s certainly the ethos among a lot of more engineering-led companies, just build the technology and the rest will happen. I think as companies mature, they start to realize that there is more to it.

    And, you know, I think companies, most Silicon Valley companies go through some stages and so there’s usually a founder, CEO, who’s usually an engineer and he’s very product-driven and they’re just trying to find, you know, market fit and engineer the product. And then oftentimes, sometimes it’s the same CEO, but oftentimes, there’s a new CEO who’s going to be in charge of the growth and the scaling. And then as they get even more mature, and getting starting to approach exit, sometimes you’ll see a third tier of CEO come in.

    I call him the Exit CEO and that’s the CEO who’s got a big Rolodex of contacts and that’s the CEO who understands strategic valuation and that’s the CEO who starts to really look at the operations and ready the company for exit. I think this sort of this dichotomy that you are asking about, you know, what’s the founder’s expectations versus the reality. When you start a company, you know, at the seed round, you think you’re just gonna build a cool technology and the world is going to beat its way to your door.

    And, you know, seven to 10 years later when you’re on your C and D round, it’s just a different animal and you start to realize that wow, you know, I have to now be a sector leader and a thought leader. And it’s in, this sector that I started this technology in seven years ago, I invented the technology. but now it’s a noisy, crowded market sector because, you know, I proved that there was money to be made there, right?

    Think about AI, right? Think about early startups there. Now it’s a very noisy market. So now, the reality is, you have to distinguish yourself from all the other competition out there and you have to rise above that noise and you have to establish yourself as a sector leader so that you get the acquisition offer so that you don’t become, you know, the best-kept secret. You don’t want to be the best-kept secret. You want to be the worst-kept secret.

    Patrick: You mentioned when we talked before about there are some key valuation drivers or things that specifically can be done to drive value up. Let’s touch on a couple of those.

    Mark: Yeah, so one of the things that we did when we set up this M&A business, X Rocket, is we interviewed a whole bunch of M&A bankers and brokers and we asked them, What are the key metrics that predict best towards higher valuations? And what we were hoping to do was create this, literally an algorithm that we could just, you know, hammer down into a science, and, it’s unfortunately, not quite, it’s still a little more of an art than it is a science.

    But there are certain metrics, we call them levers that buyers pay attention to, and they’re things like, you know, operational levers and sales levers and marketing levers and customer levers. And we built a proprietary audit around those. So we walk companies through that valuation audit to highlight where the potential weak spots are and where the opportunities are to increase the valuation.

    Patrick: Well, you mentioned before, when you’re talking about one of your success stories there where you took a company that had an exit at 30 million, and you tripled that with the CEO with what you guys did. Let’s talk about that in little bit more detail. And, you know, give us a couple case studies on where X Rocket came in and literally changed the game for the client.

    Finding the Valuation

    Mark: I can give you one case study in healthcare because it’s like textbook, right? So small company, they built onboarding software for physical therapists. The company was 25 years old, founded by three doctors. They were ready to move on and sell. They actually originally came to us for marketing help and put that on hold because they got an acquisition offer. The acquisition offer failed in due diligence, right? Per the conversation that we had earlier and I’ll explain some of the reasons why.

    They came back to us and said, Hey, we get it now, right? We get it that there’s stuff you need to do to attract an offer and survive the due diligence and then attract a good offer. So we set and we looked at the business and this is where it’s easier for us as outside consultants to kind of see the business. They were trying to figure out how they were going to improve the valuation of their onboarding software which ran on a tablet and was sold to physical therapists.

    And that was all fine and dandy. But we discovered, like, literally in the first week, that they had this database with some 22 million healthcare records. In the healthcare world, it’s called morbidities and modalities and outcomes, right? And so morbidities is what’s wrong with the patient. Why’d they come in to visit the doctor? Modalities is what did the doctor do to make them better? Then outcomes is, you know, what metrics did you measure to say that the patient got better?

    And how many sessions did it take and things like that. And what we discovered was insurance companies were starting to come to this company asking to look at that data because they could better underwrite insurance deals. They could better figure out that, oh, you know, if the patient is a 24-year-old athlete, and they’ve got a torn Achilles, it’s this many sessions to get them better. If it’s an 80-year-old sedentary adult, with a torn Achilles, it’s a whole different, you know, sort of therapy, right? And a whole different cost structure to that.

    So the lightbulb went off in our head that, Hey, you guys aren’t a piece of onboarding software for physical therapists, you’re a data analytics company. right? That’s the nugget. That’s the valuation. That’s the big pot, right? And so then we started to do all the things to position the company as a data analytics company. Like we completely wipe the website, right? Because the website was selling to physical therapists. And so we just wiped it clean and stuffed it full of keywords around healthcare and data analytics and predictive data carrier analytics and things like that.

    The sales pipeline, we need to keep that going. So we hired an on-demand sales team to just do a bunch of digital sales and stuff that sales pipelines for that look good. We went through all of the valuation metrics, the valuation levers, and sort of one by one said, How do we optimize this, right? And so our house was tidy and clean, squeaky clean, right? And they were going to survive due diligence this time, because, you know, they knew, they learned. But then the big nugget that unlocked the value was how you position the company. What’s the real valuation of the company?

    So that’s one example. And so within nine months, Carlyle Group came knocking on the door and they were looking to do a roll up and they needed a healthcare data analytics piece and this company fit the bill perfectly. And there we go. So it was a textbook example of going from a failed acquisition and failed due diligence and probably, lower than anticipated valuation to more a successful offer that kind of just, you know, game-changing, repositioning.

    But more often than not, there is a strategic nugget that’s sitting right underneath the founders’ noses. They just don’t recognize it for the value that it is because they’re running the company, they’re fighting the fires, the daily fires. And it’s so much easier for us as outside consultants to kind of hover it 30,000 feet and look in on the business and go, Okay, I see it. It’s plain as day. It’s right here.

    So the second example, it was an ecommerce company, the one that we took from 30 million to over 100 million. That was pretty interesting because it was a founder-led company where the founder actually had been pushed aside by the investors who had brought in a new CEO with a specific mission of getting the company sold. That CEO did bring in a bid. The board rejected the bid as being far too low. The board rejected both the bid and that CEO.

    Founder CEO comes back into the hot seat and now, how do we get the company sold? How do we increase the valuation? So I think we did three things really, really well. One, in the absence of any branding and marketing under that other CEO, things that really languished a bit and the competitor’s sales guys were taking advantage of it. So they were putting FUD in the marketplace that, hey, things aren’t going so so well.

    And do you really want to hitch your ride on to the ecommerce company? So that was either outright killing deals or slowing them. So that’s one where we had to go in and tell the market that no, we’re here to stay and we’re here for real. Two, was on the positioning. In the ecommerce space, there’s open-source software available that’s free and then there’s some very large competitors that focus on the mega-market. And this company is focused on the mid-market but really wasn’t comfortable there.

    The sales guys were trying to go after deals both higher and lower. And we decided no, we’re gonna own the med market there. It’s a very respectable market sector to own. We double down on that, we really built the reputation around we serve mid-market retailers. And that served us really well. And then the third was around this CEO, he’s very charismatic. He was an underutilized asset. To the first point about rebuilding the brand reputation, what we did was we trotted the CEO out and we got him a lot of visibility.

    And we made him a spokesperson for that sector, for the ecommerce sector. He was a natural for it and he had really good content to share. And we got him, you know, guest columns in media and speaking opportunities and things like that. And we really built him up so he was a thought leader and so that the company by association, became a leader in the sector and therefore attractive to M&A buyers.

    Patrick: See now I’ll show off my age, but what you do with the CEO is you almost, you turn them into Lee Iacocca from Chrysler, where people weren’t buying Chryslers, they were buying Lee Iacocca. And that, you know, that’s one of those value propositions that you can bring in where you’re not necessarily changing the culture and making people within a company forget everything they did. You’re just enhancing them and opening them up to new opportunities.

    Mark: Yeah, I mean, our case, our CEO was a little more charismatic. But yeah, people sometimes will buy into that, you know, that credibility and that story,

    Patrick: Well, now the reason why I wanted to talk to you is not only because of what X Rocket can do for owners and founders of companies but also you’ve got a whole swath of mid-market private equity firms that have been buying these companies. They’ve been cleaning them up. They’ve been doing what they can.

    But their challenge now is they need to find a bigger buyer. And now it’s not just EBITDA that you can bring to the table, you can bring some other things that can really enhance the value because that’s the purpose of private equity, you know, find bigger buyers. And the market for bigger buyers is actually expanding because, you know, the traditional issue was while you would try to take your company IPO.

    If you don’t do the IPO, then find a bigger private equity company or find a strategic. And there’s a whole new class of strategic acquirers out there’s facts, and they have nine and 10 figures to spend. So there’s definitely a market for mid-market, lower middle-market private equity firms to stage up their babies to get them for bigger exits. So let’s talk about what you could do for those types of candidates.

    Bigger Exits for Mid Market and Lower Mid Market

    Mark: Yeah, well, as you said, the PE model is buy low, sell high, right? And do something in between to make the price justify the higher price. So I think among the mid-market, PE’s, what’s interesting is they’re buying inherently smaller companies to begin with. So those smaller companies, they don’t have 5000 employees and a bunch of fat, right?

    And so the classic PE model of buying three companies, consolidating operations, getting rid of all the HR directors and all the redundant positions to cut costs and add value, that’s just not quite as effective. I think at the mid-market, we have to find ways to actually add value, not just subtract costs. And that’s really where the X Rocket methodology comes in. We look at how to add value and create value beyond just the EBITDA and find strategic value that the M&A buyer is going to recognize as strategic value.

    Patrick: Specifically, what some of the things you can do? You were talking about creating thought leadership and so forth. Let’s talk about either scalability marketing, what are some of those levers that you could bring in because the private equities, they are outside of the portfolio, but they’re not that far outside, and a lot of them are probably embedded with their portfolio company so they don’t have that outside view. So let’s talk about that.

    Mark: Yeah. Well, so part of it is being able to scale this. So I know that there are some PE firms that will put in house staff into the portfolio companies to help with certain key aspects. But that’s not a particularly scalable model because you can only put your in house people into so many companies. So one is just scalability, we can come in from the outside. Two is that perspective that you just talked about. Coming in, understanding the market dynamics and seeing the business, you know, sort of, for what it is and figuring out where the strategic valuation is the other one. And then the rest is basically just implementing, right?

    So pulling the levers. So you can have a wonderful idea for, you know, improving the strategic valuation, but then you got to go get it done. And so for example, the case study that we mentioned in the healthcare company, that was textbook, but it wasn’t just going, Oh, yeah, it’s just the database, stupid. Just do that, right?

    And we had to do all the other things to make sure that that was, in fact, the nugget that the company was identified as and that the company could be discovered around and pumping up the sales pipeline and redoing the website so that it was a discoverable company. And in that case, we also did trot out the co-founders because we found out that they were scientists and they were co-authors of some 100 or so of these peer-reviewed medical journal articles. I mean, the real deal, right? Not just a contributor article to Forbes but, you know, a peer-reviewed medical journal article.

    And they were co-authors. And nobody knew that, right? So we wanted to shine the spotlight that, hey, this company, and therefore the data in this database, is real science from real doctors, and therefore really meaningful information. So a lot of it is, you know,  not just having the idea, not just educating the portfolio companies on what strategic valuation is and then having the perspective to find where the strategic valuation is, but then also turning that into real valuation that an outside buyer can recognize.

    Patrick: Now I’ve failed to mention also, and I apologize for this, but also you just released an article connected to our podcast notes here, but there’s another source of strategic buyers out there. Unicorns. Let’s talk about the growth real quick just in terms of pure number. Our audience here already knows that a unicorn is a privately held company with a valuation of a billion dollars or greater. Mark, you just took a headcount on them. Where are we standing now with that?

    Mark: We are standing at 603 unicorns, which means they are not nearly as special as they used to be, right? You can find a unicorn in any forest now. Not just the magic forests.

