• Moore’s Law Comes to R&W Insurance
    POSTED 10.27.20 Insurance

    While attending a recent M&A conference, I was surprised to hear so many of the participants – including PE firms, M&A attorneys, and bankers – still hold the mistaken belief that Representations and Warranty (R&W) insurance is too expensive.

    In fact, the floor for R&W coverage has actually come down drastically in the past year to the point that a $5M policy can easily be found and it will cost less than $200K, including underwriting fees and taxes. (This figure doesn’t include broker fees, which the big firms are adding to maintain income levels. More on that below.)

    Why the disconnect? These folks haven’t checked in on R&W insurance for a while, and people assume what was true a couple of years ago is still valid. They tend to get their information and updates from conferences. I was happy to spread the good news while I was there, and I got positive response. These folks did not see value in a policy if the cost was $225K, $350K. But if they could get a policy for under $200K, they were interested.

    This significant drop in costs reminds me of Moore’s law. Quite appropriate considering how many M&A deals are done in the tech space. This maxim holds that every 18 months we can expect the speed and capability of our computers to double, while we pay less.

    There are several reasons why the cost of R&W coverage has dropped:

    • The number of insurers offering R&W insurance has more than doubled.
    • Rates have fallen from the 2.5% to 4% range to the 2% to 2.9% range.
    • Eligibility thresholds have decreased from deals at $75M in transaction value to $10M in transaction value.
    • Falling costs have given rise to more policies being placed.

    I expect this trend to hold steady as the increase in R&W policies written has not yet translated into a corresponding increase in paid losses by Underwriters. Due to the simple fact that more policies are out there, reported losses are up. However, most of these cases fall within the policy retentions, so insurers are not having to write many R&W checks to cover damages. Plus, just because they’re writing smaller deals doesn’t mean Underwriters are getting sloppy and accepting just anything. They expect the same due diligence, making the smaller deals just as safe for them as bigger deals.

    It should be noted that unlike other discounted insurance products, these low-priced R&W policies provide coverage just as comprehensive as the higher priced alternatives (depending on the complexity of the deal and diligence completed, of course). You’re not getting lower quality coverage or added restrictions just because it’s cheaper.

    How Low-Priced R&W Insurance Changes the Game

    A sub-$200K priced R&W policy is good for M&A for the following reasons:

    1. Lower costs make the value proposition on smaller deals more “palatable” – especially for Sellers where $1M or $2M less in escrow makes a material difference. These folks can’t take a $1M to $2M hit if there is a breach. R&W coverage is a lifesaver for them.

    2. Lower priced policies more easily enable Buyers and Sellers to share the costs.

    Many Buyers are saying that Sellers want R&W coverage on the deal but don’t want to pay for it. And Buyers are chagrined by that. But if costs are split and it’s under $100K for each side, it’s more favorable, and both sides benefit from having the policy in place.

    As you know, this specialized insurance makes negotiations smoother, lets the Seller keep more cash at closing, and ensures that the Buyer doesn’t have to take legal action against the Seller if there is a breach, which is awkward if the Seller’s management team is on board with the new entity.

    3. The lower price point makes R&W an affordable tool for add-ons, which are expected to increase as PE firms and Strategics look to enhance the value of their portfolio companies.

    With PE firms in particular, thanks to lower cost policy and premium, they won’t just reserve R&W coverage for deals above $100M in transaction value. This lower price justifies using R&W on deals at $30M, which they are doing more of because it’s a lot easier to spend $30M to $50M than $100M. PE firms will transact two to three times more add-ons per year than one big acquisition.

    I saw this first-hand recently with a policy I provided here in Silicon Valley. The company brought in a $90M add-on to an existing portfolio company. The $5M limit R&W policy cost just $175K (including underwriting fees and taxes).

    Overall, with the lower price for an R&W policy, cost is no longer an objection for either party to consider a policy.

    What’s Ahead

    If R&W continues its stellar performance, expect to see even fewer exclusions and possibly lower retention levels.

    But how much lower can the price go? Not much further if R&W insurance is to be sustainable. If the product gets too cheap insurers will not be able to collect enough in premiums to pay claims.

    We’d caution prospective users to be wary of policies coming in under $100K.

    One observation from this drop in premium rates is that the major insurance brokers offering R&W coverage have reacted to this price drop (which they’ve had to go along with to stay competitive) by adding broker fees of as much as $25K. These big firms have big overheads and want to protect their profit margin.

    That’s where a boutique firm like Rubicon Insurance Services shines. In this segment of small market M&A deals, we take a back seat to nobody. We can broker policies more cost effectively and more efficiently because we don’t have the overhead. We won’t charge those broker fees.

    I’m happy to provide you with more information on R&W insurance and provide you with a quote. Please contact me, Patrick Stroth, at

  • 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.

  • Must-Have Insurance For Your Next Add-On Deal
    POSTED 10.13.20 Insurance

    If you’re involved in lower middle market M&A deals, you should know that Representations and Warranty (R&W) insurance is now available to cover transactions as low as $10M, offering tremendous benefits to both Buyers and Sellers.

    This isn’t common knowledge in M&A circles, even though it’s been 18 months since insurers started entertaining sub-$100M transactions.

    The pandemic has disrupted the normal route that this sort of news gets out: M&A conferences, where insurance companies share details on product development and product changes.

    If I wasn’t sharing this with you now, chances are, you wouldn’t know about it.

    That’s why I’m compelled to share that R&W policies created for lower middle market deals are available, and they are cheap – costing under $200K for a $5M Limit R&W policy.
    This makes R&W coverage perfect for add-ons, which have been an increasing focus of PE firms in order to add value to existing portfolio companies. Add-ons are often a smaller investment with potential for greater returns.

    The benefits to Sellers in an add-on deal are:

    • Greater value as part of a larger company
    • Cost synergies add to the bottom line
    • Access to larger customer base
    • Enhanced purchasing power and financial leverage

    Overall, this type of deal allows Sellers to strengthen a “weakness” keeping them from the next level.

    The greatest benefit is that it’s a “second bite at the apple.” Sellers retain a portion of the new entity, giving them potential for additional money when the new entity is eventually sold.

    For example, the owner of a $20M company agrees to sell for $15M cash and roll-over $5M (25%) in shares of the new firm. Later, when the new firm is sold for $100M, that 25% is now worth $25M, 5-times the original $5M roll-over figure and $5M more than the value of the original company.

    There’s a catch. Add-ons are smaller and less experienced in M&A than their counter parties. Once a LOI is signed, Buyers with huge leverage can exert great pressure in negotiations, which creates tremendous stress on the Seller.

    The acquired company might feel cornered and bullied into agreeing to take a lot of risk and liability away from the Buyer – like take on a sizable escrow. Traditionally, the Seller could be at risk of losing 10% to 30% of proceeds if there is a serious breach. And they have to swallow the fact that they’ll only get a portion of their money at closing.

    Sellers have to wait a year or more – and the money sitting in escrow can be exhausted in the event of a breach that the Seller had no control over.

    That’s where Rep and Warranty comes in.

    Removing Risk With R&W Insurance

    One way to remove some of the contentious issues in a deal is through R&W, which enables Sellers and Buyers to transfer their M&A risk to an insurance company.

    Until recently, this powerful tool was not available to smaller (sub-$50M deals) due to cost and target companies not having thorough financial documents or Buyers developing key diligence reports.

    As detailed in my previous piece “Moore’s Law Comes to R&W Insurance” greater competition among M&A insurance companies has driven down premium levels and simplified prior eligibility criteria. To read the Moore’s Law piece, go to:

    Insurers no longer require audited financials (a deal-breaker for lower middle market companies). And at costs under $200,000, R&W is the ideal fit for sub-$100M acquisitions – especially add-ons.

    Having this coverage in place makes for a much healthier environment post-closing, where you didn’t have to grind down the target company in negotiations. These are the folks joining your team, and if they come limping in, you can bet they won’t be as enthused to make the merger work.

    In the tech community, Buyers are especially reluctant to penalize their newest partners by using up escrow funds. So they have a dilemma. Do they eat the loss… or risk demoralizing their new partners? With a R&W insurance policy in place, that dilemma is gone.

    You want people to hit the ground running. How?

    Make sure they get as much money as they can with as little risk as possible. If you are the Buyer, the R&W policy is zero cost to you. And it can be applied directly to the purchase price which Sellers will eagerly accept.

    You want these transactions happening fast. You want to integrate the new group into your team in a positive way to ensure a successful transaction. What better way than this tool – Representations & Warranty insurance.

    It has withstood the test of time. It’s worked for the big deals, and now it also works for the lower middle market deals.

    What To Watch Out For

    As the R&W insurance market has matured, different insurance companies now favor different M&A profiles. Some prefer larger risks over $200M. Some prefer lower middle market – $50M or less. So when selecting a broker, make sure you work with one who is focused on your market segment.

    You could go to a “brand name” institutional broker for your lower middle market deal. They are not bad people, but they are focused on their bigger deals. They don’t have the bandwidth to handle the smaller transactions. If they have two or three billion-dollar deals going, they can’t handle a dozen $20M deals at the same time.

    Another wrinkle is that, due to lower priced R&W coverage, some brokers will add in extra fees to supplement revenue and maintain profitability per deal.

    I’m a broker with hands-on experience with the Representations and Warranty insurance product, specializing in insuring lower middle market deals.

    To learn more about the protection R&W coverage offers, I invite you to contact me, Patrick Stroth, at

  • 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.

  • Why Representations and Warranty Insurance Is the Perfect Tool for Bankruptcy Sales
    POSTED 9.29.20 M&A

    I know of a company that was on the verge of being bought for $100M. Then COVID-19 came in, the deal fell through, and now the business, forced to go through bankruptcy, is selling its assets for $20M.

    This will not be a unique case. In the coming weeks and months, expect a growing list of companies looking at bankruptcy as their way out due to the ongoing economic effects from the pandemic.

    Unlike past downturn-related bankruptcy sales, there is a very valuable M&A tool that can be brought into the transaction that greatly benefits both Buyers and Sellers (also known in these cases as debtors):

    Representations and Warranty insurance.
    As Bryan O’Keefe, Gena Usenheimer, and James Sowka, partners at Seyfarth Shaw, put it in their recent article, “How An M&A Tool Can Benefit Bankruptcy Sales”:

    “When properly utilized, reps and warranties insurance can increase the value of the distressed asset while simultaneously providing the asset purchaser with a backstop on the promises made in the purchase agreement.”

    R&W coverage transfers the indemnity risk away from the Seller to a third party – the insurer. And the Buyer simply goes to the insurer with a claim for damages from any breaches post-closing. It’s a win-win for both sides of the transaction.

    In bankruptcy deals covered by R&W insurance, the Seller’s company and/or its assets are more valuable, which gives them more cash to cover their debts. The simple reason why is that an asset backed up by an insurance company is more valuable to a Buyer than an asset that is bought as is. They can sell for more, simply put.

    For Buyers, this coverage gives them protection and peace of mind that if something goes south and there are unknown breaches of the reps and warranties of the Purchase and Sale Agreement, they won’t have to go after the debtor (which doesn’t have funds to cover the damages because of their financial situation) for relief because the insurance company is ready to go.

    This is vastly different than how business is usually done with these 363 sales. In the past, the mode was “as is, where is.”

    It’s kind of the like buying a used car “as is”—it’s up to the purchaser to have a mechanic check out the vehicle to make sure it’s in good running order and there are no hidden issues. When a car warranty is added to the deal, not only does it cover repairs if something breaks down unexpectedly, but the owner can also actually increase the selling price.

    With a 363 sale, the burden of conducting due diligence of the target asset is on the Buyer, and they often have a shortened timeline to conduct it. Things can be overlooked. R&W coverage acts like the car warranty.
    As Bryan, James, and Gena say in their article:

    “Most 363 sales are ‘as is, where is’ – a bankruptcy term of art meaning that the asset purchase agreement has no indemnities and the debtor is not standing behind the usually limited reps and warranties contained in the agreement.”

    “While the bankruptcy court’s 363 sale order wipes out third-party claims against the assets, it does nothing for so-called ‘first party claims’ – that is, the reps and warranties made between the debtor and buyer around the overall state of the assets.”

    R&W coverage is more affordable than ever. It causes no friction or change in dynamics in the deal; in fact, it makes negotiations smoother. And it’s now available for middle market companies. This has meant its widespread adoption in some M&A circles.

    PE firms have been on board with R&W insurance for several years now. And SPACs are warming up to R&W as well. Now it’s time for bankruptcy sales to join in.

    Why haven’t bankruptcy attorneys already been using this unique insurance product? They simply were not familiar with it.

    You should know that insurance companies have departments that specialize in R&W coverage exclusively for 363 sales, which means not only are they experts in the field but also are coming in with aggressive pricing for the policy, which is a relief of companies in trouble, who face higher legal and other fees in general.

    As bankruptcy attorneys realize these and all the other benefits of R&W coverage, watch for its use to increase as the coming wave of bankruptcies crests in the near future.

    To find out how this specialized type of insurance can be a game-changer in your 363 sale or more straightforward deal, contact me, Patrick Stroth, at for all the details.

  • 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.

  • Why Rep and Warranty Insurance Is Perfect for SPACs
    POSTED 9.15.20 Insurance

    The special purpose acquisition company (SPAC), sometimes called a “blank check company,” is the newest darling of the stock market for going public because it’s so much easier, quicker, and cheaper than a regulation-heavy traditional IPO.

    As you know, SPACs are created for the sole purpose of acquiring or merging with an existing company. And there is no deal more perfectly suited for Representations and Warranty (R&W) insurance than one involving a SPAC.

    Private Equity took years to embrace R&W coverage, which transfers the indemnity risk away from the Seller to a third party – the insurer. It’s just a matter of time before SPACs do the same.

    SPACs have been in the news lately.

    Oakland A’s executive vice president (and former general manager) Billy Beane of Moneyball fame partnered at the end of January with RedBird Capital Partners to form RedBall Acquisition, a SPAC set up to the acquire a pro sports team. Hedge fund leader Bill Ackman raised $4 billion for his SPAC, the largest listing to date. All told, SPAC listings have raised just about $40 billion so far in 2020, eclipsing the $13.2 billion raised in 2019, according to SPAC Research.

    PE firms and big-name investment banks like Goldman Sachs are getting in on the action.

    Partly driving this trend is the pandemic. The valuations of private companies are falling, and they’re looking for liquidity fast – which is something traditional IPOs definitely don’t offer, especially in this time of market volatility. SPAC IPOs aren’t as dependent on market performance to be successful. Finally, they also allow sponsors to acquire quality companies at lower valuations.

    All this means opportunity for savvy investors, who enjoy the many benefits a blank check company provides:

    1. It’s safe. Money raised for a SPAC during the IPO sits in a trust until there is an acquisition. You don’t lose money if the deal doesn’t go through.
    2. In two to three years, investors can potentially see a sizeable return. You could put the money with a PE Firm, but that capital is committed for seven to 10 years.
    3. They can walk away. Founders of SPACs must make an acquisition within two years. They must convince investors to back the deal. If an investor isn’t happy – they can take their money and walk.
    4. Less than 10% of SPACs fail to complete an acquisition.
    5. The value of the acquisition sometimes brings the stock price well above the usual starting price of $10/share. And sponsors and shareholders have a vested interest in increasing value.

    Sellers love SPACs because they regularly outbid other offers to get these acquisitions and they are under time pressure. SPACs consistently pay more than everybody else. PE firms can’t match these premiums because they want to get the best return on investment.