    Patrick: There’s another bigger buyer for you out there. Mark, let’s talk about, give us a quick profile, who’s your ideal client?

    X Rocket’s Ideal Client Profile

    Mark: So the ideal client for us, as you might gather is a company that’s maybe one to two years away from considering M&A. And this is important because a lot of companies wait a little too long. And this is what was borne out when we did all those interviews with the M&A brokers and the M&A investors, bankers. They love our model, obviously, because higher valuation means, you know, bigger exits for them. But they also see the frustration.

    By the time you’re talking to that M&A broker, they are preparing the two-sheet, you know, the two-page executive overview and they’re shopping your company to potential buyers, right? And a lot of these valuation increases, it’s too late, right? It’s too late to implement these things. It’s too late to clean up your books if your due diligence isn’t all neat and tidy. It’s too late to rebrand the company, right? It’s too late to make your CEO a thought leader and a sector leader.

    You can’t just do that in, you know, a week, right? So our ideal buyer is one to two years away from thinking about bringing in the M&A broker because that way we can work on all of these, the valuation levers that we uncover in our valuation audit. The other ideal client working revenue model, science experiments, as we call them, are very hard to place. They tend to be one-off, right? A certain strategic buyer needs that specific technology, but there’s usually one buyer for that particular technology.

    And what we’re trying to do is create competition among potential buyers for companies. So a working revenue model and not a science-driven. And then an under-marketed company, right? Per the discussion that we had a lot of times or earlier, a lot of times startups these days are engineering lead companies where they really focus on the product and the product-market fit. And, you know, or on scaling the growth and they really haven’t put a lot of attention to the brand.

    And so those under-marketed companies have a huge potential to increase valuation. And what we try to educate founders on is that, you know, if you’re selling your company for some multiple over EBITDA, you can negotiate that multiple, but it’s going to be within a certain range that is borne out by competitors. So buyers go out there, and whether it’s the ecommerce sector or the healthcare sector or whatever, there is a range of multiples over EBITDA that buyers typically buy at.

    And you can be on the low end of that range of the high end of the range, but it’s a pretty narrow range for negotiation. You’re leaving money on the table if you’re not getting strategic valuation layered on top of your financial evaluation. If you’re looking at selling your company, if you’re looking at increasing your revenue because you think you’re going to get seven times EBITDA as your multiple on sale and you’re going to be focused on that, that is good.

    But if that’s all you’re going to get the company sold far, you’re leaving money on the table. You need to get strategic valuation and that is by being a sector leader. That is by having competition among buyers. They want you and only you. There’s a great quote I have, we work with a lot of security companies and there’s a sales guy, I’ll never forget. He goes, Mark, nobody wants to buy the second-best security technology. There’s no market for that. There’s only a market for the most best.

    Patrick: Excellent, excellent. Well now you’re with the M&A and I’m not sure if you’ve had direct experience with us but have, tell me about any experience you or your clients have had with the M&A transaction insurance rep and warranty, or views with insurance at all.

    Directors and Officers Insurance 

    Mark: Yeah, rep and warranty, especially what you do, Patrick is I think underutilized. I don’t have any direct experience with it because I think it’s underutilized. My experience is with D&O insurance, directors and officers insurance, and that, I’m just in general, a big believer in have good insurance because I think it’s a sign of just a well-run company. But especially to D&O insurance, when you’re trying to recruit board members, you have to have D&O insurance in place because, you know, board members, they tend to be wealthy investors, which means they have assets that they need to protect.

    And they might really love your company and might really want to come onto the board and really want to help you out but it’s just not worth the risk to them if you haven’t bought a D&O insurance policy to protect their assets because now they’re basically signing their assets to your company. And if, and, you know, people who go to court usually look for the deep pockets. And if your potential director is one of those deep pockets, you better have insurance to protect them.

    Patrick: Yeah, I think it’s important to know that a lot of times the facilities that are providing insurance for these companies, they have commercial insurance and the benefits insurance and so forth. They overlook D&O or they don’t have the capacity or the bandwidth to provide D&O. They go elsewhere for that. I think it’s very, very important.

    It gets overlooked that, you know, not only if you want to attract good board members, but if you’re a seller and you’ve got a tight group of shareholders, you’ll still need a D&O policy because your buyer is going to require you to have it because the buyer doesn’t want past lawsuits against the former owners to be brought when they take over the company.

    Mark: Yep, yep. They don’t want a skeleton in the closet to come out and cost them a whole lot of money.

    Patrick: Oh, yeah. Then we were involved in a deal once and I can tell you where we had the widow of a founder that passed away and, you know, we processed the deal, they opted not to get insurance. But within about a week after the deal closed the news about the deal was in the LA Times and how the widow was due to get her half of the money, which is about $60 million. Out of the woodwork, wife number one showed up and widow number one, you know, we were looking around. We had never heard of this. So it does happen.

    Mark: Yeah. And the rep and warranty, from how I understand how you’ve described it to me, I mean, that’s a no brainer because that means that the seller will be able to take more money out of escrow rather than leaving it in escrow to effectively be a bond against, you know, unforeseen stuff that could come up later on.

    Patrick: Exactly. Within the purchase and sale agreement, the seller puts down a number of disclosures about the company, the financials and everything, the buyer performs due diligence on those to ensure they’re accurate and within the agreement, it’s, there’s an indemnification clause that says essentially, if the buyer suffers a financial loss as a result of those seller’s reps being inaccurate, the buyer contractually can claw back a certain amount of funds or all the proceeds from the seller.

    So the seller has the sort of Damocles hanging over them because there could be something out there unknown to the seller, the seller has no control over after closing, and saying the buyer will hold them accountable.

    Well, rep and warranty is an insurance policy that literally steps in between the buyer and the seller, steps in the seller’s shoes and says to the buyer, if you suffer financial loss, we the insurance company will pay you your loss. Show us the loss, we will pay you. And if you’ve got an insurance company stepping in, there’s little or no need for the buyer to withhold funds in an escrow. So seller not only gets more cash at closing because it’s not held up in escrow but they don’t have this huge indemnity obligation that’s going to be stalking them for years after closing.

    And so they get quality of life, free of fear and everything. And the buyer, they’re assured that if something does happen, they can collect. And the beautiful thing is, I will tell you as an insurance person, price is a non-issue with rep and warranty. I know people might not think that. But here’s the thing, if you’re the buyer and the policyholder is the buyer of the company, okay? The seller will gladly eagerly pay the premium so the buyer is protected. Because if the buyer is protected, there’s no escrow. So buyer, you’re getting this great protection and somebody else is paying the bill. I mean inside it.

    Mark: Well, I mentioned earlier that more companies than you think fail due diligence and it’s not because there was something inherently wrong with the company, it’s because the buyer got skittish. And when you’re in due diligence, you’ve got lawyers, right? And the lawyers don’t get all passionate and excited about technology. They’re paid to find, you know, they’re paid to figure out well, could there be a widow number two that could materialize on the seeing? What happens if so and so dies?

    They come up with all kinds, that’s what they’re paid to do. And so buyers tend to be really skittish, and I can imagine that when the policy is in place, they can just relax, those lawyers can sign off and the deal can get done. And, you know, as you know, from deals, time is your enemy, right? So the faster you can close the better off you are because the longer that deal lingers, the more opportunity there is for something to go sideways.

    Patrick: Mark, how can our listeners find you?

    Mark: Two ways. Our website is And my email address is m.addison with two D’s

    Patrick: Well is outstanding. And Mark, really appreciate this because that’s what we’re trying to do is find ways to add value that’s just not on the books. And here’s the nice thing, if you engage an organization like X Rocket, okay, not every firm out there is doing this. So you’re going to have a competitive advantage by engaging Mark. And I’ll tell you, it doesn’t hurt just having a conversation. So Mark, thank you very much for joining us today.

    Mark: Patrick, thank you so much for having me here. I enjoyed this conversation. Always good to talk to you.

  • Mark Gartner | Turning Targets Into Acquisitions
    POSTED 10.6.20 M&A Masters Podcast

    Mark Gartner is head of investment development at private equity firm ClearLight Partners LLC, which is dedicated to the lower middle market.

    Over his years in the industry, he’s seen a sea change in how PE firms go after potential targets, from “smiling and dialing” to using CRMs and data to guide their strategy.

    He talks about other elements of his approach to potential acquisitions, including how he always has a value proposition in mind when making contact.

    Part of that strategy derives from the fact that many of the ClearLight team have actually run companies and know the reality of operating a business – they’re not investors working in a vacuum.

    We talk about that, as well as…

    • Why 75% of companies utilize rep and warranty insurance
    • The reason they focus on lower middle market companies
    • The ideal target profile they’ve identified – and how it’s evolved over time
    • Where he and his partners see the greatest opportunity right now
    • 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 Mark Gartner, head of business development at ClearLight Partners.

    Based in Newport Beach, California, ClearLight Partners is a long-established private equity firm dedicated to the lower middle market. And at the expense of showing my bias, I would say there are fewer places on this planet that are more beautiful than Newport Beach, California to have your office situated. So, Mark, I envy where you are. Welcome to the podcast. Thanks for joining me today.

    Mark Gartner: Yeah, pleasure to be here. Thanks, Patrick.

    Patrick: Now, before we get into ClearLight, let’s set the table. Tell us what led you to this point in your career?

    How Mark Got to This Point in His Career

    Mark: Yeah, good question. As I look back, I would point to a series of decisions that all seemed like good ideas at the time. I would say in most cases they were. But I started off in investment banking, like a lot of folks who get into private equity, first with a boutique out of Memphis, Tennessee, and really valued that experience working for a firm called Morgan Keegan, which a while ago now got bought by Raymond James. So fewer people are familiar with the Morgan Keegan name, but had a wonderful experience there. And that was really my exposure to the m&a process.

    And then I joined a firm most people are not familiar with called Houlihan Lokey, their industrials group and focus on plastics and packaging transactions to kind of round out almost three years as an investment banking analyst. And then I was looking for a buy-side job and I interviewed with a lot of firms, mostly in Chicago, which was where I was at the time. And at one point, I think I’d cold emailed ClearLight, not knowing anything about the firm, not knowing anything about Newport Beach. I’m actually from Cincinnati, Ohio originally. And they responded, so every now and then a cold email works, or it did back in the day. This is back in 2007.

    Patrick: It was meant to be.

    Mark: It was meant to be, yeah. And they brought me in for an interview to be part of this proprietary deal sourcing program they wanted to develop. They were looking to recruit ex-investment banking analysts who could sort of eat what they killed and really be on the phones trying to source transactions by calling business owners directly and then work on those deals once you kind of brought them in house. And to me, that was very entrepreneurially exciting at that stage of my career to kind of live the full lifecycle of a private equity transaction.

    And, frankly, everything that they promised that program would be for the most part became true. And so I was at ClearLight for four and a half years, was kind of romanced away to another fund up in the Bay Area for two and a half years to focus on building them a deal sourcing program, and then was welcomed back to ClearLight in 2014 for my second tour of duty, so to speak. And, you know, I’ve been focused since that time on building, you know, what we think is a high-functioning, you know, institutional-grade deal sourcing engine to bring in as many deals that fit our criteria as possible.

    Patrick: Yeah, that’s part of the magic there is, you’ve got these great theories on what you can do with targets is identifying the targets, and then, you know, making a good enough case for that target to want to be acquired.

    Mark: Yeah, that’s a really good point. And I think what that kind of touches on a little bit, or maybe I’ll just touch on it, is the evolution of how the sourcing strategy has changed. You know, we started out looking for proprietary deals, you know, just kind of smiling and dialing. And at that point, this is probably 13,14 years ago, you could do that because not as many funds were doing it. Then business owners started getting bombarded with calls and they just kind of stopped returning phone calls. So the strategy had to pivot.