    Why R&W Insurance Is Perfect for SPACs

    SPAC founders are under tremendous time pressure to get deals done within the two-year deadline, which, except under very specific circumstances, is set in stone.

    They need deals to go smoothly and on schedule. Plus, the longer it takes SPACs to complete a business combination – the more leverage the target has to insist on narrow Reps and Warranties and other Seller-favorable terms.

    That’s where R&W insurance comes in. It hedges risk for both Buyer and Seller and is built to facilitate fast acquisitions. Here’s why:

    1. It transfers risk of breaches of the Seller reps and warranties to the insurance company.
    2. It provides a hedge to Buyers. The board of directors of the SPAC and shareholders are protected if a post-closing breach occurs. They won’t be subject to covering that loss.
    3. When this coverage is made part of the deal early on, there is no need for the sometimes contentious negotiations over reps and warranties because, if there is a breach, the insurer pays the damages.

      This speeds up the process – not to mention saves on legal fees, about 20% savings on the negotiations part of the deal. The management team of the acquisition target will likely work with the SPAC going forward, so if negotiations are amicable, it means a good working relationship going forward.

    4. The target company keeps more money in their pocket rather than in escrow. You can’t understand how big a deal the removal of escrow is. A typical SPAC purchase is $200M to $1B, which means typical escrows are from $20M on the low side to $100M. If you can relieve tens of millions of those dollars because R&W is in place, it’s a no-brainer.
    5. Sometimes due diligence by the SPAC team is not as thorough because they are trying to save time and money. R&W underwriters could point out things they could diligence a bit more. They could uncover soft spots in diligence that should be addressed.
    6. Provided this approach is used at the opening of negotiations, the target company will gladly pay for R&W coverage. The SPAC doesn’t incur any premium cost, which can run $500K to a couple of million. A target will gladly pay that to have $2M in escrow instead of $30M.
    7. R&W insurance is also another hedge for Directors and Officers Liability insurance. Say a SPAC has a two-year D&O policy with a six-year tail. If R&W coverage is in place, those D&O Underwriters are open to shrinking that tail premium because there is less exposure.
    8. R&W coverage is another way to persuade possibly uncomfortable shareholders. This is not usually an issue. But it’s one more argument in your favor to get it done.

    SPAC sponsors are incentivized to make deals work, because if they have to give money back to investors, they don’t get paid and could lose standing in the eyes of potential future investors in other SPACs.

    With SPACs there is no history of performance. Investors look at the sponsors’ reputation and expertise when they decide to buy shares, as do target companies when they decide to accept offers. A tarnished reputation makes it hard to move forward.

    If deals are eight times more likely to close with R&W coverage in the PE market, I would believe it’s at least that much in the SPAC market.

    Given all this, why aren’t SPACs running to R&W insurance right now?

    Until recently, most sponsors have been big-time banks and successful investors and executives. They have experience in M&A, of course, but as Strategics they held so much leverage over their targets, R&W wasn’t necessary. So they never really considered it – or even knew what it was.

    Today, large PE firms, who have embraced R&W insurance, are coming to the forefront as SPAC sponsors. R&W is definitely in their “toolbox”.

    It’s clear that Representations and Warranty insurance is ideal for SPACs. To find out how this specialized type of insurance can change the game for you, whether you’re a SPAC sponsor or a target company, contact me, Patrick Stroth, at for all the details.

  • Intellectual Property in M&A – and How Representations and Warranty Insurance Fits In
    POSTED 9.1.20 M&A

    Representations and Warranty (R&W) insurance is a specialized coverage that transfers all the indemnity risk to a third-party – the insurer. If there are any breaches of reps and warranties post-closing, the Buyer simply files a claim and gets paid damages.

    In many cases, it’s a much more affordable alternative to traditional indemnification – the holdback of funds in escrow to pay out any possible damages that come up from breaches. Because they take home more cash at closing, R&W insurance is especially appealing to Sellers.

    Due to the protection it provides, R&W coverage is becoming an increasingly common feature of transactions in just about every industry. And because it’s now available for deal sizes under $20M, it’s been embraced by Buyers and Sellers of lower and middle market companies, including PE firms and strategics.

    Despite its many advantages, R&W insurance went over like a lead balloon in Silicon Valley for many years.

    Why? Early R&W policies would exclude intellectual property. It was considered uninsurable. And because IP is such a central part of deals with tech companies, what would the point be of seeking a policy that didn’t protect for breaches in that area?

    These days, breaches of IP-related reps and warranties, in which the Seller states that there is no litigation or claims related to IP infringement, they are the sole and exclusive owner of the IP, and they have the right to transfer the IP, are insurable.

    This doesn’t have ramifications just for mergers and acquisitions among Silicon Valley tech companies.

    Today, every company is a technology company, not just those that have hardware and software as their central offering.

    Consider McDonald’s. In 2019, the fast-food giant made three key acquisitions of innovative tech companies: Dynamic Yield, which offers personalization and logic technology, Apprente, known for its voice-based conversational technology, and Plexure, which creates mobile apps.

    The goal was to incorporate tech from these companies to install more efficient and personalized ordering through mobile devices, self-order kiosks, and drive-thrus at McDonald’s locations.

    When companies like McDonald’s make acquisitions, they want to ensure the IP they’re buying is free of encumbrances that could cost them months or even years down the line, such as code that comes from another source.

    The Best Ways for Buyers to Get Ahold of IP They Need

    During my recent interview with veteran M&A lawyer Louis Lehot, formerly of DLA Piper and founder of his own boutique law firm, L2 Counsel, he highlighted three different ways a Buyer might get access to IP they need:

    • Mergers are the easiest way to sell a company because it does not require all shareholders to agree to sell all their shares. You simply need a majority of outstanding shares of capital stock to approve it. This type of deal also has tax advantages for the Seller.
    • For Buyers who simply want access to technology, they could simply license it. This way, the Buyer doesn’t have to worry at all about any breaches and liabilities. However, they aren’t the only company able to take advantage of this tech. There could be other license holders.
    • However, for Buyers who want to be able to “build on” IP, developing it to further monetize it, an asset acquisition is the way to go. They are able to only secure the part of the company they need and avoid any liabilities the entity might have. They can also “cherry pick” team members from the target business they want to bring on. This also gives them “exclusivity.”

    Typical Breaches of IP Reps

    We don’t know if R&W insurance was used in these acquisitions by McDonald’s. However, in deals like this, where the technology and the intellectual property is so important, it’s a good idea for Buyers because of the many risks that might prevent it from fully making use of the IP it has acquired:

    1. Open source code being used. “Open source code is code that’s already been developed,” explains Louis. “And the condition to using that open source is that if your code contains the open source code, then you have automatically granted a license to everyone in the community.”
    2. A failure to secure consent from third parties (such as former employees or founders) who have a claim to the IP for the deal.
    3. Claims from third parties that the IP infringes on their patents or IP rights. For example, former employees from another company are accused of using tech they brought over from their ex-employer.
    4. A failure to properly register the IP with the government.
    5. Lack of evidence that employees or contractors who helped create the IP gave away their rights to the Seller.
    6. The product or service uses or licenses technology from a third party, and the Seller does not have the right to transfer the IP without consent.
    7. If the tech involves sensitive customer data, and there is no privacy policy with customers that allows the company to transfer and disclose this data.

    A nightmare scenario: A Buyer acquires a cutting-edge startup with the technology it needs to keep up with their competition. However, post-closing it is discovered – when a lawsuit comes their way – that a bit of critical code backing up this IP was actually from another company. The programmer was simply trying to take a shortcut, and nobody noticed.

    1. One of Louis Lehot’s tools for avoiding situations like this is a questionnaire that covers IP issues. It includes questions like:
    2. How did the IP first come to the company? A red flag here, says Louis, is former employment of founders. If they worked previously at a company and then start a new company doing the same thing in the same way – that’s a huge problem.

    Did each founder assign his or her IP to the company? “I’m always shocked to find the number of defective assignments of IP at formation,” says Louis. “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.”

    R&W Insurance Protects Buyers and Sellers in Case of IP Issues

    During the interview, Louis also explained that R&W insurance has revolutionized how deals are done in recent years. Not only does it provide protection but also helps create a less potentially contentious relationship between Buyers and Sellers down the road. As he put it:

    “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 the friction of an ongoing relationship between a Buyer and the Buyer’s new employees, who are helping the Buyer monetize the IP.”

    “Really, going back to those employees and dinging them for indemnification claims is really the last thing you want to be doing and the easiest way to disincentivize them and demotivate them from doing what they need to do.”

    The addition of IP protection to Representations and Warranty insurance, as well as its recent price drop and availability for deals involving lower and middle market companies, has made it a game-changer in the M&A world. As a broker, I’ve been fortunate to have had years of hands-on experience with R&W coverage. I’m ready to discuss how it might benefit your next deal. You can contact me, Patrick Stroth, at

  • 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.

  • AI and Machine Learning’s Impact on the M&A Process 
    POSTED 8.18.20 M&A

    Artificial intelligence and machine learning have radically changed the way business is done in countless industries. And the M&A world is no different.

    This cutting-edge technology has the potential to cut the average time to get an M&A deal done by 66% – if not more – within the next five years.

    It’s the biggest advancement going on right now in M&A, with the greatest impact felt in the due diligence process, which will be cut from three months to one month or less when AI and machine learning are used to review and analyze the data in virtual data rooms.

    In this report from Datasite (formerly Merrill Corp.), The New State of M&A 2020 – 2025, M&A practitioners from around the globe were surveyed on this issue.

    48% felt that due diligence could be enhanced by technology the most; so there is clear demand for its implementation.

    35% said that combining that technology with virtual data rooms would help accelerate due diligence the most.

    30% believed that AI and machine learning will have the most transformational impact on M&A in the next five years.

    Faster due diligence means more deals getting done because this element is the most important success factor in M&A and also the most time consuming – the Datasite report notes that 66% of those surveyed felt due diligence was the most time-intensive part of an M&A deal.

    AI and machine learning will make due diligence more secure, more complete, faster, and more cost-effective.

    And contrary to popular belief, technology will enhance the process, not replace the people.

    Software can’t replace deal-makers or those guiding investment and acquisition strategy. We will always need people to negotiate prices and terms, and we will always rely on experience and expertise. And, not even due diligence can be automated completely.

    How It Works

    During the typical due diligence process, there are hundreds and thousands of pages of disclosures, financial statements, contracts, and other data about the target company. It’s all electronic these days, placed in various “folders.”

    It’s organized. But trying to locate a specific piece of information among all those documents is very difficult and time consuming, requiring Buyers to read through pages and pages to get the data they need. Hence the usual delays to the process.

    When you upload the documents to a virtual data room and have AI and machine learning software scan all of them, you now have a very effective search tool to help you pinpoint, accurately and quickly, the specific document you need to get the answers you’re looking for.

    Importantly, machine learning and AI can also search documents, identifying important sections and highlighting potential risks based on parameters set by the person conducting the diligence, helping them better assess the opportunity.

    It’s an appealing picture. And it must be why 65% of those surveyed by Datasite said that “new technologies should enable greater analytical capability in the due diligence process.”

    Barriers to Adoption

    As with any change in the way things are done, you might expect some resistance to the widespread adoption of using AI and machine learning to essentially create a searchable virtual data room. In fact, only 26% of M&A practitioners surveyed for the Datasite report believe this technology will help accelerate due diligence.

    Some of their concerns? The financial constraints and data security and privacy issues.

    But, I think that the benefits sell themselves, and more people will come around as the technology progresses and costs come down. Savvy Buyers and Sellers know that the quicker the due diligence process is over… the quicker the deal gets done.

    According to the Datasite report, 56% of those in M&A believe due diligence time will be cut to a month or less in five years’ time – so there is clearly confidence this technology will progress to where it needs to be for widespread adoption by then.

    And besides, with the pandemic, everybody has become more comfortable with technology like Zoom… and that will translate to being more open to tech like AI and machine learning.

    It’s like when years ago, the idea of the paperless office started floating around. It was slow going at first. But once there were effective digital scanning and storage solutions, like cloud storage, and the costs came down, the paperless office became a reality.

    Or, think about virtual data rooms themselves. Twenty years ago they didn’t exist. Today, you can’t do a deal without one.

    Another example: Representations and Warranty (R&W) insurance.

    For years, many felt it was only for big deals or too cost prohibitive. But as more insurers have started offering this product and more Buyers and Sellers are insisting on this coverage, the price has come down. Plus, deal sizes of under $20 million are now routinely accepted.

    Implementing AI and machine learning into the due diligence process for your next deal may not be feasible yet. But you can still enjoy the protection of R&W insurance coverage.

    As a broker with years of hands-on experience with this unique product, I’m standing by to answer your questions. You can contact me, Patrick Stroth, at

  • Laura Simms | What To Expect In M&A Post-Pandemic
    POSTED 8.11.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with special guest, Laura Simms. Laura handles Business Development at Strait Capital, a fund solutions provider offering a full range of financial solutions to hedge funds, private equity, family offices, and alternative asset managers. From their Dallas headquarters, Strait delivers fund administration, middle office operations, CFO suite services, and regulatory compliance services just to name a few.

    “We really view ourselves as a partner to our clients,” says Laura. “We want to feel like an extension of their team. You know that we’re just a couple offices down, so we’ve really earned the reputation for being the trusted partner of choice for private investment advisors and managers who are seeking that quality, personalized service provided by a team of experienced professionals. Our mission has always been to protect investors and reduce risk in the global financial system.”

    We chat more about Strait Capital, as well as:

    • The importance of partnership
    • Common challenges for clients in the middle market
    • What type of clients Strait seeks and why
    • M&A trends in light of COVID-19
    • 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 Laura Simms, who handles business development at Strait. Strait is a fund solutions provider offering a full range of financial solutions to hedge funds, private equity, family offices and alternative asset managers.

    From their Dallas headquarters, Strait delivers fund administration, middle office operations, CFO suite services and regulatory compliance services just to name a few. And in this era where more private equity and other organizations are looking to add to outsourcing, Strait comes at a time that’s no better than right no. So I’m very happy to have Laura join me here. Laura, welcome to the podcast. Thank you for joining me.

    Laura Simms: Patrick, thanks for the opportunity.

    Patrick: So before we get into Strait, let’s set the table. Tell us about yourself personally. How did you get to this point in your career?

    How Laura Got to This Point in Her Career

    Laura: Sure, absolutely. Well, born and raised first-generation Texan, although my family’s roots are from Hawaii, and both the west and east coast. And it was a privilege of mine to complete my undergraduate degree from the University of Texas in Austin. So after that time during the Great Recession, I moved to the Midwest to pursue some nonprofit work. Next, I spent a handful of years as an operator of a small business. I then transitioned my career into the investment management space and ran investor relations for a private multifamily office.

    When my husband was deployed to the Middle East with the Army National Guard, we then made the decision to return to Texas. And that time around 2017, I joined Strait and was really attracted by their entrepreneurial culture, their audacious growth goals and just the ability to use my operational and client experience to advise prospective clients there. So when I joined, we were about 26 professionals and now we are a team of around 60.

    So I’ve enjoyed my time there, the opportunity to run business development efforts. And what I really value is our partnership approach. So, that we provide for our clients and have found such great satisfaction in working in the middle market space with fund managers, advising them and really helping them through that fun launch process as well as working with established managers and helping them convert to our offering, which is extremely high quality and high touch.