    And then we switched to kind of intermediary coverage, you know, getting to know all the relevant investment bankers that were producing deal flow that we found interesting, and there’s over 1000 of those entities out there. And so that was a very real process to get up to speed on the population of intermediaries out there, and, you know, adopting a CRM and using data to help, you know, guide our activities. So that was a very interesting exercise. And then, you know, other funds adopted that strategy as well. And so one of the things you alluded to is making the case for a company or an industry.

    And I think one of the really exciting strategies that’s working today is defining a thesis for a given industry, sort of calling your shot, if you will, and then going out and approaching companies in a more intelligent way, in a very purposeful way, given that you’ve already said I want to be in this space. You’re a company whose door I’m knocking on quite intentionally. Would you like to talk about a deal? And we’ve discovered that actually works pretty well.

    Patrick: At the risk of getting ahead of ourselves here, let’s back up a little bit and let’s talk about ClearLight. And then we can go into that. You know, with ClearLight, tell me how it was founded and then describe the focus that they have and you have because we’re both in the same area here. We’re looking at the lower middle market as opposed to middle market.

    ClearLight Partners’ Unique Origin Story

    Mark: Yeah, great. Yeah, so ClearLight’s origin story is pretty unique, I think. You know, we actually grew out of an operating company, there’s only so many funds that can lay claim to that. This is about 20 years ago, our founder, was running a residential security business on behalf of a Japanese publicly-traded company who had bought the security company in Orange County, as it turns out, and it was effectively a turnaround situation.

    Our founder had advised the parent company previously, as an attorney, incidentally, had learned to speak fluent Japanese in his spare time in between undergrad and law school and actually studied, I believe, in Tokyo and was able to nurture on that proficiency in the Japanese language.

    And so he earned the trust of this Japanese entity to run their US operation. And so I think at the ripe age of 31, despite a career in law, he was installed as CEO of this home security company called Westech, Westech Security Group, which, if I understand correctly, was around 35 million of revenue, was on the verge of losing money and it was his task to turn it around. And over a 15-year period through a combination of organic growth and acquisition, he got it up to maybe 250 million of revenue.

    And it’s sold to a strategic buyer for about $300 million. And rather than send the money, the proceeds money, back to Tokyo, he was entrusted with that capital to continue investing in other US-based businesses via a private equity structure. And so ClearLight was established in the year 2000, with that inaugural fund of 300 million, and we’ve subsequently raised a second and a third fund, each 300 million, with every dollar we’ve invested to date coming from that Japanese entity.

    And so having this sort of single LP structure, kind of, in a sense, makes us a hybrid between, say, a family office and a private equity fund in the sense that we can invest over a longer time horizon if need be because we’re not subjected to the fundraising cycle. Yet we are staffed, motivated, incentivized, structured, to deploy capital routinely, you know, not by hobby, which is, unfortunately, how family offices have developed a reputation. So it’s been really the best of both worlds. And they’ve been an amazing partner, you know, for now, over 20 years.

    Patrick: Well, and it speaks to the success because there’s just the trust and, you know, and that’s how these successful funds create lead to other funds is you’ve got very happy investors that are, you know, they trusted you with a little bit of money and now they can trust you with more money and they just keep rolling it over.

    Mark: Yep. That’s a great way to think about it.

    Patrick: Yeah. And so tell me about the targeting the lower middle market. The reason why I ask is that I personally believe that the lower middle market owners and founders there are the real entrepreneurs that are in a space where they’ve created value from nothing and just need to get to that next step. And the unfortunate thing is, I think a lot of lower middle market founders are underserved because they don’t know channels and access points that organizations like ClearLight Partners provides.

    Mark: Yeah, it’s a good question. I think, as an investor, what you’re really looking for is inefficiency, you know, in the market, and as funds get larger enough to chase larger and larger deals, that market, the competition for those deals creates a very high level of efficiency. And so you have to ask yourself, Is that where there is the most opportunity?

    Maybe I’m biased because I’ve spent most of my time in the lower middle market but I think about how a lot of private equity funds for instance, don’t have dedicated deal sourcing teams, are not using CRMs, are not comprehensively canvassing the universe of intermediaries who produce the deals are looking for, are still establishing kind of EBITDA thresholds of 5 million when you can find really great companies kind of in that three or $4 million EBITDA range. And to me, that just really presents a lot of opportunity.

    And to your point, business owners in that size range probably have been underserved by equity capital providers, or at least there hasn’t been a focus on them. And I really think that’s changing. And, you know, some of the best deals, or at least a couple of deals I could point to that we’ve done, that have produced really nice returns have started with a very small, very modest starting point.

    So yes, there’s more risk to starting at a smaller scale and the companies might need to be invested in and have management teams built out and have proper systems kind of put in place. But if that’s all done correctly, it can produce a lot of opportunity. So I’m a huge fan of the lower middle market. You just have to know kind of what you’re getting into and, you know, learn the playbook, if you will, to create value. So I’m a big fan of it.

    Patrick: Well, you started, ClearLight Partners started as an operating company. And so let’s talk about, and we referenced this earlier, where you have a value proposition to make to these target companies as you are actively going out there, talking to them. What’s the message that you deliver that’s different? What are you bringing this a little different?

    Mark: Yeah, I mean, as it relates to our operating heritage, I think sometimes between, you know, operators and investors, there can be kind of a communication disconnect. You know, let’s say you’ve got investors who’ve only been investors, or who were investment bankers and then became private equity investors.

    There’s a manner of speaking that might not be compatible, you know, with how operators kind of describe their world. And then there also can be a lack of empathy for what it takes to execute strategy. And so if you look at our firm, starting with the senior-most leadership, these are people that have had p&l expertise. And that story kind of ripples throughout several people on our team who have run companies before, in some cases, run companies for private equity funds, and in even some cases further started companies themselves.

    So it just lends itself to, I think, a more productive discussion and kind of bridging that communication gap and really understanding what it takes to execute strategies. That’s a huge part of what we offer. When you couple that with kind of the single source of capital and the longer investment horizon, we think, you know, in a fairly commoditized private equity world right now, we think it makes us different, but it’s just all a matter of getting in front of those owners so we can actually tell the story.

    Patrick: It’s important that you talk about the empathy that you have because there’s a danger if your investor only focused, you’re going to fall into that trap that cynical people describe private equity. And that cynical thing is for words, just buy low and sell high. And, you know, that’s not comforting for owner-founders out there. And so it’s great that you guys are stepping out, and that is different out there from a lot of other folks. Why don’t you give me an example, you know, one of the deals you’ve done, or one of the success stories you’ve had?

    Mark: Yeah, I think one of my favorite stories involves us getting into the fitness industry, which is important for a couple of reasons. One, we had never done a deal in fitness previously. And this was a franchisee. And this is before franchising was as hot of a space as it has become. And so, you know, one of our partners, you know, really deserves a tremendous amount of credit for having the vision to get into the industry to get into this deal. And so this franchisee in question was a Planet Fitness franchisee, they had 12 locations in two markets, they were generating healthy EBITDA, the unit economics were very compelling.

    And if you know anything about the Planet Fitness model, it’s all about value. So it’s the low-cost model. And this is also at a time, I think, before the world became so focused on recurring revenue, but fitness is yet another industry that is based upon recurring revenue that perhaps wasn’t appreciated for it in the way that say, a security company was, you know, back in the day or has been. And so, you know, we took a bet on this particular business and it just paid off so well.

    You know, we got into a couple of additional markets, so bought new territories, opened up clubs organically, basically didn’t acquire a single club in our journey from 12 locations to north of 60. And this is over a five-year period. And there are some really great things that happened during that time. Built out a management team. You know, the president of the company was given the opportunity to assume the CEO role. So that transition was done effectively.

    A former ClearLight employee was actually able to step in as the CFO of the company, which proved invaluable kind of given his understanding of kind of how we analyze businesses and just the strong rapport we had with him. And, you know, the business, the exit of that deal generated basically the best financial return in the firm’s history in a five-year period. It just exceeded all expectations. So it’s just one of those great success stories where everything lines up well and you make a huge difference in the lives of people at that company. And it was just a really rewarding journey to observe.

    Patrick: Well, that breaks the stereotype of fitness centers being not the greatest investment in the world. So that’s really telling. I’m just thinking from personal experience, just seeing things in the bay area where his centers are coming and going. With this thing, were you dealing in just one geographic region? Are you regional, are you cross country?

    Mark: In that case, we had pretty disparate locations. I believe we were in San Antonio initially and in Nashville, I want to say, and got into Sacramento and then Pittsburgh and then also Canada. And so literally all over the map. And I know there’s a strategy that people like to embrace of building kind of regional density and the view that that kind of enhances valuation or kind of positions you best to enhance valuation. But in this case, we benefited just fine from having disparate layers. And it was, again, it was a great run.

    Patrick: Well, and let’s transition into just a little bit broader on the profile. What’s the ideal target profile that you’re looking for?

    ClearLight’s Ideal Customer Profile

    Mark: Yeah, and this has evolved over time. I mean, if you can believe it, back when ClearLight was getting started, we were trying to figure out a strategy. We even did a few venture deals, some of which that actually panned out okay. But then we pivoted to kind of traditional middle market, you know, LBO investing back when LBO is still a term that people used.

    But I think, you know, we’ve done deals buying from other private equity funds, but our passion is to invest in founder family-owned companies. Has been for a while now. I think that presents a lot of opportunity for professionalization, for investment into the business that, you know, not to the fault of the business owner, it’s just many business owners, you know, get their business to a point where they’re generating three, four or five, 6 million of EBITDA, life is pretty good.

    You know, why do I need to take the risk of over-investing in the business or taking risks with the business? And so we think that presents a lot of opportunity. We like situations where the business is in an industry that’s healthy and growing. So it’s very clear and easy to understand macro story, supporting the growth of the business.

    We don’t really invest in story situations or turnarounds. It’s usually kind of up into the right, organic industry growth that’s beating GDP for some compelling and sustainable reason. And then from there, it’s underwriting the business and try to understand, you know, is this a company that we’re excited about where, you know, we can understand the risks and box those accordingly and, you know, proceed with the management team to hopefully, double, triple EBITDA.

    Patrick: And that’s where you guys really add the value to because the skill set for owners and founders where they’re killing themselves to get to a point where they’re three, four million EBITDA, the skill set to go up to 10 million EBITDA is a completely separate set of skills. And oftentimes, you’ve got to bring out other people, and you can risk it by yourself and try to do it yourself or find partners, you know, in private equity who have not only done it before, they’ve done it in your industry before and they’ve got the roadmap and you’ve got the resources and the knowledge to bring to bear.

    Mark: Yeah. And then the other point I should have made too is we certainly welcome the involvement as shareholders of the founders, insofar as they want to retain equity alongside us. That’s actually a better situation than buying 100% of someone’s company. And it’s that proverbial second bite of the apple, which everybody talks about. But when it works, well, it does exactly what it’s supposed to do. And the second bite of the apple can be extremely rewarding. So that’s when things go well. We like to see that happen.

    Patrick: Yeah, to talk about rolling equity into future funds. Yeah, we came across our, we, a founder-owner sold his company for 20 million, retained, rolled 5,000,000, 25% into the new firm. And a few years later, they sold the, they sold the new company for 25, $30 million dollars. So his 25% actually was worth more than the entire amount of his company previously. And they took that and rolled it on in and I just, that’s a win-win-win, which I’m surprised more of those stories are out there right now.

    Mark: Well, and it’s also a good vote of confidence, frankly, when the owners want to retain equity. It’s a little scary if someone wants to throw the keys at you and kind of disappear in the sunset. So

    Patrick: In those cases of disappearance and so forth that, I do want to ask you, you know, in your involvement, both with ClearLight Partners and before, tell me about your experience with rep and warranty insurance. Good, bad or indifferent?

    Mark’s Experience With Rep and Warranty

    Mark: Yeah, it’s a good question. I was reflecting on this a little bit because in my seat on dealer origination, it’s not a product that I’ve had as much exposure to. I’ve mostly been an observer of market trends and listening to it come up as a topic of discussion. And I was able to research on rep and warranty because I was interested about, you know, where the product came from, where it’s been.