    When I’m not working, I pursue interests in health, wellness and fitness, as well as really enjoy volunteering in my community, which I now do through the junior league in the Dallas Museum of Art. And in the future, my husband and I plan to start a foundation to address areas of mental health, caring for veterans and assisting those who are in need.

    Patrick: When you originally joined Strait, you said you went from 26 to 60. How long has that period been? How long have you been with Strait?

    Laura: So I joined the firm in 2017. So about two and a half years.

    Patrick: That’s a lot of growth.

    Laura: That is. Absolutely. It’s been great to be a part of for sure.

    Patrick: That’s impressive. Well, let’s talk about Strait. And, you could tell a lot about a company and their core and their founder’s vision. A lot of times it’s something as simple as the name. How, you know, tell us about Strait. What it is that they’re doing with the middle market, but start with the name and paint a picture for us.

    All About Strait Capital

    Laura: Yeah, absolutely. So Strait, so the definition of Strait is a narrow passage of water which connects to larger bodies of water. So Strait was founded to be just that. We are that passage that connects an industry-leading team of experts with our clients in order to provide best in class services.

    So for us, it was imperative to establish this culture of true partnership that’s grounded in ethical business practices, which really starts with our team and then extends to our clients. So our goal, we like to say, is to be the one service provider that’s on the asset side of our clients’ balance sheets. And so we do this by investing in the best technology, hiring exceptional talent and anticipating our clients’ needs and building those trusted relationships.

    Patrick: Now, one thing about investing in technology and, we’re seeing that in spades right now, is, as companies have had to adjust to work remotely, if you’ve got weaknesses, either, you know, just simple connectivity or other issues like that, then you can’t hide from those. You could push those under the rug for a while when everybody’s all in a team in house, but once you diversify out, that gets real tough. Now, in addition to, you know, that technological advantage, okay, what else does Strait bring to the table?

    Laura: Yeah, absolutely. So, you know, what you’re probably gonna hear me say a lot during our conversation is partner. So we really view ourselves as a partner to our clients. We want to feel like an extension of their team. You know that we’re just a couple offices down, or, you know, a few floors down. So we’ve really earned the reputation for being the trusted partner of choice for private investment advisors and managers who are seeking that quality personalized service provided by just a team of really experienced professionals.

    So, Strait, we provide integrated middle and back-office platforms, which for our clients translates into reduced costs and really a flawless efficiency of deliverables that their investors can trust. So, Strait, we’re rooted in our values and we’re a partner for our clients, really our team and extending out to the community. So our mission has always been to protect investors and reduce risk in the global financial system.

    So for us, accuracy is king and we’re so proud to say that we have not had a restatement in our firm’s 14 and a half year history. We also provide an exceptional user experience through our process-driven partnership approach, as we talked about before, advanced technology and really our team of industry experts. We hire people that are extremely driven, have that achiever mentality.

    Our team of professionals is comprised of CPAs or those pursuing their CPAs. At the staff level, all of our folks either have their accounting degree or their finance degree and at the leadership, we bring in folks with, you know, extensive experience in the fund administration field or who’ve worked internally at a private equity or hedge fund before. You know, our manager Stacey Relton has really done a phenomenal job at creating this type of culture at our firm.

    Hiring the right people is so important for straight that no one person comes into the firm without being interviewed by Stacey. So what she looks for are these intangibles, ensuring that their values align with ours, which are ethics above all else, owning the business, pursuing mastery, relationships matter and giving back. So, you know, we feel like if we hire the right people, give them a great work-life balance, our people are going to take care of our clients.

    So additionally, our institutional platform FIS Investran is the gold standard and private equity accounting and investor reporting. So we offer this technology, our boutique level of service, white-glove approach to all of our clients, from the emerging manager to the established global investment firm. So no matter your size, we’re going to take care of you. We’re going to give you all the bells and whistles of the big shop but with that really boutique service.

    Patrick: I think, I’m not as familiar with this just in the logistics of this. The smaller private equity firms, are, if they don’t have in-house accounting, they’re going out to a CPA firm that, you know, obviously, the bigger firms are going to cost a lot more. They run the risk of going to a regional or local CPA firm that may not have all the capabilities and all the knowledge, right?

    Laura: Yeah, that’s absolutely right. You know, you may have a team of bookkeepers, obviously not at the CPA firms. But with us, you get that fund expertise because fund accounting is very niche. And so our team does it every day, right? So we’re experienced with the fund accounting, with the investor reporting.

    And because we’ve made the steep investments in this, you know, gold standard in technology, it just helps out our clients because we can slice and dice and provide reporting customized to how they want. And then their investors, especially on the institutional side, are very familiar with Investran ready. So they’re comfortable with the platform. They’re comfortable with investor portal. And we’re passing this technology to every one of our clients, no matter your size.

    Patrick: Something that you’ve said multiple times, now I want to underline this because this is not a small deal. This is a big deal. You talk about the importance of partnership. And there’s a real strong sense with this. And it’s something that I think a lot of us, we’re all service providers in this world right now in one capacity or another. But what separates a, you know, a service provider from what we want to be as a partner, is where you look to your clients and say, Hey, you know, you’re not just a source of revenue for us. We are partners together. We have our interests don’t just overlap, they’re integral.

    And we have every interest in you reaching your goals and succeeding. And if we are, you know, tied in directly with your success and we’re joined at the hip, that’s a deep, deep commitment. Let’s go a step further on this. And I’m not certain, but I would think that because of what you’re doing, you’re almost in a fiduciary capacity, where, you know, you are, you owe a duty of care to your clients. And so I think where, you know, it’s the ethics that you underline and it’s not enough just to go ahead and have a good committed version of that and be, have a desire. You have to execute.

    And so what you’re doing is you’re setting this up so you can execute with technology and not have, you know, the bugs are other systems that are problematic, and that you can move forward with them. It also sounds to me like you’re also set where you will help firms that, you know, need to outsource because they just don’t have the capacity, they don’t have the talent,t they don’t have that. But as they start growing, well, you can scale with them. Why bring those services in-house if they’re working beautifully, seamlessly? And then, because you can grow with them, that’s the case?

    Laura: Absolutely.

    Patrick: Okay. The other thing that I noticed is going to be an issue coming up is going to be talent, and how, you know, if you’re trying to set up and have the internal accounting systems, the internal compliance controls and so forth. Where are you going to find those people and how are you going to vet them? And how do you know that they are going to be, you know, as committed and able to execute? They don’t have to do that. They just go right to you.

    Laura: That’s absolutely correct.

    Patrick: So although I’m sorry, I hope I didn’t rain on your parade and steal all your thunder but why don’t you give me some examples of, you know, where you’ve delivered, you know, for your clients. Give us a case or two of, you know, what you do?

    How Strait Helps Their Clients

    Laura: Sure. Well, and Patrick, you kind of even touched on that. So, you know, we have a lot of success stories within our firm and among our clients. And one I’ll highlight is a client that launched their fund in 2013 from the DFW Metroplex and when they decided to outsource, Strait was their fund admin, and that was back in 2015. So when we onboard them, we created an institutional platform from day one, allowing them to really focus on growing their assets, building their track record.

    And now, this firm has made over 100 transactions, manage is over 3.7 billion in committed capital. This client is very well known in the industry. Not only do they provide Strait as a referral, you know, to their peers launching a new fund looking for a service provider because they’re so satisfied that the work that we’ve done for them, but when I’m out in the market, you know, talking to prospective clients, part of our process is providing references, client references.

    Whenever I mentioned this client, that’s always, you know, super positive remarks on behalf of this prospective client and really just increases our level of expertise in their eyes because of, you know, the success with this client. So that’s one. And then, you know, that was a new kind of fund launch that we worked with.

    We also work with a lot of conversions. You know, someone who they’ve been in business for a while or they are unhappy with their level of service. You know, we talked about the middle market. Patrick, you and I have talked about it before how it’s just a market that is overlooked and often in our space, they’re paying really high fees but not giving the service that they need and desire. So we’ll see a lot of those folks come over to Strait. And we’ve, you know, from large clients to small clients, we have the ability to process large amounts of data and kind of do that operational cleanup, you know, in the middle market. I personally love working with these folks.

    There’s that entrepreneurial spirit. People are rolling up their sleeves and just going after it. Maybe they’re a deal guy, maybe they’re, you know, entrepreneur doing private equity firm independent sponsorship, but they haven’t really been focused on the accounting, the operation side when we could come in, do the operational cleanup, reduce those pain points that they are experiencing, bringing them up to speed on industry standards, which then elevates their investor experience and really sets them up for, you know, future growth. \

    We’ll take time to help them understand the accounting side, help them understand the operational requirements and compliance requirements as a fund. So that’s kind of part of that, you know, partnership approach where we really go above and beyond. If someone has a question, we have the relationship where, you know, they just call someone on our team and they can ask the question. We’ll consult, we’ll advise and help them through, you know, issues that they’re experiencing.

    Patrick: What’s the biggest, and this is completely unscripted or anything, but what’s the biggest problem that your clients have? Is it going to be on the accounting side, a compliance issue, tax? Is there anything that really grabs it? I can imagine personally, I can’t stand accounting, okay? I respect it. I know it’s necessary. You know, and I rightly have that outsourced. But I can imagine if there’s any discomfort for entrepreneurs.

    Laura: Right. You know, I mean, I would say because we service so many different types of funds, we’re agnostic to size and strategy. The problems and the challenges can be different for each. You know, we can speak to the regulatory issues. If you are a registered fund, you have to abide by, you know, everything the SEC puts out. And that gives a lot of, you know, executives, heartburn, right? Am I doing everything right?

    Am I following the law to a tee? So what our team has done is we have a compliance division. Our head of compliance, we relocated him from Bloomberg, he was a compliance officer there, and he built out our full compliance program. So those regulatory challenges that people face, especially as, you know, regulations change and update such as this year, we saw a lot of changes regarding Cayman, privacy law, their AML regulations, Sema.

    And our team did a lot of diligence getting our clients up to speed to that and aligning them where they needed to. So, you know, there’s definitely those pain points in the compliance area. You mentioned the accounting. You know, maybe we’re nerds and we enjoy the accounting, but we definitely take that, you know, off of the plate for our clients. But really pain points can come on the compliance side making sure that you are doing, you know, everything right and correct.

    Patrick: As a matter of fact, just Bloomberg issued a report where it’s concerned with mergers and acquisitions for companies that have either been getting the PPP loan for paycheck protection, or the employee retention tax credit. And if we’ve got companies on, you know, doing one or the other when they combine, then what happens? And even the government doesn’t know yet because they’re still waiting for guidance. And so, you’ve got this thing that’s constantly moving and you’ve got to keep your fingers on the pulse.

    Laura: That’s right. And even if a client isn’t engaged with Strait for compliance, they have access to all of our experts. So we’re keeping our clients up to speed on all of these new regulations issues coming out, like you mentioned, regard to PPE. And so our team is keeping everyone abreast of what’s going on and making sure that, you know, people are in line with what’s coming out.

    Patrick: We’ve got a lot of listeners, both on the entrepreneurial side and in the private equity space and so forth. Define first, give me a description of your ideal client. Who can Strait best serve?

    The Ideal Client for Strait

    Laura: Right. So what’s great about Strait is, you know, for us the accounting is the accounting, so that allows us to be agnostic to size and strategy. And because we’ve invested in the top shelf technology, our systems have the ability to process, you know, most every asset class out there. However, in terms of AUM, our ideal would probably be funds with committed capital of 100 million up to multi-billion.

    However, we do work with smaller funds such as VC, which typically launches maybe around 50 million. Some examples of strategies we service on the private equity side are buyout, mezzanine, growth capital, distressed, oil and gas, minerals, real estate venture, hybrid kind of funds. So we really do most everything. You know, this isn’t an exhaustive list. As you shared at the beginning, we also service hedge funds, family offices. We work with independent sponsors.

    Patrick: Gotcha. Within, in terms of geography, regional, nationwide, what’s your reach?

    Laura: Great question. So, you know, we are headquartered here in Dallas and have a fair amount of clients in Texas, however, our client reaches nationwide. So we have a fair share of AUA assets under administration in the northeast and really sprinkled throughout the US.

    Patrick: I focus on the rocky mountain area and in the Midwest. There just seems to be a lot of flight of capital and organizations and just talent getting away from the higher tax states into those quality of life sections of the country.

    Laura: Right. Patrick, what’s really interesting is just this week, I talked to maybe three prospects out of Colorado. I don’t know if it was a coincidence, but yeah, new launches in Colorado. I guess one of them is vacationing there but

    Patrick: Well yeah, that’s where, that made Montana they’ll go look at those places over there. So we will see. But it’s an issue being based in Silicon Valley how much talent and abilities we’re, you know, going down south into southern California and now they’re actually moving east into eastern Nevada and then into Utah and Colorado. So we could see quite a bit more out of there. And that’s going to be, I think that’s just because thanks to technology and a lot of other things that facilitates it.

    Laura: That’s right.

    Patrick: Yeah. The, as an issue and I look at this just being an insurance guy, okay? Does the subject of insurance as part of the overall with compliance or whatever, is it played at Strait or what do you observe on that, if anything?

    Laura: Sure, yeah. Well, to be honest, we don’t deal much with compliance, excuse me, insurance issues on behalf of our clients. What we do see at our level is, DNO and ENO. We’ll process insurance payments on behalf of our clients because we should serve as the treasury function, but we’re not necessarily involved in insurance-related challenges our clients may face.

    I will say though, during the pandemic, we’ve had a lot of look back to policies to see how COVID type events are covered. How our, you know, our space is so niching, I would love to hear your thoughts on how you think insurance and different related matters could benefit our clients.

    Patrick: Yeah, I think that the area particularly with private equity being at, the sole function of private equity, or the big function is to you know, acquire companies add value to them and then secure an exit at a point well north of where they started from. And so mergers and acquisitions, those transactions have been insured traditionally, in the last several years by a product called rep and warranty insurance.

    The biggest development in why we’re were reaching out, as Strait does to the middle market and the lower middle market, is that the threshold for eligibility for rep warranty insurance, which really accelerates the process of closing successfully and eliminates all or virtually eliminates the need for escrows. There’s no fear of clawback of proceeds post-closing, if there’s a breach. Just a backstop for both sellers and buyers. It’s an ideal tool that private equity has embraced.

    Only though at the hundred million dollar transaction threshold and up. In the last 18 months, though, because of competition, because among insurance companies with the success of the product in terms of claims, there are a lot fewer claims made. not because they’re excluded, but just a lot fewer claims that are happening because the diligence is so good that, you know, is a very successful product financially.

    And so the pricing and the costs have fallen along with the thresholds, now we’re able to see transactions that are 15 million to 30 million. I mean, these are, you know, add ons that can now be insured. Where, with an add on, perhaps it didn’t make sense to spend three, $400,000 in cost per rep warranty policy.

    But if it’s under $200,000, all of a sudden that’s check the box. Particularly with buyers and sellers, a lot of times they negotiate and they share the cost of it anyway. So it’s a win-win. The more information we get out about that, we’re trying to do that largely because lower middle market, middle-market companies are getting overlooked. And if they default and go to the brand large institutional firms, who are great, we need somebody to ensure Disneyland, we need somebody to handle, you know, the billion-dollar Walmart acquisitions. You know, to them as an add on.

    But for the smaller companies, they don’t get serviced well and they get overcharged with fees. Because the premiums are so low, the commission’s are equally low. So the large institutional insurance firms have to charge fees in addition. That’s a cost add you don’t need, particularly for the lower middle market. And, you know, it’s better to come in at that level. The other comment I’m going to do on my soapbox, particularly with directors and officers liability, is, and it’s something that you should look at, is with mergers and acquisitions, the target company has to purchase a DNO tail.

    They have a policy that will last for three to 16 years after closing of the transaction just in case any wrongful acts pre-closing get brought in litigation against the former board. There are a lot of D&O policies on real Mainstreet standard carriers that are out there that will only give you a one year tail, maybe a two. That’s not gonna help if you need six. And so you need products or somebody that has the capability there. And that’s with, you know, that’s a very common thing.

    A lot of times we find that you got sole owners of industrial companies never needed D&O policy because they were the only shareholder or they and their spouse for the shareholders. They didn’t need D&O. Now all of a sudden they come up to sell their company and they need it. So those are the types of things we really relish getting in because we want to be, as with you, the entrepreneurs, the folks that really created something out of nothing to have something so they can get a clean exit. And so that’s the area that we get in with the insurance. And it’s been just a great ride in the sector.

    I focused in this sector starting in 2015 and it’s been an absolute joy. You know, I always ask about what you see for trends and so forth in and around private equity or M&A. As we record this, we’re at the I would call it the end of the beginning of COVID-19. We’re steadily reopening and there’s fits and starts no matter where you are. You’re in Texas so I know that maybe not everybody’s back at the office yet, even though you’re leaps and bounds ahead of California. But, you know, what do you see trend-wise either in light of COVID, not in light of COVID, but what do you see, you know, out there that you can share?

    M&A Trends Amidst COVID-19

    Laura: Sure, yeah, that’s a great question. I can certainly share what we see among our client base as well as, you know, what I’m just hearing in the market. So for one, force measure clauses and their effectiveness have been a big topic. Also valuation in terms of downside and illiquids, like oil and gas interests. Among our private equity clients, valuations, not surprising, have been hurt during the pandemic.

    But as you know, for us at the fund level, you know, it’s a long-term investment and thankfully, everyone has been able to weather the storm. So we didn’t see much M&A activity happening. We did see activity though. We saw deals get done both on the acquisition and exit. However, these were deals that were already in motion pre-COVID. I was recently talking with one of our clients and he focuses, his firm focuses on the lower middle market in Texas and surrounding areas. And for them, deal flow, he said, has been surprisingly steady. Things did slow in March in April, but everything still remains on track for the year.

    So they invest in a niche manufacturing healthcare services and business and industrial services. Key trends that we kind of see in the market, we touched on this at the beginning, and obviously, it’s what we do, but the demand for outsourcing and all, and additionally acceleration in adopting technology and then just an even greater focus on cybersecurity. So, demand for outsourcing has been on the rise in recent years. However, the move to remote working and the fallout from the pandemic has only accelerated this trend, right? So this surge in demand is not only expected in the fund admin space, but also areas such as HR and IT.

    So why is this important to M&A? Well, outsourcing enables sponsors to focus on fundraising and supporting their portfolio companies, which is essentially, which excuse me, which is especially important for smaller firms with limited in-house resources. So investors more and more are desiring to partner with GPs that are able to focus mostly all of their time on investment decisions and leave the back-office operations to a team of experts like Strait. Digital collaboration, as most everyone has experienced during the pandemic, and as you and I are doing now, communication and document sharing tools are vital and extremely helpful.

    This is especially true for GPs, LPs and other service providers during this time of quarantine. You know, GPS have been hosting investor presentations via video and have that critical need to sign things digitally. So these changes were already happening slowly in our industry, but because of the pandemic, we’ve been forced to move forward in this area. And I was reading a survey that private equity international put out and they said 50% of GPs intend to hold more online LP meetings once quote normal business life returns.

    And then lastly, just with technology and cybersecurity. So, with these digital collaboration functions and a greater demand for data among LPs and GPs. This brings a greater need for focus on cybersecurity and data protection. If firms fail to manage their cybersecurity risks, they could face regulatory sanctions, reputational damage or liabilities to third parties which could really impact the value of an investment. And we all know cybersecurity has been a hot topic and it’s very much so a hot topic for investors and often asked in the DBQ ODD process. We field a lot of those questions when we’re on calls with prospective investors for our clients.

    Patrick: I’m gonna put a shameless plug in for you. I’m sorry, I do apologize. But, you know, with cybersecurity, we’re noticing just the amount of capital being raised by firms in cybersecurity space, the number of acquisitions by strategics and private equity to bring in a cybersecurity company or cybersecurity talent to then augment the cybersecurity of a portfolio, okay? There’s another hedge to all of that.

    And there’s an insurance policy called cyber liability that pays not only for the damages arising from a breach, and that’s just loss of confidential information getting out, but it’s going to pay the compliance fines and penalties that will follow a breach. It also has business interruption which is free from the COVID business interruption and a lot of other, you know, crime coverage from hacking, ransomware, that kind of stuff. It’s a great underlying product and the beautiful thing about it, it’s not expensive. And, you know, so as we see that important going, you got it really invest on that cyber infrastructure.

    But this is the back, you know, just the hedge on that. I think, I completely agree because that’s, a number the acquisitions we’ve been seeing are tech companies specializing in cybersecurity. And, Laura, with all this going on, which is all fabulous, you know, so we’re turning lemons into lemonade here with what’s going on. How can our audience reach you to learn more about you and Strait and have a quick go for a conversation?

    Laura: Yeah, absolutely. I would love to chat with anyone interested in Strait, our services. They could visit our website, That’s And I’d be happy to take their email at

    Patrick: Two M’s for Simms, just so you know.

    Laura: Yes, that’s right.

    Patrick: Well, Laura, thank you very much. It was an absolute pleasure speaking with you. I hope you had as much fun as I did today. And I really encourage you to check out more at Strait Capital.

    Laura: Thanks, Patrick.


  • Jo Bennett-Coles | The Biggest Myths About Credit Insurance
    POSTED 8.4.20 M&A Masters Podcast

    Asset-based lending is one of the best ways for mid-sized companies to get to the next level.

    And the role of credit insurance, which has vastly improved since the days of the Great Recession, is often overlooked… yet will be vital to recovery after countries – and the companies in them – exit lockdown.

    Jo Bennett-Coles, managing director of FGI Finance, a global leader in domestic and international finance for mid-sized companies, gives us the lowdown on credit insurance, including when you need it, how it works, and the many varieties of coverage available.

    This type of coverage gets a bad rap in some circles. Jo dispels the myths and offers some best practices.

    Tune in to find out…

    • Why credit insurance is a powerful tool for private equity
    • Services credit insurers provide that will surprise you
    • How credit insurance fits in with M&A
    • The biggest mistake companies make with credit insurance
    • 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 Jo Bennett-Coles, Managing Director of the global finance leader FGI. FGI’s slogan, no deal is too complex and no market is out of reach. Jo brings a wealth of experience in a specific field of finance that will play a significant role as companies look to recover from COVID-19.

    Not long ago, 208 out of 260 companies surveyed expect to be back at full speed in six months after opening. Now they’ll be challenged to find new ways to get there. One of those tools is credit insurance. Private insurance is not what you might have thought before. That’s why I’m very excited to have Jo join me today and explain these new opportunities for companies. Jo, welcome to the program. Thanks for joining me.

    Jo Bennett-Coles: Thank you, Patrick.

    Patrick: Now, before we get into the credit insurance and these new tools and the new application of them, let’s set the table for our audience. Give us a quick background on how you got to this point in your career.

    How Jo Got to This Point in Her Career

    Jo: Gosh, it’s a long time ago, Patrick, that’s for sure. But let me start from the very beginning and overview. Well, I’m an attorney by profession. So before everyone’s switches off, I haven’t practiced in law now for probably over about 30 years, so you’re quite safe out there. I went from practicing law into the world of commerce very, very early on in my career because I wanted to be close to the action.

    So I joined a mid-market logistics company in the UK which had about 300 employees and seven divisions. And I worked my way from the shop floor, literally. Starting in the credit control department because, you know, cash is king all the way up to the board. And I did that for 12 years. So I cut my teeth on a tough rough business where we did everything from restructuring to buying stuff, having the good days, definitely having some bad ones too.

    And then from there, I found my feet in the world of asset-based lending. I was lucky enough to join an advisory group, where I again started on the bottom working with asset-based lenders and helping them to work out, fix problem situations. So I saw a lot of challenge loans and a lot of deals that needed to be refinanced. And I did that for 12 more years. And along the way, I met up with the great team at FGI, and they became personal friends. And about five and a half years ago, they said, Hey, come and join us.

    Come and see what it’s like to actually put together deals where you put the money out and finance. And that’s what I did and that’s how I ended up at FGI in 2015. And what I do essentially today from the UK and Europe is work with our, work with advisors, work with other asset-based lenders to provide asset-based loans, which is what, is one of the main areas of FGI. And obviously, as part of that structure, when FGI puts together a lone, we use credit insurance because we’re working with transactions that are multi-jurisdictional cross border. We have credit exposures in just over 60 countries.

    And in order to do that, in order to lend in more places, to lend more efficiently and more comfortably, we’ve always relied on credit insurance in FGI. And FGI, just to give you a little flavor, if that’s okay, Patrick, is a business that’s been going now for over 20 years. We are a global leader in domestic and international finance and we provide asset-based loans and loans against accounts receivable and there’s, that’s aimed particularly to mid-size companies. Companies in a variety of different industry sectors from manufacturing to service providers.

    But the other side of FGI, and this is why we use credit insurance so much, is we’re actually a broker of credit insurance. And we also have technology. We have unique technology, which is our own. And that brings out the best in credit insurance. And it’s been making us a great study across this particular time because, you know, it’s, we now have three words we use, finance, protect, collect. These are the three areas which we think are very strong in the current climate. So it’s a collaborative effort between all these elements to give us the comfort we need when we’re lending. Hope that’s helpful, Patrick,

    Patrick: Very helpful. And I’ll tell you, the issue today is that when times are good, issues about credit and financing aren’t that important or they’re less emphasized because everybody can get credit and everybody can get capital very easily. It’s when times are bad that suddenly, the attention gets directed to Okay, what are some of our options? What are alternatives out there?

    And how can we go ahead and get from point A to point B in this new environment? And the other emphasis out there, need for capital, is that if we look back, as many people have at the last recession, where we had a big shock to the system, there were a lot of opportunities in the wake of the recession that a lot of players didn’t take advantage of just because there was so much fear.

    Those same investors this year are now going to look and capitalize on these opportunities that they missed last time. And so you’re already seeing pieces being moved on the board to get companies in position to do that. And so tools like this that they may have overlooked, are why we need to go and bring the emphasis back. Yeah, what are you seeing, just either economy or the business as we’re pulling out of COVID-19 and beginning to move forward?

    Why it’s Going to be Different This Time

    Jo: Yeah, I mean, it’s a great one. And it’s fantastic to draw the analogy back to the great recession of 2008-2010. And you made a great, you know, very accurate statement, but there’s been analysis done on this. Obviously, the fear factor has been that there’s going to be a lot of bankruptcies. I think we all accept that that’s going to happen.

    And it could be very ugly. No one knows the numbers. But there is an upside and the upside is there’s going to be this bounce and everyone needs to be ready for it. And, you know, getting that, getting businesses geared up, getting them ready to go and getting not only the businesses ready to go, but getting their lenders comfortable with lending as well is very important.

    And I think when we reflect back to the great recession that people miss a challenge when you talk about credit insurance because people say oh yeah, I remember credit insurance in the great recession. It didn’t work. Didn’t work. Well, the world’s moved on a long way since then. And I think one of the big areas, of course, is great technology, better information sharing. And those are things that are going to make it very different this time. It’s far more joined up than it was before. So I think as far as businesses getting back on their feet, there are a number of tools.

    There’s obviously a lot of businesses are talking very much with their lenders right now and getting them organized. There’s a lot of support coming to businesses, both from governments around the world. And I talk globally because I’m a global lender. I think businesses are refocusing themselves. There’s a lot of businesses that are changing, tweaking the way they operate. And that’s a big thing. They’ve got to get comfortable themselves. They’ve got to get their customers and their supply base comfortable with that. And in order to do that, you’ve got to have some good tools to move quickly.

    So credit insurance is a great fix. Businesses are having to work differently now. They’re having to work remotely, they’re having to work with better technology, they’re having to do things separate from each other. So you need greater levels of transparency and speed of information to make all those things happen in a joined up way. And that’s not going to change anytime soon. We’re in a whole new world now. I think we all accept that. And that means what we do now is going to carry on for a very long time. It’s going to be the sort of the game-changer for the future.

    And I think there is a, generally, what I see out there in the market is businesses are sharing far more between themselves amongst lending communities as well, how they’re fixing problems, how they’re coming up with solutions. It’s very open. Everyone is trying to help each other. There is a mentality to share risk now far more than there ever was before. And you’re seeing that from governments all the way down. Right now, I mean, for example, today in the UK, there’s been an announcement that we’re going to have a big government’s pull program around the credit insurance world that’s going on across a number of European countries as well.

    And it will become a global thing, of course, everyone will be doing it. So that’s happening top-down, and that’s going to flow all the way through. So that will stimulate a lot of trade, a lot of activities. So these are all the things that we’re starting to see. Look, it’s a long way to go, Patrick. We’ve got, we’re only in the early stages of coming out of this lockdown process and different countries are at different parts of their release.

    You know, for example, in the US, you’re probably a little bit further behind some of the European countries now. We’re seeing, for example, in mainland Europe, the car plants are opening up again. They have far more freedom in terms of their hospitality sector is getting moving. Asia is further ahead than all of us just because they finished their lockdown earlier. But, you know, we’re all fearful along the way of making sure that we put in place good measures that can cope with any potential second surge that may come from COVID. So this is a sustainable release from this lockdown period.

    Patrick: Let’s get into credit insurance specifically because, you know, for those that our audience just was basically, what is it, who it’s for and how? And this is the real big thing is it’s not just for your traditional manufacturers that are at foreign supply chains. This is now being used and it’s embraced and it is ideal for the technology industry. So give us the one on one on that.

    The Lowdown On Credit Insurance

    Jo: The lowdown. Yeah, and, you know, before I do that, I’d say the first thing I get is particularly when I’m talking in the US market, you kind of get this eye-rolling. Oh, credit insurance. And it always makes me laugh because historically, when you’re talking particularly into the US market, it’s always been it doesn’t work. Why doesn’t it work? Well, you know, I bought it and I stuck it in the drawer. And yeah, well, credit insurance is a living breathing thing. You don’t just, it’s not a buy it and forget it and stick it in the drawer. You’ve got to love it, nurture it, otherwise it doesn’t work properly.

    So very simply what it is, there are a number of big carriers out there. There are some specialized ones too. But they’re probably about, you know, 8 to 10 really big names who are global and they will offer different lines of coverage, which give you the protection if your account debtor fails to pay or goes bust. So really what you’re doing here is you’re buying something that shares the risk. You’re going to get paid out, you’re going to get paid out something if your account debtor fails to pay you. That’s very simply what credit insurance is doing.

    And there’s all sorts of different types of policy. What I would say that you need when you’re buying credit insurance, particularly if you’re buying a biggish policy is probably needs some expert help. That’s the first thing. It’s a little bit like when you buy motor insurance or household insurance, you probably going to speak to someone who will explain the nuts and bolts of how it’s gonna work. And you need that, particularly because there are a number of different kind of levers you can use with credit insurance to make it efficient for you.