    Apparently, the product has been around since the late 90s. And it was created as you might expect, for fun, I wanted to free up money from escrow to get paid, you know, more at closing versus having some percentage of the purchase price being locked up for 12, 18 months, whatever it was.

    And so it’s easy to understand why a product like that would be created. It wasn’t really embraced until maybe 2007, 2010. People were accustomed to doing things the way they’ve always done them with escrow being some set percentage of the purchase price and so forth. I’m told rep and warranty insurance really gained traction to a law firm, a fairly prominent law firm who got behind the product was really recommending it to their clients and like I said, Maybe 2000, 2010.

    And I would say my extreme awareness of the product, you know, really started to come into view upon my return to ClearLight, maybe 2014 or so you just started hearing everybody wanting to talk about it. And if I understand statistics correctly, this is a little anecdotal, I’ve heard that in private equity-backed deals, maybe 75% of deals at this point are utilizing rep and warranty insurance. From my perspective, it has a couple of advantages, certainly to the seller. You know, you get more of your consideration paid to you at closing. From a buyer’s perspective, there’s also advantages.

    You know, if you have to go after a claim, you know, you’re dealing with an insurance company, as opposed to your new partners in the deal, which I could imagine would create for some awkward conversations, as you’re, you know, in the early innings of a transaction trying to build a company together as friendly colleagues. So it’s very clear to me why the project has, you know, become increasingly in fashion. You know, certainly in the recent, some of the recent deals we’ve done, without citing any specific examples, I know that it has been something that’s been utilized and I would expect that trend to continue.

    Patrick: Yeah, well, the biggest development out there is that rep and warranty initially was a product, the reason why I didn’t gain traction was it was prohibitively expensive and it was limited in what it covered and what it didn’t cover. In the technology sector, particularly for years, it would exclude any IP-related reps, which is is a deal-breaker in Silicon Valley.

    But because of good success and good traction and a copycat industry, other insurance carriers would get into the mix. And with competition comes two things, a broader improved product and lower prices. Today, rep and warranty can now be brought to bear for a transaction as little as $10 million. Were the minimum price, you know, all in including underwriting fees and taxes and everything, a $5 million rep warranty policy is under $200,000 total costs.

    I mean, rep and warranty is now available for add ons, where is it did make a lot of financial sense when the pricing was probably a multiple of where it is now. And it’s not only less expensive, it’s simpler to secure. And so that’s where we want to get the message out, particularly to the lower middle market, because two years ago, if you were under 100 million dollars transaction value, you probably wouldn’t be eligible for rep and warranty.

    Now, that’s not the case. So it was great being able to have it out there where it really does make a difference. Now, Mark, from your perspective, and I want to go to an article you just posted not too long ago called Never Let a Good Crisis Go to Waste. You had as we’ve been mired in this COVID-19 pandemic settle in place on again off again in California, especially, but what do you see out there for m&a going forward? And you had a great piece, we’ll link it to our notes here, but tell us what you see.

    Where M&A Might be Headed

    Mark: Yeah, I know I wrote that piece, I was just tired of all the negative headlines. I mean, it really weighs on your consciousness. And so I said, What’s the contrarian thing to do here? Let’s talk about how the glass can be half full amidst all of it. I mean, one of the alarming statistics is now an estimated third of our population is suffering from anxiety and depression, if not both. I mean, that’s like 100 and 10 million people. You know, wandering around their house, you know, depressed or anxious because of COVID. It’s like, we all need a little bit of cheering up here.

    So I tried to sprinkle a little bit that optimism through the article. And one of the quotes that I love that I just discovered in writing the article was something John F. Kennedy apparently said. And he said, When written in Chinese word crisis is composed of two characters. The first character represents danger, which is pretty easy to understand, but the second represents opportunity. And I think, therein lies the opportunity to find the silver lining amidst all this.

    And so, you know, I was reflecting o,n you know, what are some of the sectors or themes that are surviving if not thriving, you know, kind of amidst COVID? Because there are some green shoots, if you will, or some very nice signs of life amidst all of this. I think it’s important to focus on those. So I just kind of talked about a couple of them. I mean, recurring revenue is an easy one to point to. That’s interesting in its own right, has been for a while. Not a new idea, but recurring revenue-generating businesses are doing, for the most part, you know, pretty well right now.

    Similarly, and I’m saying this having just invested in an IT services company, companies with remote monitoring capabilities where you don’t have to be physically present to deliver some good or service are doing great as well because you can do what you need to do from the safety of whatever coronavirus-free location you happen to be in. Those companies are doing well. You know, I look at companies like our ice cream business, and I pointed things that I’m calling small consumable luxuries where there’s like a high ROI on happiness.

    You know, you buy a $6 milkshake or whatever it is, and that’ll cheer you kids up, get you out of the house. You know, so there’s all sorts of things like that that I think are doing okay. I look at like, at-home convenience services, having your groceries delivered to you. All these things that have given rise because in large part our behaviors have changed to be well-positioned. So, you know, thinking about specific sectors that might be kind of interesting.

    You know, I mentioned the depression and anxiety issues, I point to outpatient behavioral health, you know, sitting with a therapist and talking through your problems, there’s a lot of people who need help. And some of these issues often go untreated. And I think at the same time, some of the stigma around behavioral health is coming off. And I think there’s a lot of people that could benefit. So that feels like a classic do-well do-good industry that has been largely untapped by private equity for various reasons.

    And it’s pretty interesting. Express car washes, fabulous industry, hiding in plain sight for way too long, you know, high margin recurring revenue, you don’t have to get out of your car, very COVID-friendly, you know, really nice business that kind of plays with our kind of multi-unit retail strategy. We’d love to do something there. We talked about fitness, there’s no way around it. Fitness is going through some hard times right now, for the obvious reasons, but as soon as people can get out of the house and feel comfortable exercising again, it’s just gonna go gangbusters, in my opinion.

    And I think that it kind of correlates interestingly to the depression issue because fitness, you know, offsets, you know, kind of gloomy moods. You know, you get out there and you generate some baritone. And then I mentioned kind of IT and other tech-enabled services for the reasons I mentioned before, recurring revenue, remote monitoring. I think those businesses should do pretty well, too. So, you know, not an exhaustive list. There’s others. Some of the stuff is pretty obvious, but you know, trying to find, or trying to view the glass as half full, anyway.

    Patrick: There has been that trend of pre-COVID to have fitness being brought from the outside into the home, particularly with peloton. We’ve only been in our home so much, I think that trend is going to go back. And just the desire of being around other people and being in another facility away from the home is a real good idea. Mark, how can our listeners find you?

    Mark: Oh, gosh, yeah, so I’m on the ClearLight website. I’m, I think, reasonably easy to find there. But people are welcome to email me, call me anytime. Early often, we love hearing from people who want to chat about any of the topics we’ve discussed in this podcast. Or maybe they know a company or are running a company that could benefit from capital at this point. Even if it’s early, it’s always good to have those conversations to kind of get to know people. So feel free to visit our website. Email addresses on there, phone number, and give me a call anytime.

    Patrick: And without showing any bias again toward ClearLight with our other guests and our other colleagues and partners out there. I will say though, if anybody is interested, have had a chat with ClearLight and see if you can swing a quick visit to their offices because like I said, there are fewer places on this planet that are as beautiful as Newport Beach. So Mark, an absolute pleasure being here. We’re going to talk again.

    Mark: Alright, thanks, Patrick. Enjoyed it.

  • Sander Zagzebski | M&A Outlook for the Rest of 2020
    POSTED 9.22.20 M&A Masters Podcast

    Back in May, Sander Zagzebski maintained that COVID-19 was not a black swan. He even saw a silver lining in the pandemic in the form of opportunity for savvy players in the M&A world to make significant gains.

    In this episode we talk about his original prediction and how it has manifested today.

    Sander, of Greenspoon Marder LLP,  says the current economic crisis is similar to what happened in 2008/09 but also quite different in key aspects, including the cause and how the presence of trillions of dollars of dry powder means there is actually money to invest this time around.

    Sander shares how he’s advising his M&A clients right now, and we also talk about…

    • What he thinks will happen in Q3
    • Why companies can’t “wait out” the pandemic – and what they must do now
    • How to account for legal and regulatory uncertainty going forward
    • A unique insurance product – perfect for the pandemic – that transfers risk
    • 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 Sander Zagzebski, partner of The Corporate and Business Practices Group of Greenspoon Marder. Greenspoon Marder is a full-service business law firm with over 200 attorneys in 26 locations throughout the United States and has been ranked consistently among American lawyers Am Law 200.

    It’s one of the top law firms in the country since 2015. Sander wrote an article back in May for C-Suite Quarterly, and it had the subtitle taking advantage of the disruptive opportunities during the coronavirus pandemic. And this was one of the first articles out there that was pointing to a silver lining in the pandemic. And I’m pleased to have Sander here as my guest to discuss this piece, which is both, it will be linked on our show notes. But it is contrary to conventional wisdom.

    And when you consider the time that this came out, the first week of May, we were just getting, you know, into that settle in place, the fatigue was coming in, the stock market may have been bouncing off of the March lows, but still, there was a lot of uncertainty. And Sander’s article has a lot more credibility now because since that came out in May, there have been at least a dozen other prominent authors out there putting out very similar predictions for not just economic recovery, but recovery in mergers and acquisitions. And so I’m pleased to have Sander here. Sander, welcome to the podcast today.

    Sander Zagzebski: Thank you, Patrick. Appreciate the invite. Lawyers love listening to themselves speak and I’m no different. So thanks for having me.

    Patrick: Well, that’s why we’re not short on content with you. Now, before we get into this article and how you saw the trend, which is a unique way that you looked at it, let’s talk about yourself real quick. Okay, how did you get to this point in your career?

    How Sander Got to Where He is Today

    Sander: Yeah, I’m a, I’ve been practicing as a corporate securities M&A private equity lawyer for 23 years. I started in a large regional firm and a large international firm. But I’ve also run my own law firm for six and a half years. And so more recently, kind of bounced back up the food chain a little bit and joined Greenspoon Marder, which is an Am Law 200 firm, meaning it’s one of the 200 largest law firms in the country. And I, you know, one of the corporate partners and I head up the corporate practice on the west coast.

    It’s, you know, I got here, I guess, in large part because I’m a little bit adventurous. I like to try new things. And one of the things that we do very well is we sort of follow the entrepreneurs and, you know, try to harness their entrepreneurial spirit. And so we get involved in industries that maybe some of our competitors don’t pay as much attention to. Technology that is pretty saturated. But, you know, hospitality, entertainment, new media, Cannabis. We’re probably, we probably have the largest cannabis practice of any of the Am Law 200 firms.

    You know, blockchain digital assets. And we try to, you know, it’s more fun to go where the action is, and these are some of the places where the action is. So but from a skill set level, we are industry agnostic, and I do, you know, I do probably 40, 50% mergers and acquisitions. And my, you know, in a given year, maybe a third capital raising transactions. And, you know, the rest is kind of a mix of joint ventures, strategic alliances, other kind of significant corporate matters that don’t fit neatly within one of those two boxes of, you know, PE M&A capital markets type stuff.

    Patrick: It’s safe to say that Grinspoon Marder is not a boutique, but it’s got that feel and responsiveness and passion of a boutique but with all the leverage and all the services and all the resources of the larger firms.

    Sander: Absolutely. I love it when you sell me.

    Patrick: Well, let’s go over this transition over to your piece, okay? Because that was one of the other predictors out there, the reflex prediction out there was there’s going to be just the M&A field will be exclusively distressed, you know, bankruptcies and distressed assets out there. And that’s all that we’re going to see across the landscape.

    And in your piece, you go ahead and you go contrary to conventional wisdom, and you just say, you know, unlike what a lot of people are saying, this COVID-19 this is not a black swan, okay? And, you know, you do this uniquely because, again, you didn’t have some positive thinking, hopeful aspirations out there. You actually looked at the past and found key markers in the past that could lead to what could happen in the future. So let’s talk about that please.

    COVID-19 Not a Black Swan Event?

    Sander: Well, sure, you know, it’s, I’ve been doing this long enough that, you know, I certainly can still remember the financial crisis of 08 and 09 and can draw parallels that I’m sure many others are drawing as well, you know, with the current situation. And, you know, Professor Nassim Taleb who actually coined the phrase, the black swan, in his book that came out, I believe, around the time of the financial crisis.

    I think it was either right before or, you know, even during the financial crisis. You know, this term black swan has kind of become something that means a little bit, it means whatever you want it to mean, right? It’s, and a lot of people use it as just sort of a, you know, what’s the Black Swan event of this year? Well, Taleb himself, you know, the idea of the black swan is that it’s a highly unusual event. It’s something that’s really unforeseen and one that can have very, very dramatic consequences.

    And I think from his perspective, as an investor, he’s looking at it more from the perspective of risk, right? Fail risk and the like. But he, I was kind of, I found it curious because I saw him talking about the Coronavirus and the government’s responses to the Coronavirus. And he resisted calling it a black swan. And the reason was, he said, Look, a pandemic is a highly predictable event. We’ve had these before. We know what these things are all about. So in other words, he sort of chafed at the notion that this would be thrown in as a black swan.

    Now, part of his perspective there candidly, may have been because he has previously written about the risk of a global pandemic and kind of lumps himself in with Bill Gates and some others who have talked about a pandemic as something that systems, you know, his whole concept, I’m not, I haven’t read all of his books, but this whole antifragile concept for you, right, where you want to build some robustness into systems. You know, one of his observations is that, hey, you know, we have this interconnected global economy with supply chains and the like, and it doesn’t take a whole lot, you know, for it all to come crashing down.

    But from my perspective, you know, looking at the parallels between the financial crisis of 08 and 09 and the current situation, once shutdown started to happen, it seemed obvious to me that there was going to be a dramatic economic effect. And we could look to 08 and 09 to maybe remind us about what was going to come next. So that’s kind of the premise there.

    I’m not sure really think too much about whether it would be called a white swan versus a black swan. You know, that doesn’t really do too much in my world or yours. It’s really, you know, how significant is this? You know, what are the winners or losers going to look like? And then how do we, as deal professionals, position ourselves to provide the services to our clients that we would like to provide going forward? What are they going to be doing? And what are we going to be doing to help?

    Patrick: What were some of the steps that were taken or not taken in the wake of 2008, 2009 that served to be lessons for investors and deal makers now?

    Lessons Learned From the 08, 09 Recession

    Sander: Well, one of the things that really struck me about 08 and 09 was that the dramatic shift in sentiment, particularly in the financial services industries, but really, across the board was so significant that it really created a lot of opportunities. And when we look at 08 and 09, at least when I look back at 08 and 09, there’s a lot of writing about the folks that predicted, to some degree, the crash and the decline in real estate prices, the resulting impact it would have on all sorts of different financial products that were associated with real estate.

    So, you know, we focus on books like The Big Short, right? And the movie that came out about the same events. We look at, you know, folks like Kyle Bass and others, and there’s a bunch of folks that figured out how to make some very timely bets before the crisis to profit from the decline, but I think there’s been a lot less in the way of press devoted to the folks that came in, I can’t remember who the famous investor that said, you know, the best time to buy is when there’s blood in the streets, right?

    There was certainly blood in the streets in 08 and 09, and some people were able to take advantage of that opportunity and make some pretty significant gains. So, you know, in the article, for example, I talked about Oaktree went in and they put a really significant multi-billion dollar bet on corporate debt.

    And, you know, one of the co-Chief Investment Officers of Oaktree, I guess, was quoted as saying Look, this is either the greatest buying opportunity in my career or the world is gonna end. And he kind of reasoned if the world was gonna end, you’d have bigger problems anyway. So he decided to take advantage of the buying opportunity on behalf of his clients and did quite well. And there’s a couple of other examples of people that made, investment professionals have very timely bets. I think Leonard Green made a minority investment in Whole Foods.

    Again, and there was I think the other one that was significant and it was reported by the New York Times is that essentially the, one of the, if not the biggest wins in private equity history was this bet Apollo made on the chemical company. And what I think is so interesting to me about both of those moves is that these were completely out of the financial services sector. These are just folks that took advantage of an opportunity that presented itself because of the crisis, right?

    I mean, it was, Leonard Green had an opportunity to come into Whole Foods, presumably did the analysis and determined that this was a good time to get in at the right price. Similarly, Apollo’s is interesting because it was a distressed transaction and that they went out and acquired a lot of discounted debt and then pushed that company which is the third-largest chemical company on the planet, pushed them through a bankruptcy and then came out with an enormous return when they converted their bonds into equity.

    So to me, that was really, you know, the reason for the article, it’s okay COVID-19 has everybody inside, you know, doing Zoom happy hours and learning French or whatever it is that you do when you have downtime. But let’s think about what’s going to happen. Let the talking heads deal with good versus bad policy.

    You know, what’s going to happen in the world and how are dealmakers and deal professionals going to cope with it? What’s going to happen next? And where it really struck me that, you know, the unsung song of 08 and 09 are the people that came in, went long at the bottom and really profited. Everybody’s heard about The Big Short, people that went short at the top, and took it all the way down. But you don’t hear nearly as much about the people that came in and saw the opportunities. And so it just strikes me that we’re going to start seeing people making moves because they’re going to see those opportunities.

    Patrick: So I think the other contrast with the last recession, and I’m stealing this from somebody else, but the last recession, you know, there are all these opportunities, but nobody had money. Now we’ve got a lot of money and we’re waiting to see where the opportunities are. I mean, this was not an issue in the financial system or anything, and in the areas that you and I both work with private equity.

    There were articles about their trillions, plural, of dry powder that had been accumulating and they’re waiting to deploy it. Well, that didn’t disappear. I mean, they’re extending more resources to support their portfolio companies, but they still have quite a bit. So I think it’s just they’re going to start finding things at the right price.

    And I sincerely believe private equity is going to be the ones that lead us out. I also think that, you know, even looking back at those ventures that were tried, I mean, they were multibillion-dollar investments. And back then, a billion dollars was still pretty significant. Now, you know, you’ve got companies doing that on a strategic acquisition and it’s no big whoop.

    So there are those types of things out there. And also, I just think that, as you said, all the focus was on the people that shorted and watch everything go down, whereas every, you know, a lot of smart money was coming in, you know, buying up things at a discount. I had also pointed just recently in Silicon Valley, there has been just short of a billion dollars being raised by companies, multiple companies, five or 10 a day, but is totaling 700, to a billion dollars for the last five days, last two weeks.

    So companies are raising money, there is activity that’s happening. And so if you fall into the trap of, like you said, listening to talking heads or all the other noise out there, you’re going to join the group out there and start getting depressed. Whereas if you focus on these opportunities, I sincerely believe they’re out there. And, you know, there’s just going to be more, you just have to look for it.

    Sander: I think that’s, right. I mean, I would also just observe, and I tried to mention the article, right? It’s easy to draw analogies or parallels, but sometimes you can take it too far. And the financial crisis was just that, right? It was a financial crisis driven by, you know, the precipitous decline in real estate prices.

    And, you know, as it had that sort of snowball effect. And here COVID-19 is still COVID-19, right? It’s still a pandemic, the virus is still out there. And, in fact, what hadn’t happened at the time I wrote my article, but of course, has happened since is, you know, the stuff out of Minneapolis, right? George Floyd, the protests and all, you know, the focus on police brutality and minority rights.

    And, you know, these are all, again, very good things and worthy to be talked about. What I think COVID and some of these other things now sort of amplify, potentially at least, is the legal risk, if you will. The regulatory landscape. We don’t know, for example, whether, you know, private equity funds that have portfolio companies that took relief loans from the government. Is there going to be a law that tries to attach some sort of penalty? There’s already been some public shaming, if you will, of folks that have larger financial backers, you know, taking some of these relief loans.

    Are you going to see something along the lines of, you know, the congress tries to, you know, once again deal with, you know, screwing around with the carried interest and how it’s taxed or something that they want to do in order to try to, in their minds at least, level the playing field between the, you know, the private equity professionals, you know, the top one-percenters as they’ll probably call it, and the entrepreneurs. So, I think that’s actually where things get a little more dicey is goalposts are going to start moving and we really don’t know exactly how that’s going to shake out, right?

    Patrick: Yeah. Well, what are you telling your clients? If there are, those that are anticipating or were looking for an acquisition target or were looking before but now are, you what are you telling them?

    Sander: Well, I think the nice thing about it is when you’re a lawyer, a lot of the stuff I’m doing is all just for fun. It’s not like people come to me for my economic advice. But the, what I’m telling people is to essentially what I’ve told people in good times and in bad, which is still be prudent, right? I mean, in other words, the, everybody that’s out there and has looked at deals and as analyzed deals, has been trained to look for the variables and handicap those, right?

    And so, we’re in a situation, it’s certainly uncharted territory to most of us. I mean, I don’t think the, you know, the quarantines, the shutdowns, love them or hate them, I mean, I’ll let other people talk about that. But certainly, it’s one of the most, if not the most significant responses to an event that we’ve seen in peacetime in our history of our country, right? So big things have happened and it’s causing disruption.

    And what I tell clients and anybody else who is interested in my opinion, it’s simply to say, opportunities are always created in this environment, right? And that’s really what the lesson was from 08 and 09. It wasn’t just the opportunities that were created before the event, but there’s opportunities created in the event. And so, you have to look at whether, you know, you can acquire debt positions in order to gain a controlling interest in a target, or whether, you know, you can make a strategic acquisition, provide liquidity to somebody in your supply chain.

    Whether you can, there’s a whole bunch of different things that people can and will look at in these types of environments. And so, and it’s, you know, it’s a good time to do it. And people who have that dry powder, as you mentioned, the private equity funds. I do think they are, you know, I doubt that they’re just going on vacation waiting for all to end. I think the good ones are already looking to see how can we benefit from this? How can we lead us out of this crisis?

    Patrick: Well, the other thing this highlights to us just when we get a big disruption like this and a shock to the system, suddenly people start worrying about risk again. Suddenly those antennae go out a little bit and they’re a little worried about it. And so when they used to not worry about risk and figure, I’m an entrepreneur and we’re going to go and we’re going to hang in bang with them, and you know, good things will happen if we think positive. Now, I think there’s going to be more of a focus and some value associated with transferring some risk or limiting risk, however, you can do it.

    And I bring that up because there’s a lot of what we do in our practice with rep and warranty insurance, is we remove the risk exposure between buyers and sellers and transfer the risk that they have to a third party, which is an insurance company. And in almost every case, the insurance company has deeper pockets than both players combined so it’s a real safe place to go and transfer risk. Because of your practice with M&A, share with me whatever experience good, bad or indifferent you’ve had with rep and warranty on deals.

    Sander’s Experience With Rep and Warranty

    Sander: You know, we do a lot of M&A in the middle market space. We’ve been particularly active in cannabis in recent months. And as you and I have talked about, right now, M&A, insurance, rep and warranty insurance isn’t an option in the cannabis space. But likely with some legal changes and regulatory changes will start to become an option.

    So in those deals, obviously, we’re not looking at M&A, or not looking at rep warranty insurance, and we’re dealing with everything your old fashioned way, right? Just hyper-focused on the language of the reps, hyper-focused on the schedules and the indemnities and the baskets and caps and escrows of their escrows and that sort of thing. In non-cannabis we dealt with rep and warranty insurance a handful of times in recent years and the, my experience has frankly been, I would say, guardedly positive.