    The other thing I would say with credit insurance not just for you, as the business person, you as the technology company, having it is very powerful as a tool for your lender because if you’ve got it for yourself, it gives you protection. It gives you that comfort of thinking, well, if I don’t get paid, I’m gonna get the money back from the credit insurer so my cash flow’s protected, that’s great. But if you have a lender and you say, by the way, I’ve taken the step, the lenders gonna feel a lot better about you. You can use that to leverage or a loan facility. So it has more power than just your own cash flow. It shares the outside world.

    Patrick: In other words…

    Jo: Exactly right. You can use it to go around the market and potentially get a better loan, better availability, particularly obviously, if you’re with, you know, an invoice financer or asset-based lender, it’s a very powerful tool. So if you take control by having your own policy, it says an awful lot to the outside world. So very simply, you are getting something that protects your cash flow, gives you the comfort.

    You can sleep nights, that’s what it’s about. But you’ve got to love it and nurture it. You can’t just buy it, stick it in the drawer and then when you feel you need to make a claim go, I’m going to make a claim, because likelihood is you haven’t complied with the policy and you’re going to get the insurer come back to you and say, I’m not paying. And that’s one of the other big problems that I used to come up against when talking to certain markets. Well, credit insurance, you never get paid. Like Yeah, well, if you follow the rules, you’ll get paid. Same with like having house insurance or car insurance, follow the rules, you get paid. Same thing.

    So now having more technology, having more clever ways that make it easy in terms of managing a policy are the way forward to ensure you stay in compliance all the time without having to work super hard to do that. So that’s really the kind of nuts and bolts of credit insurance, but I would always recommend to anybody who’s looking at it that they get some help with putting the right policies together that’s suitable for them, suitable for their business and also it’s going to make them attractive for a lender potentially. So you can hit a number of boxes there.

    Patrick: And it enables you, as a business, to grow more because they can extend more credit and more payment terms to their customers. So customers are only allowed to buy $5 million in a quarter. Well, if you have insurance, you can sell them $10 million worth of your product because you have the insurance to back you up. So now all of a sudden you can increase sales and have no risk.

    Jo: Absolutely. That’s a great point, Patrick. And you can do that not only domestically but also internationally. Traditionally, credit insurance was always seen as the international tool. But nowadays, it’s everywhere. It’s global. It’s as much domestic as it is international. And I think what we’re learning as we come out of COVID is that the traditional markets that maybe your business was facing into, are going to be different. So you’re going to have to have that flexibility to be able to move quickly with new customers in different jurisdictions, different scales, different levels of concentration that you had before COVID.

    It’s going to look new now, new and fresh. So yes, you’re absolutely right. The other thing you may find as well, certain lenders may only have certain levels of limit on different customers. You may be able to get more somewhere else. That’s an important point too. So it’s really, really essential that you explore these options yourself and get very comfortable with the process that you understand. All the mechanics of how credit insurance can really bring you value and I think we’ll talk a little bit about more of that, as we go through this conversation.

    Patrick: Well, with what we’re seeing out here now, I could just see this as an extra tool for private equity, or some of these emerging companies that as they’re growing quickly, they don’t necessarily know what other expertise they need to have in house. And one thing was credit insurance, I think there’s a nice value add is where you can leverage the database of the insurance company to go ahead and do background checks and credit checks on prospective customers. And that I can imagine saves a ton of time. Could you explain that for us?

    Jo: Yeah, absolutely. I mean, that’s one of the great things. And people often say to me, Well, you know, I’m paying this premium, what do I get for it? Well, you’re getting the power of this global credit insurer behind you and it’s not just you’re getting the insurance coverage, you’re getting the power that they have from financial information, real-time.

    They get stuff, and I’ll give you an example. We were, I was working on a deal recently where the financial information I was provided on a major account debtor to my client was about six, nine months old. And it wasn’t pretty. It wasn’t pretty. And we were like, Whoa, we don’t like the look of this. But I spoke to one of our credit insurers and they had data that was only three months old. They’re like, how do you do this? And this is because they have an enormous network.

    They have huge power. They have the ability to research financial credit reports and what this is doing for you, as the policyholder is saving you huge amounts of time and money and effort in doing all this stuff because you are effectively using their underwriting skills. That’s becoming your credit department. And you should use that. That’s so powerful because they have all that data at the touch of a button. And that’s important to remember. And I will say this every time, they are sharing the risk with you.

    So, you know, you must use them as the partner and get maximum value out of all the facilities they have. And not only remember, not only are they got all this information, but they often have collections teams as well in different countries. So if you’re stuck with trying to, you know, recover some money in a territory you’re not familiar with, they can help you with that too because they have this massive global network. So there are a lot of benefits here that come with credit insurance programs that save you a bunch of time and money and resources.

    Patrick: While we’re all about M&A here Rubicon. So let’s talk about credit insurance in the context of a mergers and acquisitions transaction. How does that play a role from your experience?

    Credit Insurance and M&A

    Jo: Yeah, I mean, it’s in my experience when we see it within the M&A world, obviously, typically, we’re looking at providing some kind of EBL facility as part of the deal. And what always has been looked for is maximum availability. Maximum availability in a facility. You want to squeeze out every penny of availability to assist with the program of the M&A. And in order to do that, having an efficient credit insurance program that can give you that availability over all your account debtors, in whatever jurisdiction they’re in, whether it’s domestic or international, is absolutely critical.

    But also it gives comfort to the private equity groups. And often, you know, we’re dealing lower down in the chain of command here but if you can prove and show that you have structured this thoroughly and every area has been thought about, you’ve managed all the risk. That is a very big kind of comfort point for everybody in the process. And at the end of it what you show is an availability or borrowing base and this is me talking as the lender here where we’ve been able to give as much coverage as possible to the account debtors because we’re using credit insurance that’s working efficiently.

    Patrick: Yeah. And again, that could be a situation where post-closing you have some outstanding amount due from a customer, the customer doesn’t pay or can’t pay. And all of a sudden that could result in a breach on the reps and warranties and trigger all kinds of other bad financial outcomes, but by having that risk mitigated and transferred out, no worries.

    Jo: Absolutely, because, you know, we’ve seen with other deals that we’ve worked on historically, where potentially there might be an issue regarding a customer where there’s concentration. So if you can’t, if we couldn’t get comfortable through credit insurance, then what we would probably have ended up doing would be going back to the private equity group and saying, you know what, we can’t finance this account debtor.

    So either you’re going to provide some kind of security or some kind of guarantee or it’s out of the game. So actually going and then take a chunk of money away. So you don’t want to be in that position. So having the credit insurance is a big win for them because it takes away that headache. So one less thing to think about.

    Patrick: Perfect. How is COVID-19 and this whole pandemic, you can contrast it with the experience you had after the 2008-2010 recession, but how has COVID impacted credit insurance today?

    Jo:  Yeah, it’s a great point. Yeah. I mean, obviously, it has, yeah. I’m the first one to say credit insurance is great, but it isn’t a silver bullet for absolutely everything. Clearly, there are areas now where credit insurers are taking a tougher line. The first thing I would say is, you can’t, there is credit assurance out there to be found. You can find the coverage. It’s what level of coverage you’re going to get right now. And it’s changing all the time. With, if you’d asked me two or three weeks ago, I’d have said certain sectors are very difficult right now. But it’s really moving very fast.

    And keeping on top of that managing and monitoring that information is a day to day job right now. You can’t do that manually. That’s the first thing I would say. Certainly going to have an impact on price. But really pricing when you consider it as a percentage of premium, the premium effectively, this percentage of your revenue is still very low. I mean, it’s less than 1% of your sales figure.

    So when you look at it like that, it’s minute. But yeah, we are seeing increases for sure. Those that will go up, they’ll go down, there’ll be movement all over the place. I think all the credit insurance of expecting to get a higher round of claims, there are going to be more claims. It’s like a tsunami. They know it’s coming. It’s not arrived yet, but it’s coming. And what I would say with regard to that is, you know, if you follow the rules, if you have your policy properly managed and monitored, you’ll get paid.

    But if you don’t, there’s no doubt in my mind, insurers are going to take a much tougher line before they’ll pay out because why would they not? They’ve got to be sensible here. So I think, you know, what I would say in the marketplace right now is any coverage is worth having. It’s all about risk-sharing. You won’t get everything but you’ll get something and that’s got to be a good thing to have right now. Work with your credit insurer through a good broker or work directly if you’re with a smaller group. But they are creative thinkers.

    They’re working very hard. There’s a huge amount of support going into the credit insurance industry globally right now from governments as well because it’s seen as such a key tool for domestic and international trade. And therefore, that’s why there’s so much support going on now. So yeah, price increases, a narrowing of appetite, sure, get your claims filed, you know, carefully, but you’ll get paid. These are the kind of key things we’re seeing at the moment.

    And, you know, the big players are the ones who obviously have the strengths. Some of the small what I call niche credit insurers, they may be more challenged. Perhaps if you’ve worked with, you know, traditionally with one big credit insurer, try another one for a change and see how they can beat it. So don’t be frightened of doing that right now. You know, don’t fall into that route of saying, Oh, well, they’ve always looked up to me so I’ll stick with them. Don’t be frightened about doing that right now.

    Patrick: That’s the role you can provide at FGI is that, you know, business owners, the CFO, they don’t have to do this themselves. They come to you, you’ve got the relationships with multiple facilities, and there may be a niche little boutique facility that can fit a boutique client in that space and be ideally suited. You can do all of that. They don’t have to kind of, you know, do it yourself, figure all that out. So that’s a great benefit.

    Jo: Yeah. Absolutely right. And thank you, Patrick. Yes, I mean, we can do the whole thing. So we can, you know, we can help broker a policy for them. We can help the technology to manage the policy and also if they need finance, we can help with that too. We can do all three things. You know, there are other brokers out there, I wouldn’t say I’m the only one in the world, of course not. But we’re in a very unique space at FGI, where we have these three great strengths and they all dovetail together very neatly to provide, you know, a business, a technology, business service business, business, that’s, you know, going through an M&A process.

    The private equity teams with a whole bunch solutions that fix the problem in the current climate, which is getting the deal done, getting the finance in place and ensuring you can sleep nights because you’re going to get paid and there’s not going to be a big hole in the cash flow three months down the line.

    Patrick: Yeah. And the objective for a lot of the people in our audience with private equity and investment bankers, is we’re taking these owner-founder companies, and you’re looking to scale them and grow them quickly, steadily. However, you’re not going to be perpetually in one state. You’re going to be growing and there’s going to be a need for scale, a need to adapt to complexity as needs change and so forth.

    It’s nice getting in on an entry-level, okay, when the needs are simple, but then have this enhanced tool that can be used in a variety of different ways. I think the combination of the fact that you’ve got, you’re transferring risk as you’re getting some risk out, you have the leverage of improved rates from lenders, because you’ll save money right there because lenders will give you more favorable terms if you have this insurance, which is a benefit anyway. And then on top of that, you can use the resources for doing background checks on, you know, on potential customers.

    So all those items offset this minimal cost and at the same time, if something really bad happens, we’ve all now just gone through this so we can see that something bad can come from out of nowhere. It’s there for you. It’s an absolute no brainer, particularly as is flexible. I mean, lenders are more flexible. There are facilities out there that are more flexible. Because of technology we have to be flexible. And having a tool like this that will work with a client is really, really reassuring. Jo, what are the basic entry-level information that a prospective client would need to give you? What are you looking for just baseline to get an engagement started?

    FGI’s Niche

    Jo: Yeah, so very simply, we would have a chat with them first about what it is they need. We have a very simple discovery document usually about one page or so. We have a whole team in the US. Our headquarters are in New York. We have offices in Chicago and in Florida and in California as well. So we can speak to the client, find out what they need and do some discovery work and then build. If they’re looking for brokerage help with a policy, that’s how we’ll start to build a policy for them.

    If there’s something specific they need, if they’ve got a lender in play, if this is part of a, you know, an M&A program, we can look at all these elements. We’re very much a bespoke team. So we don’t have a one size fits all at all. And we’ll look at what’s needed to help the client achieve their goals. So the most important thing is have a chat with us and we’ll take it from there and build something that’s unique for them.

    Patrick: That’s ideal. And you can go ahead and get that processed, onboarding processed fairly quickly. You’ve done this so many times. And really figure out what they need, and then you cut out the superfluous stuff, right?

    Jo: Absolutely. Yeah. We’re all about getting things done quickly. We work, FTO, works in a world where we have to respond very fast as a boutique commercial finance business. That’s our niche. We don’t have a complex structure. And, you know, funny enough, I was on a call earlier today to do with credit insurance. And somebody said, how quickly can we get them a proposal? And I said, Will you give me some information? And literally inside of 24 hours, that’s how fast. So, yeah, yeah. So we speedy, we’re speedy, and that’s the key. And right now, you have to be quick. You have to be quick because tomorrow could look really different to today.

    Patrick: Yeah. And if you get a proposal, jump on it now because unlike other things, firms can change very, very quickly.

    Jo: Yeah. And that’s a really great point, Patrick. You know, things are moving very quickly. They’re moving fast in the world of credit insurance. They’re moving fast in the world of finance, too. And, you know, particularly in the M&A space. And deals have to be done quickly. Money’s moving fast and appetites are changing now more quickly. We’ve been used to 5, 6, 7 years of benign conditions where everything was the same day in day out, and now it’s a very different road. And it’s going to be like that for a while, for a very long while I fear so.

    Patrick: Yeah. The conversations I’ve had with a few PE firms where we’ve been talking about their inability to get out and travel and get very active on their acquisition activity, many of them have turned to focus their efforts on maintenance and taking care of their portfolio companies and just making sure that there’s management and cleanup and ironing out any wrinkles and so forth. That’s going to continue. We should see a flurry of activity and everybody galavanting out there to go meet others in the coming months.

    But while they have this time, I would strongly recommend having them reach out to you because, have a conversation. You may not know or realize that you need the types of tools and facilities that Jo can offer. And so I would definitely advise anybody, just as a preliminary diligence for assisting your portfolio companies and protecting your investor’s interests. You really owe it to yourself and your investors to go ahead and reach out to Jo. Jo, how can our listeners find you?

    Jo: Yeah, thanks, Patrick. That’s a great one. Well, we have a great website which is Not only do we put all our details of where you can reach us on there, but there are some fantastic case studies, both on our credit insurance side, but also on our finance side. We publish details of companies we work with and testimonials so you can get a real sense of the story that drove what we were doing and the outcome that we were able to achieve in those cases.

    We have teams, obviously, you know, we’re headquartered in the US, New York, Florida, and California, as well as Chicago. I have, we’ve got email addresses that we can share for all the different teams. I’m based in the UK. So if you’re, you know, thinking about to deal in the UK and Europe, then probably I’m a good person to talk to.

    But clearly, if you’re in California, you’re going to want to speak to our excellent colleagues in our San Francisco office and La Office as well. So, yeah, so we’re easy to reach and we’ll be delighted to hear from you, all of us. And obviously, waiting to see if we can help fix some problems or come up with some solutions and ideas that meet your requirements.

    Patrick: And in the unlikely event that you can’t find FGI and get to Jo, please reach out to me We’ll also have the show notes here, and you can get to their website but they are uber responsive. I would definitely say that about them. Jo, thanks very much for joining us and we’re going to talk again,

    Jo: Patrick, thank you. I really enjoyed our chat. Stay safe. Stay well, Bye, guys.