    And the only reason I say guardedly positive is I have actually personally never, on one of my transactions where I was lead counsel, I’ve never had occasion to make a claim against, you know, against an insurer. So perhaps that’s because my team is still very focused on schedules and making sure that, you know, when they make reps and warranties, they’re not going to create a scenario where there’s actually any reason to have a claim.

    So perhaps that’s, I don’t know if that’s good or bad, but my experience has generally been positive in that the, as long as you get in early, you talk about the rep and warranty policy and how it works. In my experience, it was, actually, I think, in all cases, it was a private equity relationship that was driving the rep and warranty insurance. But as long as you get in early and you work the process, it hasn’t slowed down deals, it’s you know, everything is worked out the way it’s supposed to. I think your industry is getting it, starting to get it right.

    Patrick: I appreciate it. There are two big points that you have in that response. The importance of introducing the concept of rep and warranty as early as possible the deal, it can always be removed. I mean, my wife does that all the time where she’ll order a bunch of stuff, like we can always remove it, so don’t worry about it.

    It just slows down the deal of all of a sudden you’re, you know, 10 yards from the goal line and now well, let’s introduce this new process that the parties might be unfamiliar with. And so the sooner you do it, the better. So that’s usually helpful. Yeah. The other side on a claim side, I’m pleased you haven’t had one, the one thing that’s fearful for us insurance people is in order for, you know, the policy to quote-unquote work, a claim has to get paid. That means something bad’s gonna happen.

    And so while we stand by, you know, all the reports so far is that rep and warranty, and actually, cyber liability insurance are the two insurance products that really deliver on the claims payment, less hassle and all that. So they’ve had a very, very solid track record, which is good. But at the end of the day, I always kind of like where, well, I’d rather have an instant be reported and clients like, well, it amounted to nothing, eventually turned out it was okay. But boy, I felt good that I had this behind me just in case. So it’s kind of nice that way.

    You Need a User-Friendly Professional 

    Sander: Well, let me, if I can cut in real quick, Patrick. So I think what I would say is it’s always important in a major transaction. And, you know, as an aside, I think when you’re doing M&A, for most of us, if it’s in the middle market, it’s a major transaction for your client even if it’s not necessarily a major transaction for your firm, right? I mean, generally speaking, these entrepreneurs, this is their business.

    This is their recent life’s work if not their entire life’s work. And so for them, rep and warranty insurance is a significant benefit to them to just sleep better at night knowing that their deals close and they have something behind them if something, they have an insurer behind them if something goes wrong. For deal professionals, I think the real key is interacting with experienced folks like you when it comes to products like this because even though I’ve done a number of times in my conversations with you, I’ve learned more about it and how it works.

    And you really, I think you need a user-friendly professional to help keep that piece of the deal on track, right? Because, again, it’s one of those things where the deal professionals don’t necessarily think of it as, they don’t plug the insurers into the whole deal. They do their deal and then they like to sort of dump it all on the insurers. But the reality is if you’re on a deal team and you’re getting a deal done, you’ve got to loop in those folks early and proactively because then, number one, you don’t have any surprises, number two, you have a better product. In other words, you have a much higher likelihood of a successful claim if one needs to be made.

    And then number three, you don’t have any problems getting the deal done, right? You don’t run into any issues at the 11th hour that caused you to have to delay closing or reprice or do whatever. So that’s what I think is the good reminder for entrepreneurs is, you know, rep and warranty insurance in particular, highly specialized, it’s a niche market and you need to have the experienced professionals helping you. And it’s worth the investment and it’s worth, you know, getting them on the phone early.

    Patrick: I’m going to stop it there and just say I couldn’t say that any better. So we’ll go with that. Those are words to live by, folks. Sander, as we’re going through, we’ve had this, you know, sell in place now for a while. We’ve been seeing a kind of as we’re recording this, we’re opening up and then we’re having some, you know, we’re stubbing our toes, you know, Texas, in particular, and some other places, as the rollout isn’t going as planned and cases are rising. So there’s a lot of fear out there. Give me your idea just based on where we are today, and this is midway through 2020, what do you see for M&A?

    Sander: I think it’s going to accelerate, for sure. I think, look, you know you’ve had at least one pretty sizable transaction that was reported. You’re in the gig economy space and you’re delivering product to people that are holed up in our homes right now, your valuation has certainly benefited from this, right? And, you know, the door dashes and the like. The, like it or not, as hard as it will be for our policymakers will try to create rules to mitigate this, but there will be winners and losers and always are in these sorts of things.

    It’s just an unfortunate fact of life. And so, I think when it’s amplified like this, and this one, I don’t think I’ve seen anything amplified to this degree, right? I mean, if you’re a Spinal Tap fan, right, this one goes to 11. This is going to be because, only because, you know, major, the world’s major economies just stopped for a couple months, right? And even as we get back, moving again, it’s very uneven in how it’s happening and there are likely to be additional waves of the virus, right?

    It’s likely from what I’ve read, there’s seasonality. And like I said earlier, I think there’s going to be a lot of tinkering with the law. So to me, what would slow things down is legal and regulatory uncertainty because certainly, if you’re a private equity fund, you got money, you’re looking around, you just want to make sure that you don’t do something that turns out, in hindsight, with legal or regulatory changes to be a really dumb move.

    But I think what is driving it is frankly, just going to be pure necessity. I mean, things are so different now. You know, huge numbers of tenants, both residential and retail haven’t paid their rent in the last X number of months, you have a huge number of debt payments that have been missed. We got a lot of very significant bankruptcies. I read that Microsoft is going to close virtually all of their retail stores. You can just see how this stuff starts to ripple, and so you will have folks that can come in and buy an asset that has been devalued temporarily.

    And I think it’s, they’re not all going to be, you know, record-setting valuation deals, but I think the volume is going to go up significantly, probably starting in q3, but certainly by q4. I gotta think we’re going to be just seeing a whole lot of action, as will you, right? It’s just looking at the macro aspect of it, right? I mean, because, again, you’re gonna see a lot of, we’re seeing big bankruptcies already, a number of significant ones, right? And so, those are going to be dealt with in some degree, which will involve significant strategic transactions, whether it’s M&A or something else, right?

    But it’s so, to me, it’s so big. It’s so significant. It really, it affects virtually everybody, right? Virtually all companies are going to be affected to some degree. And so the question is, do they just sit still and wait it out? Some will. But I think a lot of others will realize that they have to either combine with somebody, shed some weight, right? A lot of stuff is going to have to happen because it’s just so significant. There really isn’t gonna be an option to wait it out for a lot of folks.

    Patrick: There are companies that are good before the pandemic, they’re probably going to be really good after. And coming from California where you guys are or up here in Silicon Valley, I mean, literally every company here is for sale. And it’s just a matter of time and is going to come around. So we will see what happens, but Sander, again, I greatly appreciate the piece that you put and just great perspectives here. And it’s always nice hearing, you know, from a variety of forward thinkers out there. Now, how can our audience find you?

    Sander: Sure. Well, and by the way, thank you for reading it and paying attention. It’s always nice to know I’m not just writing to an empty audience, right? I have at least one fan. Listeners can find me certainly at our website, Greenspoon Marder. Just google Greenspoon Marder or go to First name Sander last name Zagzebski with a Z, ZAGZEBSKI. So listeners, it’s not too hard to find me on the website. And then you can also, you can reach me by phone 323-880-4525 is my office line. Email is I think I’ve given you everything. The easiest way to just get online. That’s how you find everybody these days.

    Patrick: If you went to the website and they looked up attorneys by name, are you the only Z in your office?

    Sander: No, no. Look, we have 240 lawyers so I think we have four or five people with Zs. Actually, my, the head of our entertainment practice in Miami, Lesley Zeagle is actually behind me. I can’t even say I’m the last person on the list. But yeah, if you click on the Z on the far right, you know, you’re not gonna, you’ll find me pretty fast. I’m in Los Angeles. So, you know, run the corporate practice on the west coast and, you know, M&A, strategic transactions, private equity venture, that’s our life, right?

    That’s what we’re doing. We’re not going to stop doing it just because times have gotten tough because a number of the folks in our office, including myself, have done quite a bit of deal-making when times are tough and I think you will too, Patrick, because it’s, you know, your world, M&A, you know, in the M&A world, rep and warranty insurances is kind of become the standard for certain types of deals.

    And the only thing I would say to your listeners is, because I’ve sort of made this mistake myself and you kind of, you called me out on that a little bit is it’s not, the product is getting good enough and the process is getting efficient enough that it makes sense for deals that are much smaller in size, then, you know, we would have considered rep and warranty insurance for say two, three years ago, right? So if you got any deal that’s over, what would you say people should call you if the deal is over 20 million? Or what’s the

    Patrick: Over 10 million? I mean, it’s that small. And saving on a 500,000 or a million-dollar escrow by having a policy instead. That’s a lot more for some than a $100 million deal.

    Sander: Oh, 100%. I think it smooths things out, right? It doesn’t obviously eliminate the need to have good deal professionals put the deal together. Certainly, as with anything in insurance, you’d rather not be making a claim than having to make a claim. And so you still need to run through the process, but your clients, in particular, will love having that assurance. My experience has been the private equity folks have embraced it. And since they tend to set the deal terms for the industry and determine what’s quote-unquote market or quote-unquote standard, it’s now de facto standard to deals that are, you know, in the middle market.

    Patrick: Great. Sander, absolute pleasure having you. We’ll be talking again.

    Sander: Sounds good. Thanks, Patrick.

  • Louis Lehot | The Biggest Changes in IP in the Last 10 Years
    POSTED 8.25.20 M&A Masters Podcast

    As a veteran M&A lawyer in the Bay Area, Louis Lehot has advised many public and private companies, VCs, investors, and more on forming, financing, governing, and buying and selling companies.

    Formerly with DLA Piper, Louis founded his boutique law firm, L2 Counsel, to serve the unique needs of entrepreneurs and investors, specifically those young founders in the early startup phase.

    He talks about that work as well as the changing role of data, technology, and IP in deals.

    Tune in to discover…

    • How rep and warranty insurance has changed the game
    • Avoiding “extra” tax liabilities as a seller – and how counsel can help
    • The biggest mistakes companies and founders make with IP
    • What the future of M&A looks like in a post-pandemic world
    • 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 Louis Lehot, founder of L2 Counsel. L2 Counsel provides practical and commercial deal lawyers for founders and their investors. L2 is focused on legal strategies and solutions that make sense, which is really important when you’re getting into some complex deals.

    Lou is a veteran of m&a transactions representing the who’s who in Silicon Valley. Last month, I had the pleasure of joining Lou on a panel for structuring IP and technology acquisitions. So I asked Lou to join me today and share his perspective and predictions and I’m really excited to have him here. Lou, it’s a pleasure having you. Welcome aboard.

    Louis Lehot: Patrick, thank you so much for letting me join and speak to your audience. I’m a Silicon Valley lawyer. I’ve been practicing for 20 years. And I love to help founders, management teams and investors plan really smart exits, according to the theme of the situation. And I have so much fun in what I do. I have a great team of lawyers in my firm called L2 Counsel and an extended network of other lawyers that I bring in according to the circumstances.

    And it’s a pleasure to be with you. Like most of your listeners, I’ve been sheltering in place and working from home and trying to find ways to stay connected with people. And Patrick, I was so grateful that you joined me in my webinar a couple of weeks ago on how to structure IP and technology acquisitions. And I’m just thrilled to have the opportunity to speak to your audience about, you know, what I’ve learned along my journey and how I can help.

    Patrick: Yeah. And Lou, before we get into the IP issues, because this is not just limited technology companies, it’s essentially everybody now and we can get into that. But let’s back up before we get into L2 Counsel and M&A. Tell us about yourself real quick. What brought you to this point in your career?

    How Louis Got to This Point in His Career

    Louis: Oh, thank you, Patrick. I grew up in the San Francisco Bay Area, but in the East Bay in the hills above UC Berkeley. And I watched my father who is a PhD in computer science, go from entrepreneurial venture to venture and I caught the startup bug when I was at a very young age. I went off to college in law school on the east coast and found myself in Europe helping multinational corporations access the US capital markets. And after I met my French wife and had two kids, you know, she had the smart idea that we should move back to California.

    And we came back in 2005 and have been here ever since. Recently, I was running DLA Piper’s Northern California operations and their, co-leading their venture capital team. And I stepped away in October of last year and took some time off and came back to the market just as COVID was shutting us down with a new market offering to fill what I see is a gap in service where, you know, young founders, in the earlier stages of their startup, and when they go to exit have the most and the greatest need for legal services.

    And those are the times when they have the least amount of cash. And so calling up a lawyer who might have some giant hourly rate is a big impediment to, you know, forming that relationship and growing it. And so, in my new structure, I’m trying to find creative ways of making sure that I can build long-term relationships with founders and management teams and investors that are not based on the billable hour or with built-in disincentives for us to build our relationship.

    So that’s what we’re doing, Patrick, and we’re really having a great time. I think at the outset of COVID, we all tried to get the deals done that we had in process. And as of this recording July 10, you know, we’re starting to see brand new deals where, you know, buyers and sellers have not actually met each other and who have built enough of a relationship over Xoom and email and phone calls and video calls that they’re launching transactions to create inorganic growth and I’m really excited about that development and I think it bodes well for the rest of the year.

    Patrick: Well, I share your view and your optimism. I also have been noticing how necessity has become the mother of invention. And it was unthinkable of doing an M&A deal unless the parties were in a room physically together, to be able to look each other in the eye and see the whites of their eyes and, you know, get up all the body language and everything. Sometimes that’s just not possible. And I’ve seen, like you, not as many but a few of these things moving forward.

    First of all, let’s just talk about technology because, you know, technology 10 years ago was thought of as those are the Silicon Valley, those hardware, software companies, okay? Today, every company is a technology company, okay? Whether you are a manufacturer or restaurant chain, you’re deploying and utilizing some kind of intellectual property. Talk to us about that. I wonder what the perspective is on the challenges for these companies that may not think they’re IP intensive and how things have changed in the last 10 years.

    Every Company is a Technology Company

    Louis: That’s a great question. When I started out in Silicon Valley, I think there was an idea that really our companies were built on the back of two things. One was the idea and two were the people that knew how to implement the idea. So it’s technology and people. And the way we did transactions was really designed to grow the technology and bring along the people that were essential to the technology. And we viewed it as very much a wave of growth. It started here in Silicon Valley and would go eastward until it went abroad.

    And I guess the biggest development of the last 20 years, I would say, is that when I see it and meet a new company now, it’s just as likely that that company will achieve its first dollar of revenue outside the US as inside the US. It’s just as likely that its intellectual property will be developed in another part of the world as it will here. And I guess, I believe that the key to success for all of these businesses is that they plot a strategy for the development of their intellectual property from inception and that they identify what it is.

    And, Patrick, you know, I think the greatest development of the last year is the realization that the data that is created or harvested by the technology company is also part of that portfolio that needs to be addressed from inception. You know, how can you harvest the data? How can you create the data? How can you protect the data? How can you keep it private? How can you keep it secure? And so, when I work with early-stage founders, and especially when I help bring them to exit, really telling the story of what that is, is often the most compelling thing about the reason why a buyer wants to buy them.

    Well then as you move into the execution of the transaction, you’ve got to anticipate, you know, what a buyer is going to be looking at to determine that they’re getting the full value and that they’re mitigating any potential risks. So it used to be that buyers would, you know, focus on a freedom of operation analysis to make sure that there was a sufficiency of patents and that the patents didn’t infringe anybody else’s patents. And today, you know, many companies never get patents. Their business is really based on trade secrets.

    It’s based on computer code that they would never want to write a patent for just because of the time and expense and that it would render it public. And then, you know, they obviously have some of their greatest assets that they harvest from their trade secret software code is data. And so I don’t care whether you’re making masks or machines, you know, there’s data that’s flowing through your supply chain and your customer chain and the ecosystem that your product lives in. And, you know, harvesting that and monetizing it is the challenge of our time.

    Patrick: What’s, when you have a client there and they’re looking for an exit, okay? Let’s talk about the structures that. You know, very simply, what kind of structures are available out there for these companies?

    Structures for Exit Plans

    Louis: Great question. And, you know, when you’re looking to sell your business as a seller, you would like the buyer to take the entity so that you have no further ties or obligations. Those become the buyer’s ties and obligations. And so, you’re looking to either do your transaction through a merger, which is the easiest way to sell your company because it doesn’t require 100% of the shareholders to sell their, each and every one of their shares. Each of the state laws allows a merger as long as a majority of the outstanding shares of capital stock approve it.

    And some states have some additional requirements that, such as in California that each class of shares separately votes on that. But a merger, a share purchase is really in the best interests of the seller. It also guarantees the seller that they know what the tax treatment is going to be on the sale, which is simply going to be hopefully, a long term capital gain with the purchase price that they receive minus the price that they paid per share, which if you’re a founder, is hopefully a peppercorn and all of that as long term capital gains.

    Now, a buyer is going to look at several other ways to structure an acquisition. First, and this doesn’t always come to mind, but if you’re a buyer merely looking to get access to technology, a license is a really great way to go as it doesn’t give you the requirement to maintain the electoral property.

    It doesn’t make you a liable for any breaches of those patents by somebody else or breaches by those patents of somebody else’s patents. It doesn’t give you any of the historical liabilities for failure to pay payroll tax or any of that. So a license is really an easy way to go for a buyer. Now, they’re going to want exclusivity of the intellectual property. And so they’ll want the ability to develop it, grow it. And so acquiring the IP through an asset acquisition is often something that the buyer wants really just to control it better and to better monetize it. So an asset acquisition is another way that buyers look to do transactions for IP.

    Patrick: I just want to break in here real quick. In light of the economic climate out there where you’ve got a lot of companies that are struggling, do you sense that they’re going to be a lot more attention on opportunistic buyers to really push the asset acquisition as opposed to either allowing a merger if they can’t get a license?

    Louis: Absolutely. You know, I think that buyers are going to be looking to opportunistically supplement their own portfolio of products and an asset acquisition and then the recruitment of the people that know how to monetize the IP is often the most protective way for a buyer to acquire the business. It’s an asset acquisition, leave behind all the liabilities, leave behind the entity, leave behind the employees and whatever liabilities that may have occurred and then directly recruit the employees that they want cherry-picking them on a person by person basis.

    Patrick: Grabbing the talent. Yeah.

    Louis: And why that’s not the best thing for sellers is that typically, the company will have to pay tax on the difference between book value of the assets that were sold and the amount of proceeds that they receive. And then when they dividend out those proceeds to the shareholders, the shareholders then pay a second level of tax.

    So whereas in a merger, you could have, if you’re in the state of California 33% tax, if you’re selling your assets, you could pay a flat 20% corporate tax and then the individual of 35% in California 13% on top and suddenly, it’s over the vast majority of the transaction proceeds are going to Uncle Sam. And so not the best outcome for sellers. I would say the other risk for sellers and an asset acquisition is that the buyer has the right to, unless you contract around it, the buyer will get to attribute basis on an asset by asset basis.

    And, you know, you as the seller could get hit with the wrong tax treatment on a specific asset. And so for example, you know, a big risk is if there’s a lot of basis that the buyer attaches to some sort of a non compete or intangible asset that you don’t have basis in. And suddenly, you as the seller paying all this extra tax on top of what I already described. So, if you are a seller doing an asset deal because you have no other way of doing it, you really need good counsel and really strong accounting to make sure that the deal is what you think it is and that you minimize the damage.

    Patrick: I would say that, you know, another way the seller can try to negotiate and engaging a solid return that’s done these deals before, is, you know, the number one reason why a buyer doesn’t want to buy the company and everything is because they don’t want to assume any, or pick up any of the liabilities there might be that they don’t know about, okay? Either IP, HR legal, things that the buyer didn’t know about and, you know, they perform due diligence. You know, they’re on the hook just as if that target company committed them post-close. And so there is a way to transfer that risk away from the buyer, and that’s with rep and warranty insurance.

    Louis: Yeah, you know, that’s a great point. Rep and warranty insurance has been really a revolution in how we do deals. And it’s, you know, I think it’s in the interest of buyers and sellers to externalize the risk of breaches of reps and warranties, with insurance. And it really takes the sting out of, and the friction out of an ongoing relationship between a buyer and buyers’ new employees who are helping the buyer monetize the IP and really going back to those employees and thanking them for, you know, indemnification claims is really the last thing you want to be doing.

    And the easiest way to de-incentivize them and demotivate them from doing what they need to do. But you know, Patrick, there’s something I wanted to tell you about representing startup companies and growth companies as they come to the market for sale. And that’s that they’re all so special.

    They all come with their own history and relationships and problems. And so what I do as counsel to two sellers, is I come to them, and I schedule a three-hour meeting and I go through my 20-page checklist that I’m constantly updating of every question that I can think of that will impact how to do the deal. And so I’ll give you an example. A lot of founders will have family members in the company.

    And if you don’t ask the question, you won’t find this out until the day after the closing when the founder calls you, you know, that his daughter’s crying that she lost her job. And so if you don’t, you know, anticipate those issues at the outset, you know, you can have a bad surprise. And another one I’ve seen multiple times is the founder of the business also owns the facility and has an arm’s length or some rental agreement between the company and her or his family trust that owns the property. And, you know, if you don’t anticipate that, you can have issues.

    Trusts and estates, when you’re really in the money on your business and you go to sell it and it’s your life’s biggest asset, you really want to be thoughtful as early as you can about taking advantage of trusts and estate and, you know, family planning vehicles, so that, you know, you can put the money in the places that will best benefit, you know, you and your stakeholders. And I can go on and on. But, you know, I’ve got this 20-page checklist, Patrick, that I really need to spend a lot of time with my clients on to understand what are the issues and how we can best structure deals.

    As we look forward to the rest of the year, Patrick, I am seeing a lot of early-stage companies running on fumes, running out of cash running out of runway and they’re going to be faced with a tough decision whether they empty more of their personal savings into the company or whether they bring it around for sale. And some of those companies will, you know, will fail and they’ll end up either in chapter seven or 11 bankruptcy proceeding if there’s sufficient business that it merits the expense of that process. Or, you know, I often find that the IP simply is assigned for the benefit of creditors.

    And you have specialist firms like Sherwood partners or Armanino, or one of others, many others that will go, you know, keep a database of assets that they hold on behalf of creditors that are for sale and buyers will be in touch with those brokers of insolvent assets to acquire pieces of intellectual property that they need. And so, you know, one example I’ll give you is, you know, I had a client who had a business idea that might have involved repurposing some product to help turn those into ventilators. And we discovered through the process of mapping out the technology roadmap that we needed some licenses.

    And so we went to business brokers and found who had what we needed and took out a license. We didn’t actually acquire the intellectual property, we just took a license to it. And that was one way that whoever had bailed out on their business was able to monetize it even after the business had failed. So I expect to see a lot of restructuring transactions, a lot of assignments for the benefit of creditors, and a lot of, you know, new and important ways for people to learn how to monetize intellectual property and structure technology acquisitions and sales.

    Patrick: I think that’s a great role that you provide there, Louis, you and your team, is that people may be thinking that okay, there’s only one way out and it’s not going to be a favorable one unless we go ahead liquidate our personal assets and I think they come to meet with you, all of a sudden, all these options open up that they never knew existed.

    And the larger firms don’t have the time to deal with those smaller things and probably don’t focus on those options. They’re too busy worrying about much larger needs of larger clients. I think you meet a great need there. The other thing is important is with that 20-page questionnaire, I mean, your objective when you’re representing sellers is what?