  • The Importance of Data Security in M&A – and How Insurance Fits In
    POSTED 7.28.20 M&A

    The nature of risk in M&A deals has changed, and it’s made specialized insurance coverage more important than ever.

    Data security is now, more than ever, one of the biggest concerns for those involved in M&A. And for good reason. It’s creating more risk in deals, especially those involving tech companies.

    These days, businesses need to be aware of how the businesses they acquire collect data, secure data, and use data. There are several factors at play here.

    Increased data privacy regulations in the European Union, known as GDPR, as well as the California Privacy Act (with similar policies sure to be put in place in other jurisdictions across the country), can put Buyers at severe risk, particularly when they acquire companies with less than effective data security.

    And Buyers are taking notice.

    In fact, according to Deloitte’s annual The State of the Deal: M&A Trends 2020, 70% of respondents (from Strategic Buyers and PE firms) stated that protection of data in a company they were acquiring was more of a concern than it was a year ago.

    Andy Wilson, a partner in the M&A Services division of Deloitte & Touche, put it nicely:

    “Data privacy can be a diligence issue. A target company may bring a cybersecurity weakness into the organization, or a transaction that involves layoffs or other workforce changes may create data security risks.

    At the same time, data protection and management can be an integration issue, with a newly combined organization perhaps reaching into new geographies where regulations differ for the handling of data.”

    Regulations Today Call for Strong Penalties

    GDPR (General Data Protection Regulation) was instituted in 2018 in the European Union and outlines strict guidelines for the collection, organization, storage, use, and destruction of personal data. Fines for violations, based on annual revenue, can run into the millions. For example, Marriott International in the U.K. was fined £99 million in July 2019 for a data breach of 339 million guest records.

    Investigators believe the incident goes back to 2016, when Marriott acquired Starwood hotels group. The group had its systems compromised in 2014, but it was only discovered in 2018. Regulators faulted Marriott for not conducting proper due diligence prior to the acquisition or doing enough to secure its systems.

    Elizabeth Denham, with the Information Commissioner’s Office, which administers these regulations, said this about the case:

    “The GDPR makes it clear that organizations must be accountable for the personal data they hold. This can include carrying out proper due diligence when making a corporate acquisition and putting in place proper accountability measures to assess not only what personal data has been acquired, but also how it is protected.

    Personal data has a real value so organizations have a legal duty to ensure its security, just like they would do with any other asset. If that doesn’t happen, we will not hesitate to take strong action when necessary to protect the rights of the public.”

    As you can see, they’re taking it seriously, targeting businesses of every size in every industry. These days, every company has sensitive customer data. It’s not just tech or financial industries like banks or credit card companies that have to worry. Any business that touches the internet is vulnerable.

    Plus, not only can you run afoul of regulators due to a privacy breach or data leak, but you can also introduce vulnerabilities to your own secure system by blending it with the newly acquired company’s system.

    How to Protect Yourself

    1. There are solutions, or at least things you can do to mitigate potential problems.
    2. Enhanced due diligence.
    3. A laser focus on post-acquisition integration of systems to make sure they and each company’s security practices line up. This goes from the IT side all the way down to prohibiting employees from putting their password on a Post-it on their computer monitor.

    Purchase the right Cyber insurance.

    Cyber Liability coverage is a must-have for virtually every M&A deal in today’s climate, due not only to regulatory penalties but also the financial damages from a data security breach. There are measures to take to protect data, of course, on the tech systems side. But hackers are ever more sophisticated and can get around even the most sophisticated protections.

    The need for Cyber Liability coverage may sound obvious, but be aware that not all Cyber policies are alike. Avoid the cheaper versions that only cover data breaches. The top policies now offer coverage for malware attacks (which happen 5x more often than loss of data), electronic theft and ransomware attacks – all of which can seriously damage a company’s value if left unprotected. The difference in cost for a more comprehensive Cyber policy is negligible.

    Due to the heightened exposures businesses face from cyber-related losses, most R&W policies will require a Cyber Liability policy be in place for the target company, and will impose exclusions for Cyber-related losses if no such coverage is in place.

    In the case of both Cyber Liability and R&W coverage being in place, here’s how it works:

    In the event of a breach, the insurance companies will let the Cyber Liability claim be paid first and then the R&W policy will cover any damages not covered. Keep in mind, the deductible on a Cyber policy is a fraction of a R&W policy retention, so Cyber provides a cost-effective first line of defense.

    It’s comprehensive protection that’s very necessary today.

    As a broker with extensive experience with both Cyber Liability and R&W insurance, I’d be happy to discuss coverage for your next M&A deal.

    Please contact me, Patrick Stroth, at

  • Let’s Talk Exclusions 
    POSTED 7.21.20 M&A

    When it comes to insurance – in any realm – most people aren’t as concerned about what the policy covers as much as what is excluded.

    That’s the number one factor in whether or not they get the policy.

    Why would something be excluded?

    There are three principal reasons:

    1. Something is flat out uninsurable. An example of this would be a moral hazard, which is a situation in which one party engages in risky behavior because they know it is protected… and the other party (in this case, the insurance company) will pay the price. You can’t intentionally misbehave to trigger a policy and get paid – that would be like suing yourself. If you could, there’d be no incentive to be on good behavior.

    2. Underwriters want more information on a specific point before they are willing to insure an exposure in the Purchase-Sale Agreement, so they put in an exclusion until they are satisfied with the extra information provided. Once they have that information, they’ll make a value judgement about whether or not to remove the exclusion and what, if any, additional premium charge is applicable. For example, if the standard policy costs $120K, the Underwriter might say we will remove a particular exclusion… for another $30K.

    3. An exclusion might be included because the exposure is simply better covered on a separate policy. Environmental Liability is routinely excluded in R&W policies because the risk is best insured by a broader (and less expensive) Pollution Liability policy.

    All that being said, here are some of the most common exclusions we see today.

    (Disclaimer: This is subject to any specific terms in a deal, due diligence performed or not performed, and each particular Underwriter – whose opinion can vary.)


Top 10 Representations and Warranty Insurance Policy Exclusions

    1. Actual Knowledge

    This is when you want to buy a policy, but during diligence you discover the financials aren’t accurate… and you buy the policy anyway. In this case, any damages related to issues you knew about won’t be covered. If you notice anything unusual about a target, which would trigger a breach, you can’t suppress it until after closing. If you do, this is known as “sand bagging” and is excluded.

    2. Interim Breaches Between Signing and Closing

    If there are any breaches between the time of signing the deal and closing it – and the parties knew about it – it’s not covered. For smaller deals, signing and closing are usually on the same day, so there’s no problem. But for bigger deals with regulatory or funding issues (like the bank offering financing won’t sign off until signing) to sort out, this comes into play. For example, when Amazon bought Whole Foods, they had to wait six months for regulators to okay the deal as far as potential anti-trust issues.

    3. Full Disclosure Representations and Rule 10b-5

    These are catch-all Reps that go way beyond standard Reps and Warranties. They are excluded– because you can’t cover everything out there, especially something with unknown potential financial impact. As a result of this “universal exclusion” the 10b-5 reps are being removed from agreements.

    4. Purchase Price Working Capital Adjustments

    Sellers have complete control in calculating and providing sufficient cash in the company’s accounts to cover operating expenses for a period post-closing. Since it’s in the Seller’s interest to have as little cash left behind as possible, a moral hazard exists. R&W Insurers therefore exclude any failure by the Seller to accurately estimate and adequately fund the company’s accounts. If, for some reason, the Buyer discovers they’ve been “shortchanged” after closing, the Buyer has to go after the Seller directly.

    5. Fines and Penalties

    Any misbehavior that results in government action may be excluded where deemed uninsurable by law (i.e. punitive damages in CA are uninsurable).

    6. Deduction of Tax Benefits from Recovery Amount

    If you have losses and related expenses after closing, that breach often nets you a tax break. If the insurance company pays the claim for your damages, they’ll deduct the amount of the tax break accordingly.

    7. Wage and Hours Laws Violations

    Misclassification of employees versus independent contractors is common, especially in the tech sector in places like California. With contractors, companies don’t offer benefits or pay employment taxes. But often the line between contractors and actual employees is blurred and companies can be sued. With that much exposure, insurers won’t cover it, without extensive information and at a higher premium.

    8. Major Environmental Issues

    Say you buy a company that owns a building which had a major fire or chemical spill in its past. These are hazards that a R&W policy won’t pick up because it should be covered by a 
Pollution Liability policy you can buy elsewhere.

    9. Forward-Looking Reps

    With R&W coverage, you’re insuring Reps of what you know up until the close. Any projections or forward-looking statements are simply uninsurable. For example, if you’re projecting $14M in revenue in the quarter following the acquisition, up from $10M in the quarter before the deal, the insurance company can’t protect that estimate. Projected revenue or growth is not covered.

    10. Consequential/Multiplied Damages

    In the past, R&W insurers considered consequential damages/multiplied damages uninsurable; however, competition and favorable claims experience has changed this position. Today, insurers are willing to either cover these broader damages outright (mirroring the Purchase -Sale Agreement) or will agree to remove any specific exclusion language (be “silent”) on consequential/multiplied damages if the Purchase-Sale Agreement concurrently omits “consequential/multiplied damages” in its definition of “damages”.

    A savvy Buyer will insist on consequential damages being included in the Agreement. It’s therefore essential for R&W Brokers to address this point with all Insurers to ensure proper coverage is either provided or limitations disclosed to the prospective policyholder.

    Next Steps

    As you can see, R&W insurance is not a catch-all that will pay claims on any sort of issue post-closing. What’s covered is narrowly defined by necessity. It’s also essential to note that exclusions can be flexible where Underwriters are provided the right information. This highlights the importance of Engaging an experienced R&W Broker to negotiate with Underwriters on a Buyer’s behalf.
    Still, when you consider all that these policies do cover and the other benefits, including transferring the indemnification risk to a third party, speedier negotiations, and more, it’s well worth pursuing this coverage for most M&A deals – for both Buyers and Sellers.

    It would be my pleasure to discuss potential exclusions and other coverage details with you. Please contact me, Patrick Stroth, at

  • Alex MacLaverty | Solving Business Challenges With Communications
    POSTED 7.14.20 M&A Masters Podcast

    Communication is vital during an M&A transaction, on both sides, externally and internally. Clarity is a PR firm that works to help companies get through the deal, from media relations to crisis management.

    It can be a stressful process… and certainly not the time to “wing it.”

    As Alex explains, they use a change management model called ADKAR to shepherd organizations and people through times of transition, get buy in, and make sure new policies and procedures “stick.”

    We get into detail on that, as well as…

    • Strategies for integrating vastly different company cultures (and customer bases)
    • COVID and post-COVID communications strategies
    • What they do when deal details leak
    • How they balance confidentiality and the need to share information
    • 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 again by Alex MacLaverty global COO of Clarity PR. Clarity PR defines itself as an agency with a heart of a startup, working with rebels and Titans. We take risks, solve problems, learn, adapt, and deliver fearless global communications.

    This is the second of two conversations I had with Alex discussing the role of communications in mergers and acquisitions. In the first conversation we had, Alex talked about the role of communications for Clarity PR as its own strategic acquire itself where it has had a number of acquisitions and we’ve talked through case studies of what she did. To find that recording, simply go to Google, Apple iTunes, look up the podcasts and just search for M&A Masters and you’ll find it. M ampersand A Masters.

    It’ll be there, it’s the only one out there. Today we’re going to discuss the best practices for communications both internally and externally for participants in an M&A transaction, and this is where Clarity provides the role of advisor on holding the hand and shepherding the parties through this process. Communications in M&A are absolutely critical, particularly when you consider how much confidential sensitive information is being handled by a limited number of parties and how do you get that message out as other parties are added to the process. So it’s not as easy as it looks as I like to think. Alex, welcome back. Thanks again for joining me.

    Alex MacLaverty: It’s a pleasure to be back.

    Patrick: Now before we get into the nuts and bolts on what Clarity PR does in terms of communications for others in M&A, let’s get a little context. Tell us about Clarity PR itself.

    Who Are Clarity PR and What Are They All About?

    Alex: Well, thank you for the introduction. I think you said a lot of it already actually, which is great. Saves me a job. But to give you a feel for us, Clarity was an agency founded specifically to bridge the gap between the very large multinational agencies that you’ve probably all heard of, and the sort of small local boutique agencies and we like to think that we are in the perfect spot where we’re not too big, not too small for our clients.

    We’ve got offices at the moment in London, New York, San Francisco and LA. So we serve, obviously, the US market and Europe out of London. And we’ve got partners across the world as well that we work with because obviously, a lot of comms needs to be handled in multiple markets these days. But we really focus on tech-enabled companies.

    Not usually the biggest player in the markets, we tend to sit very well to the heart of a startup filled with challenges. So, some of the companies that are doing the most disruptive, innovative things in the market and really looking to challenge what’s out there already. And we specifically enjoy working with clients that have exciting stories to tell where there’s a really positive change coming out of the work that they’re doing and we’re able to bring that to life.

    Patrick: And this is more than just press releases too. This is also going to be internal communications on how you go ahead and get messaging internally through, and then with the counterparties and so forth.

    Alex: Yeah, absolutely. Yeah, sorry. We cover everything from media relations through to content marketing, digital, social, internal comms, crisis management, of which there is a lot in M&A as you know, and everything in between. So we tend to enjoy a very privileged position as advisors on sort of business strategy as well in a lot of cases because we get to deal quite often with, directly with a CEO, particularly in mergers and acquisitions.

    Patrick: Let’s look at what we’re doing with communication specifically in the world of M&A, okay? And I, and you and I’ve had this conversation before. The communication is a skill set that a lot of us take for granted because particularly if you’re in the professional field, we believe we’re communicating all the time. We either spoken or written, we’re constantly using sophisticated language and, you know, being aware and getting out there to a whole lot of people.

    And that’s not the same skillset you need when you’re dealing with, you know, highly sensitive, confidential information and being able to get it out at a measured time, particularly in the case of an M&A situation. You really can’t wing it. And you guys don’t. You’re not improvising on this on the fly. You go ahead and you have a real set process. So could you briefly go over that process that you use for the, I guess the hierarchy of the communications?


    Alex: Yeah, absolutely. I mean, the most important thing is to take a look at the whole picture of what you’re trying to achieve with the deal and then work back from it. And I think it’s very easy for communications to end up siloed in individual departments or with individual people. And so our role is really to take that overview of the whole process so that we can make sure that everything’s been joined up and is working consistently.

    There’s a process I talked about on the last podcast, which is the ADKAR model, ADKAR, which is, we’ve used for many years with great success, which just really acts as a reminder of the different processes you need to go through. It was devised for change management. So if you think of a deal as a process of change, both for the individuals being impacted, for the market, for the businesses as a whole, it seems to work well in terms of making sure that you just check off everything you need to. Just to recap very briefly, the first step one, that is awareness, so making sure that the parties involved have an understanding that there is a need to change.

    The D is the second step which stands for desire, which is actually inculcating in the people involved this desire to have that change happen. So for a positive outcome, and it’s only at that stage that you then start to impart the knowledge, which can take the form of training or communications to the team so that they really start to understand what it means for them and how they’re going to be working with it. The A is the ability, so giving them the toolkits they need to apply that change. So that could be equipping sales teams with new materials, it could be doing some of the sort of operational and logistics side of things.