    No surprises when they’re negotiating with a buyer. You don’t want buyers coming in here all sudden asking the uncomfortable questions that turn up some real big problem that could derail the deal. From your experience just solely with regard to intellectual property, what are some red flag things out there that buyers, you know, buyers are gonna be asking you about that either your clients don’t think about or just aren’t as prepared as they should be?

    Intellectual Property Acquisition Red Flags

    Louis: That’s a great question, Patrick. And, you know, On my long list of questions that I go through with a seller that I’m working with the first time is how did the intellectual property first come into the company? And upon formation, did the founder assign her or his intellectual property to the company? I’m always shocked to find the number of defective assignments of IP at formation.

    And so that’s an easy fix as long as the founder that contributed that IP is still around. But if you have a co-founder that was really key to the development of the IP, that formation has departed and you have no leverage to get that person to sign in as assignment later on that can be sticky. Another red flag is prior employment of the founders. And so, you know, if the founder worked making bread at Acme CO and was responsible for the designing of the baguette and then suddenly starts a new company and guess what? Baking bread and the designs are the same.

    You know, that can be a big problem. So typically, technology companies and any company, when they hire an employee will ask them to sign all of their intellectual property to the company that is their employer that they create during their duties during their nine to five job and that relates to their job. And so I always want to know, from a founder,  what was their prior job, what were they doing and what paper did they sign.

    Another one is, you know, in the life of a startup, you know, it used to be that you could exit a company in three to four years and today, I think the average time to exit for a company is more like 10 years. And so, you know, there’s gonna be a lot of people coming and going during that 10 year period and you’ve got to make sure that every employee from day one has signed an assignment of invention agreement so that you can put hand on heart and tell the buyer that when they acquire the company that they’ve got all the IP without any claims from employees that the IP is in fact theirs.

    So the famous example was when Cruise, the automatic autonomous vehicle company, came out for sale to General Motors, there was a former co-founder that raised his or her hand and said, Hey, I’m actually co-founder and I actually, you know, owned X percent of the company and the idea was mine and there was no paper. And so I believe there was a settlement and I don’t know that the settlement was ever disclosed, but I’m sure that it was painful for the management team of Cruise that upon sale to pay that out.

    So that’s another red flag. You know, another one is that I find often are, especially here in the Silicon Valley, or, you know, we have a lot of professors from Stanford or Berkeley or one of the other great universities in a 50-mile radius of this technology hub that spins out of the university to create a company or even creates it in the lab. And you’ve really got to be careful at formation that the intellectual property that’s in the company actually belongs to the company and not the university. And oftentimes, you’ll see spectacular problems when universities have claims to the IP. I see that a lot in life science companies, especially.

    Consultants and contractors, just because you hired someone as a consultant doesn’t mean that they, you don’t have a similar risk of them claiming rights to ownership or intellectual property. Or worse yet, that they were misclassified as a consultant that they were, in fact, an employee. And so you want to make sure that your consultants and contractors are all papered. You know, all of this can be remediated, Patrick, for the most part, and fixed and cleaned up and oftentimes founders take shortcuts because they think can all be cleaned up later.

    And while that’s usually the case, sometimes the people that you need to clean it up are, you don’t have them at your disposal or they don’t want to agree to the cleanup and you end up having to pay them out. Finally, I guess another area of red flag is joint ownership. And so, you know, whether it’s founders that form an LLC where they put the technology and then the technology from the LLC gets licensed to the company or if it’s a, you’ve partnered with a large company, one of the big tech Silicon Valley players and you’ve jointly owned the property, how can you then sell it?

    So those are some of the big issues. I guess I’ll just finish by saying, you know, that in today’s day and age, we see just a ton of enterprise software companies coming to the market. And, you know, they’re essentially selling a platform of software that’s written on a code stack. And that code stack needs to be analyzed once a year for open source code. Open source code is code that’s already been developed. And the condition to using that open source is that if the, if your code contains the open-source code, then you then have automatically granted a license to everyone in the community.

    Patrick: I’ll echo the concern with a prior employer because I mean, that’s the running little joke around Silicon Valley is we’ve got, you know, we’re home to a number of very large search engines and social media platforms. And within those organizations are thousands and thousands of engineers working there that quietly have their own little pet project in their side drawer, just waiting for the day to go ahead and step on out and open up their own shop.

    Louis: Yeah, yeah. Well, I could go on and on with red flags, Patrick, but I hope that’s a good introduction for your audience. And I can to talk about specific problems and ways to solve them.

    Patrick: Well, they’re, I mean, with, as you said, all these organizations are unique. And so they all have their story to tell and they need someone like you that knows how to ask the right questions. Why don’t you give me a profile of your ideal client?

    Who is L2 Counsel’s Ideal Client?

    Louis: Oh, that’s a great question. And thank you. You know, I have set out to target four areas in the market where again, I think there’s a real disconnect. You know, the first is entrepreneurs, management teams and investors at formation and as they go through the life cycle. And so, you know, sometimes you meet the lawyer that’s right for you as you’re exiting your prior employment and you do it all right.

    And sometimes, you don’t meet the right person until you’ve just closed the Series B round and you just meet someone and you click. So for me, you know, the best introduction is that formation or as somebody coming to market with financing for their company. So that’s the first area. The second area is when that entrepreneur or business comes to the market for sales, the sell-side M&A.

    And oftentimes, I’ll get introduced by their banker, I’ll get introduced by one of their investors or board members or members of their executive team. And, you know, I really try and distinguish myself, you know, with a great network of relationships, you know, deep experience and, you know, a really personal approach that starts with that three-hour meeting going through the 20-page checklist to think of every possible issue that is leveraged for and against in a deal.

    You know, the other times, or ideal clients, for me are our larger technology businesses that are looking to create an acquisition machine. And so I help a number of larger tech companies design forms, design, you know, term sheets that are, you know, firm but fair and that are designed to help deals get done efficiently and mitigate risks. And so that’s a really fun part of my practice.

    And then the last part of my practice is I work with a lot of investors across the value chain from, you know, large growth equity investors like the SoftBank Vision Fund or Riverwood Capital or others to, you know, real early-stage investors, you know, that come in with a half-million-dollar check. And I help them design, you know, an instrument that best reflects their horizon for investment and harvesting and that gives them a set of rights that works for them. And so those are kind of the four areas that I’m targeting in my new firm, Patrick, and, you know, I welcome new conversations with folks in those areas.

    Patrick: And this is a regional where you’re doing as long as you stay in California?

    Louis: You know, my practice has always been what I call garage to global and, you know, I’ve lived in worked in Europe, all over the east and west coast and in Asia and so while, you know, most of my day to day company-side clients are here in the Bay Area. You know, I work with investors and acquirers all over the world.

    Patrick: You were good enough to publish an article in CEO Magazine recently where you were putting out your predictions for M&A during COVID. And we were hoping a month ago that we’d be in post-COVID right now, but we’re still kind of bumping along. Why don’t you share a couple of your predictions for M&A as you see from your perspective?

    Louis: Sure, sure. I think that there’s a window of opportunity right now as technology buyers and sellers have been kind of locked in place and sheltering at home. And really, I think there were a couple of months where not a lot of deals got done other than kind of finishing things that were in the pipeline. And even those deals that were in the pipeline, for the most part, got restructured with some sort of a 10 to 20 to 30% haircut on the pre-COVID valuation. I’m now seeing this window of opportunity blasting open as the economy reopens, has been reopening since I would say mid-May.

    And I’ve been seeing investors and buyers willing to look at new transactions, new investments, new acquisitions, on a remote work from home basis. You know, everybody’s still responsible to their stakeholders for delivering growth and, you know, COVID or no COVID, work from home or not, you know, if you want to, you know, capitalize on your opportunity, you’ve got to make the best of your circumstances. And so I’m now seeing, you know, a really strong uptick in M&A activity, both from strategic and financial buyers.

    I think that as valuations, especially in the lower middle market have fallen down by a good third, I’m seeing the private equity buyers are really finding their appetite to go and do deals, Patrick, because, you know, it’s been a tough five years for financial investors and strategic ones as well to justify paying the kinds of valuations that private companies were demanding in the market through the boom. And, you know, COVID is really an opportunity for, you know, value-based investors to get assets at a fair price, or at a price that they can justify to their limited partners.

    Patrick: Would you see maybe initially more M&A activity for add ons where, I’m looking at private equity specifically, where rather than take a big jump on a new platform is maybe you already know what you have and maybe making smaller investments on the add ons or go for the platform, because you’re gonna save a lot more money now on those larger deals that are going to be cut by 30% then on an add on. I mean, just out of curiosity.

    Louis: Yeah, that’s a great point. And I will tell you that I’ve seen both. And so I’m currently working on a new platform acquisition that will be the platform for a technology vertical for a private equity firm. And, you know, they’re very excited about it and excited about the valuation that they were able to obtain and really believe that, you know, this will allow them to further, you know, do those add ons that you’re talking about.

    And I’m working with another private equity firm on doing those little tuck-ins, revenue add ons really, or product add on features. And so I think both platform and add on deals, we should be able to see those happen now through the end of the year. I predict a really big fourth quarter. I think people were thinking big third quarter and maybe slower fourth quarter because of the election.

    But I think that, you know, the economy is going to slowly reopen and we’re going to play whack a mole with all of these COVID spikes, and it’s just going to build momentum. And I think that, you know, the fourth quarter, hopefully, it’ll be a little bit more under control and, you know, people will really want to get their deals done before there’s a change in administration, whether it’s, you know, whoever wins, there’ll be a change in administration and, you know, the associated risk of change of policies and change in market dynamics.

    And so I think the fourth quarter is going to be really big. And then finally, as we’ve alluded to before, I think there’s going to be a lot of technology businesses that just have to come to the market for sale because they have to. And then they’re going to be a bunch that would have been for sale in the first half were it not for the pandemic, but so there’s kind of the pent up supply that’s going to come into the market on the second half.

    And then I think 2021 is going to be a big year for private equity sales. I think there’s a big backlog and I think a lot of these technology companies have done really well through the pandemic, and they’re going to look to sell at bigger multiples and they’re going to be a lot who really struggle where people are going to give up. And bring those in and either restructure or bring them in at lower multiples.

    Finally, there’s one thing we haven’t talked about on this call, Patrick, which is the IPO market and that’s really been booming last month, totally unexpectedly. And I believe the second quarter of 2020 was the biggest quarter for issuances of equity in the history of the US capital markets. And I think that, you know, that really bodes well as capitals return to firms and they’re able to then, you know, deploy new capital or raise new funds. So the IPO market is a great bellwether for M&A as well.

    Patrick: Louis, how can our audience members reach you?

    Louis: You know, I have a website which is my name, and then my firm is And there are multiple ways of finding me on those websites. And Patrick, I’m really grateful for the opportunity to speak to your audience. And I shouldn’t close before I thank you for being so innovative and having brought rep and warranty insurance into the lower middle market as it’s really a product that before I met you was really reserved for sales of 100 million dollars or more.

    And the need for rep and warranty insurance at all levels of the value chain is critical and especially in the smaller middle market deals where It’s so price-sensitive and where an indemnification issue can be so dramatic. And so, you know, Patrick, I look forward to continuing to work with you as we navigate these choppy markets.

    Patrick: Yeah, I put together a list of the 10 reasons why I love insurance, why I love M&A. And I consider M&A events. The most exciting business event out there. It is where dreams come true, legacies get made, and it’s very exciting just being a small contributor but just being around it is really given me that surcharge set, you know, find my purpose and stuff.

    So, and it’s great because now we’re able to bring this service and this product down to the innovators and the creators where they took, there was nothing there and from nothing, they created tremendous value. And to help them and reward them is just the least I could do. And it’s working around people like you that, you know, like I said, you work with who’s who in Silicon Valley. So it’s been great. So Louis, thank you very much. And I look forward to talking to you again. Folks, look for him on LinkedIn. He’s got a ton of fabulous content.

    Louis: Thank you, Patrick. And have a great weekend.

    Patrick: You do the same.