    And then the R stands for reinforcement, which is obviously, just making sure that once the change has happened, you don’t just assume that it’s stuck. And it’s about going back again and reinforcing that awareness and that desire for the change until you feel like you’ve got a properly integrated business once again. It’s a very helpful way to navigate the uncertainties and the kind of scariness I think for lots of people involved either, you know, at a senior level or at a sort of junior level, in any kind of change. And it certainly helps to inform our communication strategies when we’re working with clients.

    Patrick: So what I like about this is that this isn’t just composing a press release announcing a deal. There’s got to be a way that you are ensuring that the deal ends up with a post-closing integration process that’s successful. And in order for that, and I love how you guys frame this, is this is all about change, and that people have to be aware of the change.

    They’ve got to understand, not only understand it, but then actually want it before you spend a lot of energy-giving them the skill set and the tools to move forward. If they don’t want it, you could have the greatest training in the world and they’re just not gonna buy into it. With mergers and acquisitions, we got issues with confidentiality and, you know, it can go big swings, depending on the parties in place, and the sensitivity of the information. How do you balance the need to make people aware and confidentiality?

    When Details Leak…

    Alex:  it’s a gray area to focus on because it is a very tricky one. And I think there is something in human nature that means when you know a secret, you really want to tell everyone about it. And particularly when you’re excited about a deal, I think people find it very hard to keep it to themselves. Particularly with the workload that involves, you know, people just have a need to share, which obviously isn’t always the most sensible thing to do.

    Obviously, it’s critical that you observe the terms of any deal and keep things confidential when you have to. I think there’s a few challenges specifically around that. One is that usually the most senior people in an organization seem to feel that that rule doesn’t always apply to them. So some of the most interesting challenges I’ve faced on the communication side of things has been from a CEO letting it slip to somebody who’s a friend in a club or whatever.

    And we’re the ones I have to pick up the pieces on that. Journalists are very good at getting, thinking they can get information off the record when obviously, if the information is interesting enough, then nothing is off the record. So keeping things to yourself is always a bit of a challenge, just generally. Where I see our role is really in having taken that bigger view of what the challenges are likely to be and what the communications considerations are, is trying to get involved as early as possible in the tabling of the deal and the discussions around what can and can’t be said so that we are in a position to try and influence that for the best.

    Experience shows that the earlier you can start to bring people along on the journey with you, the better the outcome. And therefore if we can put certain, you know, opportunities in place to start getting a team up to speed with the fact that change is coming, even if we’re not able to discuss what that change might be or speak to the media about plans and ambitions so that they’re getting warmed up, ready to accept a change in circumstance and that usually really helps us out and helps the client out in terms of getting the outcome they want.

    So we try to get involved as early as possible. I think the other thing is that you need to have a very clear comms plan so that you can be agile, because you never know, as we’re discussing, when something’s going to come out. So the comms has to come right at the beginning of any planning. It’s not an add on, it’s not a secondary thing. We’ll figure that out once a deal is signed.

    We like to get involved as early as possible so that should something go awry, we are able to kick in with a plan straightaway. So I’ve had an example where the deal was leaked to an employee who then told the rest of the staff. And so obviously, luckily enough, we had a, we had the commerce plan ready so we were able to kick in straight away. We had that email prepped from the CEO explaining what was going on. So with a few quick tweaks, we were able to address that situation immediately. If we didn’t get organized so far in advance, that kind of situation can be very easy to mishandle.

    Patrick: Yeah, that gets real difficult too because if the message gets out and you’re scrambling and you’re not prepared to respond within less than 24 hours, I can imagine the narrative has been written. Why don’t you, because that’s always a real big issue is dealing with the employees because obviously, they’re going to hit the panic button. Their first survival instinct is what about me and my job and so forth. So I can imagine a lot of things like that happened. Talk about a couple of cases where, as you alluded to just now, where your services come in and impact the deal. How does what you do benefit clients?

    Alex: I’ll give you a couple of examples naming no names. But to give you one example, so there was a client that I worked on who were very well known in their market kind of tech brand, but they were very, very cool in their space. They have a lot of fairly a sort of gang of followers, if you like, among the tech community. So quite geeky. They like to get the sweatshirts. And they go to the events and they were seen as a real sort of challenger in the space.

    And that company was being bought by a very large, very established, quite boring, definitely not cool, larger tech player. And so the challenge, obviously, from the outset was how do we bring their fan base and their client base along which was a key reason for the acquisition without disenfranchising them because we knew that as soon as they heard who they were, you know, who they were being bought by, they were going to be kicking off all over social media and, you know, saying terrible things. So

    Patrick: Were those sellouts?

    Alex: Absolutely, absolutely. And so there was a lot of stock in being able to secure that fan base on that client base, because obviously, if that goes, then there’s much less point to the deal. So we started working in the very early doors to make sure that we’ve got the messaging, right. We worked with, on a very confidential basis, with a couple of influences who we took into the confidence of the deal and we were able to actually run ideas past. And so we’re able to use them as a sanity check on the messaging that we’re using.

    They were able to advise us on points that may be as non-geeks, we hadn’t thought about things that would resonate with the community and things that wouldn’t. And so we ended up with a commerce arm which was quite different to a lot of the client-focused plans that we put together, normally, and this one involves a lot of roadshows and events where we’d actually go and meet the fans, you know, in a sort of comfortable environment for them. We media train the CEO of the acquiring company specifically, told him what to wear so that he didn’t allow them with his suits and his, you know, monogram shirts.

    So we turned that down a little, and also looked a lot more at things like social content. We produce some animations for them to use to kind of get the right write messages across so that people could understand why this change was happening. And that was a really useful way to do it because we were getting the inside knowledge, which was obviously very helpful to create the right messaging platforms. But also, we’re able to really get the content to the place where the fans were able to understand why the change was happening And we’re able to sort of, they were never 100% happy with the deal.

    I think it was hard to convert everybody. But the client drop off rate was very low. And, you know, we were reliably told that that was a lot to do with the way that we’d handled the client taking the customer base with us. It’s great when we get given a lot of free reign because, you know, the more client leans on us, the better able we are to serve them. When we’re just told we need a press release on this, it’s never going to end well. Whereas if we’re able to get under the skin of all the different challenges, we can put together a much more comprehensive program for the client.

    Patrick: Give me a profile. What’s an ideal client for Clarity PR?

    Alex: The clients that we like to work with are, tend to be more in the scale upside of things. They tend to be very progressive, usually challenger brands in their markets doing something disruptive, as I said. The key thing is that they have a really solid business challenge and they’re there looking for a partner in overcoming that challenge through communications. As I say, I think things, relationships where we’re expected to just put out press releases for any agency, that’s never a particularly inspiring role and I don’t think it creates any value for our clients.

    And so the best clients are the ones that will allow us, will sort of give us the keys to the kingdom and allow us in to spend time with the team to really get to grips with what their challenges are, and then give us free rein to put some proposals in place that will help to address those. But tech is a fantastic space. And luckily, there’s no shortage of exciting businesses in that space. So we’re very spoiled, particularly at the moment, because technology is just such a hot area. So it’s great to In such a vibrant kind of marketplace at the moment.

    Patrick: And I would say there’s no industry with a more glaring, I’m not going to call it weakness but a glaring non-strength is human chain of communications within technology. And so I think that’s an ideal fit for where you bring in the softer side, the people skills and that fun stuff. When you’re onboarding, let’s talk about timeline, what’s the usual life cycle for you, particularly in an M&A situation? Okay, how long in advance should they be talking to you? Or can you get up and running quickly? Give us an idea of what the onboarding process looks like.

    Onboarding at Clarity PR

    Alex: It’s possible to get started very quickly. There are some shortcuts to this kind of thing. But my recommendation is always that as soon as you think there’s a deal about to be, you know, a deal in the pipeline, then bring us on board. Ideally, you know, when you’re at the letter of intent kind of stage, that’s a great time to be starting to talk to us because we can help them form the process from there. You know, obviously some clients, this is a regular thing for them in the tech space.

    There’s something happening, you know, every other month, whereas other clients who may be that they literally just suddenly decide that they need some comms help because they’re about to do a deal. So we’d be important on both kinds of things. But the main thing is to invite us in as part of the team. You know, if we can have a seat at the table, we can understand the challenges that are going through among the people that are discussing the deal and are working through the processes, then that gives us, as we were discussing earlier, a huge amount of insight into where the problems might crop up.

    And there’s a, you know, there’s a lot about comms and I think people think that Oh, if you’re a publicist, you’re always about talking about the good news. That’s the really easy part. And the bit where we add the scale is identifying the tricky questions, the challenges we’re going to get from the media, the what about this? What does this mean? Why don’t you talk about this? So the quicker we can start thinking about the difficult questions the more we can help you avoid getting those questions in the first place.

    Patrick: Have there ever been any problems with communications where the message isn’t going to be good and as the buyer is considering a deal, as they’re looking at it and we’re talking about potential problems, how are we going to communicate these problems? Communications ever talked anybody out of the deal?

    Alex: Very good question. I’m gonna have to say no, in my experience, simply because I don’t want to be seen as a bad luck charm. But it does raise some very interesting questions. And I think that’s the other thing about having an independent person in the room in some of those conversations is that we can bring that independent perspective.

    We don’t have a financial stake in these deals, but we can put ourselves in the shoes of your employees, in the shoes of your clients, in the shoes of the media. And it almost gives us a license to ask the question. So quite often, other people in the room maybe want to ask but they don’t dare to. And so I think there’s also value in bringing that sort of outsider perspective to the table so that you can get all of these things ironed out ahead of the deal.

    Patrick: Wow. Well, as we’re sitting here talking now, we’re hopefully on the downside of the COVID-19. And there are already conversations about ramping up for businesses returning to work and so forth. If you can share with us, what are your projections for the future either with M&A, with communications for Clarity, you know, what do you see down the road probably, you know, late third quarter and beyond?

    Post-COVID Communication Strategies

    Alex: That’s a great question. And that’s what we’re spending a lot of time thinking about at the moment and working with clients on is what comes after COVID. And I think no one knows yet quite what that’s going to look like. But it’s definitely worth putting some thought into it at this stage. A lot of our clients, they’ve had to change the way that they communicate through this crisis. Some have stopped and doing other things. Some are doubling down on what they want to be saying.

    And some are obviously just changing tact, completely changing their messaging. So I think there’s going to be a period of settling down after this. And I think, you know, there’s still quite a lot of deals around. And as I said, we’re very lucky to be mainly focused around the tech sector, which is, there’s still a lot of deals going on. It will be interesting to see what happens once the deals that are currently in the pipeline have sort of made their way through.

    But I think certainly from a commerce perspective, there’s going to be a lot of regrouping and remessaging. I don’t think any of us can expect things to go back to exactly how they were pre the virus, and therefore, the way that we approach deals, the way that we approach communications, I think there’ll be a naturally a lot more caution, but also a willingness to kind of get back on and get back up to speed quite quickly. So it’s going to be an interesting time, I think, all around.

    Patrick: One other thing I want to just impart with the audience real quick and why I’m so pleased to have you, there was advice that I heard a father give his son who was a technology, very well educated in tech and was doing, he was on a good fast track to success. And his father insisted that he get a job, summer job either at a Starbucks or at just someplace where he had to talk to people. And the son, you know, stereotypical tech introvert guy, very, very sharp, nice kid just didn’t have the people skills.

    But the father said, you need to get out there and be with people and communicate and learn how to do that. And the son objected. And the father said, Look, the best ideas and the ideas in a boardroom that get listened to and your bosses out there, they’re going to promote, not, they’re not always promoting the smartest person in the room. They’re going to promote the person who has the best message who can pitch their idea most effectively.

    And so you can’t understate the value of communications. We’re human beings. This is, you know, everything happens with humans until artificial intelligence takes over. So I can’t stress that enough in the great work that Clarity PR does. And, you know, I wish you all the success. And thank you very much for joining us today. Alex, how can our audience find you?

    Alex: You can look me up on LinkedIn or give me an email at It would be great to hear from anyone.

    Patrick: Yes, some of us are visual. We say dot com by habit. It’s Alex, thanks again and we will talk again soon.

    Alex: Thank you.

  • Alex MacLaverty | Effective Communication in M&A Transactions
    POSTED 7.7.20 M&A Masters Podcast

    Clarity is a public relations firm that offers communications strategy, positioning, marketing, content creation, and other services to companies in the fast-moving world of global business.

    As Global COO, London-based Alex MacLaverty guides the growth of this ambitious agency. Part of that growth has been through recent strategic acquisitions of complementary PR agencies.

    Alex explains why they chose those specific agencies, how it will change their business, and why they had never met the team at one of the firms before the sale.

    We also talk about how they handled integrating two teams when they bought the other firm so that they had a running start when the deal was signed.

    In both cases, Alex and her colleagues were guided by a change management model known as ADKAR.

    In our talk, she explains the five parts of that strategy and why it’s key to follow in times of large-scale changes in an organization to ensure all the key players have the right mindset going forward.

    Tune in for all the details on that, as well as…

    • The biggest drivers of their strategic acquisitions
    • How they prevented client attrition
    • Why they don’t forget the people side of acquisitions – and how that impacts operations
    • What they do to get buy-in at a “deep level” from new team members
    • 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 Alex MacLaverty, global CEO of Clarity PR. Clarity PR defines itself as an agency with the heart of a startup working with rebels and titans.

    We take risks, solve problems, learn, adapt, and deliver fearless global communications. I like that fearless part. This will be the first of two conversations I have with Alex as she shares with us her perspectives on the importance of communication throughout an M&M process. Today as strategic acquirer, Clarity PR has had a number of acquisitions lately. Then on the next recording, as an advisor to other buyers, both strategic and financial, Alex, welcome to the program and thanks for joining me today.

    Alex MacLaverty: My pleasure.

    Patrick: Before we get into communications and Clarity PR’s fearless communications and everything, let’s give our audience a little bit of context. How did you get to this point in your career?

    How Alex Became COO of Clarity PR

    Alex: So, I’ve got about 20 years in primarily technology and PR. I started out as a commerce consultant and then moved into agency management as tends to happen. I’ve worked in agencies large and small with some of the world’s largest tech brands as clients.

    And I’m based in London, as you can probably tell by my accent, but my role for the last 10 years has been global, overseeing businesses across the US and Asia pact. And Clarity, I mean, Clarity is a very fast-growing, ambitious agency. We’ve got offices in London and across the US. So my role now is really all about ensuring we’re set up in the right way to achieve our ambitions.

    Patrick: Well then we’re going to talk about communications a little bit later, but, you know, let’s put it in the context of communications in an M&A process from your perspective as an acquirer, not advising outsiders. But let’s talk about, you know, give us a couple examples of experiences you’ve had with being part of Clarity through various different scenarios, because not every acquisition is the same.

    Alex: No, absolutely not. And I thought I’d share with you today the examples of our two most recent acquisitions. The first was completed in around November of last year. And that was the acquisition of a complementary PR focused agency out in Los Angeles, which we plan to add as a standalone office within our US business. The second completed in around December time of last year and was of an agency that was much more focused on technology startups and digital communications.

    So most of the team we’re based in London with a few people out in San Francisco. And this deal was much more focused on integrating their team into our existing London team. So slightly different setups for each of those deals. But not only that, they’re also very different in terms of the way that we roll them out. And we sort of manage those acquisitions.

    Due to the nature of the LA deal, we had the sort of interesting experience of not actually being able to meet with any of the team on the ground before the deal completed. So we haven’t met any of the key players, obviously, we’ve heard a lot about them and all good things. And we’re very excited to meet them. But we hadn’t actually spoken to any of the people that were going to be running the business for us out in LA. And the first time I met them, it was to tell them that they had been acquired.

    Patrick: So this was big-time confidentiality at the extreme.

    Alex: Yeah, absolutely. There was a lot of focus on the paperwork, getting the paperwork all done correctly, and making sure that that had happened before we said anything to anyone. So it was a very kind of secretive process. So there wasn’t really the ability to get much done behind the scenes in terms of communications, putting together a plan for that.

    Or any of the operational side of things which obviously had to follow. So it was quite a, everything was resting on the moment that the signature happened. I jumped on a plane over to L.A. as soon as I could, and then was able to meet the team. But it was an interesting experience too because when I got there, I felt like I knew them all already.

    I knew so much about them, their business, how things were working. And of course, they’d never heard of us before. They had no idea this was about to happen. So it was an interesting, not a clash, but it was an interesting differentiated between sort of my feeling going into it and obviously, they’re feeling being on the receiving end of our attention. So it’s quite an interesting experience.

    Patrick: Yeah, there’s a lot of pressure there because this isn’t just you’re gonna have to make a really good first impression. This opening message is, Hi, you don’t know me, but we own you now. What was the challenge like? How did you guys do that?

    The Big Acquisition Introduction

    Alex: I prepared very thoroughly in terms of trying to understand as much as I could without meeting them, the team, what will likely to be their concerns, their triggers, the things that they were going to be most interested in finding out about us, but also working out the best way that I could position our business for them so that they would understand their role moving forward within it.

    It was a bit like some sort of strange blind date where I’d done all the cyberstalking and I sort of found out all the facts about them, but they hadn’t done the same on me. So was trying to make sure that it was a, still felt like a collaborative process, even though actually the deal was already done. And to be honest, there wasn’t much they could do about it.

    Patrick: I’m gonna take your analogy there, instead of a blind date, it’s an arranged marriage.

    Alex: Yes. Yeah. Totally, yes.

    Patrick: There were mechanics that go into this and we can talk about later. What about the other situation?

    Alex: So, the other deal, the London deal was totally different. From very early on, the teams were told about the plan to that we were going to acquire the business and integrate the teams. It was important to us that we did that as early as possible. I think because so much rested on the teams getting on with each other.

    But there were also commercial imperatives. There were already clients that would have benefited from the combined team that we wanted to work on. And it also obviously made a lot of the operational planning much easier and communications planning much easier when we’re able to have the teams working closely together. So, in that deal, the team that we were acquiring actually moved into our office several weeks before the paperwork had been finished.

    Patrick: Sorry, say that one more time.

    Alex: So the team that we’re requiring moved into our London office several weeks before the paperwork was done. Which I appreciate is quite unusual, quite a risky move. And, you know, it was fun. I think there’s something, you know, we’re in a very lucky position to be able to work in that way. There was a great cultural fit between the teams anyway, which was one of the big drivers for making the acquisition and we felt that the team on both sides would respond better to being brought in as early as possible getting to know each other, raising their concerns as we went along, rather than having it landed on them suddenly.

    And that absolutely proved to be the case. We did have to swear everyone to absolute secrecy. And there were some tricky moments even just having the team members walking in and out of our office in case somebody saw them and was able to figure out what was happening, some challenges around that.

    But actually, it worked out incredibly well in the long run in that we have no client attrition, no team attrition, and due to the acquisition, which is a quite normal, you know, thing to happen in these circumstances. But more importantly, the team felt like family. Once the paperwork was done, we opened some champagne, but they’ve been part of the family for the last few weeks. And so it was a very natural sort of harmonious thing to do.

    Patrick: You were already joined and it was just a formality at that point.

    Alex: Yeah, it was. It was as if we’d all been living together for years before we actually got married.

    Patrick: Yeah. The two extremes, which is great. And both of them, and it resulted in successful acquisitions, successful integration, which is evidence that there’s no one way to do these things.

    Alex: Yeah, absolutely. And, but I think it’s, yeah, both were interesting learning experiences. But I think, you know, I know which way I’d prefer to do it in the future.

    Patrick: Gotcha. There was a lot of trust involved and so forth that has to come across with this. I think that with what, you know, Clarity PR does and what you do specifically dealing with communication, that’s a skill that I believe a lot of us take for granted because we’re communicating in one way or another all the time, formally, informally. And so there’s not the same appreciation for.

    And when you’ve got situations where you have a potential volatile situation where the wrong word, the wrong tone can damage a relationship, sometimes irreparably, that’s a big balance that’s got to be there. Now it’s your profession, is communication. So clearly you’re not winging it when you do this, okay? So there’s got to be a plan in place. Is there, describe your process or your plan in assessing a situation then how to deliver communication, when, how, all that.

    Alex: So, a long time ago, now I was introduced to a change management model called Adkar, ADKAR, which I found to be incredibly useful in any number of business and personal situations actually, in terms of planning out the right way to move forward with something big that requires not just a structural change, but a behavior change, a mindset change, an emotional acclimatization.

    And that’s really been at the heart of the processes that we’ve focused on around M&A and making it successful. And it’s a really great way to make sure you bring everyone along on the journey with you. And I think what it does, and I’ll sort of explain it a little bit shortly, but what it does is it allows you to, I think when you spend so long working through a deal, you as I was saying earlier, you feel like you really know the business, you know, the people you get really into the details of it.

    But you tend to forget quite easily that the people who are actually going to be on the receiving end of all this, the people who actually work in the business, this is all new to them. And so it’s very easy to skip far too quickly to the how, the operational side of things. Okay, so we’re going to change this, we’re going to do that we’re going to move things along without actually getting their buy-in.

    And so this process just is a very useful way of reminding you at every stage that the buy-in is probably the most important thing. And if you’ve got that emotional connection and that desire to be part of the business, then you, the operational stuff kind of works. itself out. And people are much more forgiving of any glitches in how the new structure works. The Adkar model is a really good way to do that and it makes things a lot easier in my experience. So, if I just talk you through, I’ll talk you through what each of those steps is, if it’s useful. I can explain a bit more to your listeners.

    Patrick: You will have shown us and have this written out. So those of you who were driving or something listening, don’t worry because we’ll, you don’t have to pull over and take notes. We’ll have something available. So ADKAR

    ADKAR Change Management Model

    Alex: That’s right. And you can, I’m sure you can, you know, get the book and read it yourself. But it’s fairly simple. So the A stands for awareness, which is awareness of the need to change. So actually telling people, we need to make a change here for all these different reasons, which hopefully, if you do it right leads to D which is the desire to make that change. So before you even start making any changes, you’re ensuring that people understand why there is a need to change and that they really want to do it and that they’re on that journey with you.

    The K stands for the knowledge of how to change. So actually, what does this practically mean? And the A stands for the ability to demonstrate the right skills and behavior. So that’s why you’re training people up, you’re arming them with the tools that they need to adapt to new processes, systems or different offers, whatever it might be. And then the R stands for reinforcement. So to make the change stick, you can’t just do this once and then think Oh, it’s done. You know, everyone’s moved in, it’s fine, let’s just crack on with our normal business.

    The R also means that you actually almost have to start right at the beginning again, go back to the A, and reinforce with people why we made the change, what are the results people are seeing and back that up so that people really stick with these new behaviors rather than just thinking back into their old ways. It’s very, you know, everybody knows that humans don’t like change and will naturally go with the easiest route, which is usually an old way of doing things in a change situation.

    And so, what we found is that, if you can follow this methodology, it really means that everybody who’s involved on the leadership side of things in making that change happen is thinking about creating a sort of heartfelt change in behaviors and understanding and all the rest of it rather than just an on the surface, people are doing things differently, but actually, they don’t like it or they don’t believe in it.

    And if you can’t get that emotional buy-in, and that sort of heartfelt support for what you’re trying to achieve, then that’s when I believe you see the attrition. That’s when you see people going back to their old ways, non-compliance with processes or structures. It’s where a lot of these deals seem to fall apart.

    Patrick: Well, it underlines something I’ve said ever since I got into mergers and acquisitions. This isn’t Company A agreeing to merge with Company B. This is a group of people here choosing to work and join forces with a group of people over there and then the two of them coming together. And if it’s successful, the whole is greater than the sum of its parts. I like the way you talk about this where a lot of people, particularly if they’re just hearing about a sudden change and a change in job is foundational.

    I mean, look what people are going through today as we record this. When this change happens, they’re thinking, What’s in it for me? What, how is, how am I impacted? And I like the way that you outline without getting personal, here’s why change needs to happen. Otherwise, there won’t be, your survival could be at risk. So there’s this change, this isn’t being done at the whim of some executive.

    And this is, you know, we all want to go in the direction, I like to desire because you’re getting everybody to go the same direction. And then you give them the tools on how to do it and then you follow through. And reinforcement. I agree, people, sometimes a lot of us need to be reminded over and over again, particularly as you’re going through the adjustment process that, you know, it’s out there. So that’s a great plan because then you can structure the communications and you can pivot from there as issues come up, I imagine.

    Alex: Yeah, absolutely. And when problems come up, you simply start from the top again. So you start, go back to the awareness. When you see problems happening in terms of, you’re not seeing the behavior change you want to see or people aren’t getting with the new systems or whatever it might be, signs that it’s slightly unraveling, it tends to be because they don’t believe in it.

    So you have to go back to the beginning again and remind them of the need to change and try and reinstall that desire for it to work. And so I found it to be very helpful. It works outside of M&A obviously, as well in lots of other, you know, any changes within a business environment and a personal environment actually.

    Patrick: A lot of people need the why. You know, why are we doing this? And once they, whether they accept it or not, at least they understand, you know, the reasons that are supporting the change in environment, whatever. And so they go through that. So and that’s, you’re not just advising other firms about this professionally. You were doing this yourself. So if you’ve exercised these exact steps with your processes.

    Alex: Yeah, absolutely. But also advised, counseled lots of clients that this is something that they need to be doing. If you look at the way that governments are trying to get people to change their behaviors at the moment, you know, it has, people wouldn’t stay in lockdown if they didn’t believe in it. And the moment they stop believing that there’s a good reason to do it, they’ll go out again. So I think, you know, any kind of, if you’re trying to communicate effectively, it has to be to do with the heart more than the mind in many different ways,

    Patrick: Especially for those of us who had to avoid cutting our hair for eight weeks. Well then, as we’ll talk about Clarity’s, what’s an ideal target for you? For our listeners out there, I mean, you’re out there, you’re looking at PR companies, give us ideal target for what you’re looking for.

    More Isn’t Always Better

    Alex: Yeah, it’s kind of, it’s easy in some ways to say and hard in others because we’re very ambitious and we’re a very agile kind of agency. And so while we’re always working on a number of intentional strategic, very well thought through plans and deals and we’re also very open to those kind of serendipitous opportunities that just come up through having the right relationships.

    So there’s a combination of the very targeted and strategic and the opportunistic. I think currently, our focus is really on businesses that help us do probably one of four things that help us expand geographically. So give us a new location that will be useful that broaden the services we can offer that open up new vertical markets to us or that strengthen our existing teams. So there has to be ready, you know, we don’t want to do these deals for the sake of it. They have to add something to our existing business. But we look for, you know, we look for different things in those businesses.

    There’s got to be something special about them. We’re not interested in being an average agency and so we don’t want to acquire average agencies that do, you know, standard boring work. We’re looking for something a little bit special. And so there is an element of gut feel to it as I think most people who do M&A work, you know, there, you can look at a lot of spreadsheets but there has to be something that makes you really excited to do that deal.

    Patrick: More isn’t better, more is just more.

    Alex: Yes, exactly. Very well put. We’re also very conscious of finding deals that are going to be the right size for us. And we’re not a massive agency and we don’t particularly want to be massive for the sake of it. As you say, more is just more we want to so we’re looking for agencies that are going to be a good fit but aren’t going to overwhelm us. You know, that Going to be too big for us to handle or that will change the way we do things to significantly. But I’m also looking for a cultural fit.

    I mean, it’s absolutely crucial. And the work that we do communications is all about the people. So if the people bit isn’t a good match, there’s literally no, you know, you’re not buying anything. All you’re buying is a fantastic team, hopefully, really. And so it’s important to us that the fit is right and that there’s a really good match on that front.

    Patrick: Yeah. Fit’s one of those real difficult elements to identify. It’s one of those intangibles but you’ll know when you see it.

    Alex: Yes, I totally agree. And I think obviously, and then the, you know, the standard stuff, it’s got to be a good business. It’s got to be, have a great team. It’s got to have a, you know, a strong client base. All of those things are important, but I would say usually, the cultural fit almost going to clinch it as to whether we’re going to do the deal or not. Even if it was a great business, if the cultural fit wasn’t there, we probably wouldn’t go for it.

    Patrick: So Alex, as we record this, we’re hopefully in the second half, the downslope of the settle in place COVID process right now. So, understanding that things do change quite a bit from week to week, actually, I don’t want to ask you to go out on a limb there. Give me a prediction, you know, where do you see, you know, transfer M&A, transfer activity, either globally un public relations to communications or for Clarity PR. I mean, what are you seeing? And make it whatever timeline. Six weeks to a year in, what do you see out there?

    Alex: I think from our business perspective, you know, Clarity is in a really lucky position, our business is still growing and fingers crossed, we’re going to remain in a strong position. So we’re still powering ahead with a number of deals that we had in the works prior to this happening and we’re still on the lookout for more deals to be done looking ahead, I think we’re seeing something similar in the market from our clients.

    You know, we work with VCs and PEs and things like that as well, is that deals that were in the pipeline are getting done. And there’s a lot of activity on that front to close out deals that were already in the works. I think what remains to be seen is how many new deals get struck over the next few months, given all the uncertainty around. I think there is a lot of nervousness, obviously, in the market.

    So how this next phase goes, I think, will have a lot of impacts on how much, how many deals happen towards the back end of this year. I think in terms of the work that we do, you know, as a communications consultancy, there’s never been a more important time for people to have a good comp strategy and not just in terms of promoting your brand or whatever it might have been in sort of normal times.

    But as we move into, you know, global downturn, quite possibly, it’s about things like internal comms challenges. It’s about being able to handle a crisis in your supply chain or whatever it might be. It’s about communicating effectively with your customers and your clients. And the brands that get it right at this time, you know, will obviously come out of it much better at the end of this than those that bungle it.

    And I think we would be seeing larger brands suffering because of the way that they’re handling this crisis. So I think it’ll be interesting to see what that does to the shape of things when we come out the other side and who will still be standing because it won’t just be down to sort of the economics of it, demand. I think lots of it will be how businesses have treated their clients, their staff is going to be really important and obviously, commons has a lot to do with that.

    Patrick: Also, you’re gonna want to get that message out. You know, we’re back. We’re open. We’re back to business or we’re back, we may not be ready at full capacity, but be patient.

    Alex: Yes. Absolutely.

    Patrick: Those are the optimists out there. Alex, how can our listeners reach you? How can we find you?

    Alex: You can go to our website. Just And I’m, you can email me directly at Alex, And be, yeah, happy to be, to hear from people.

    Patrick: Well Alex, thank you very much and look forward to speaking with you again soon.

    Alex: Thank you.



  • Christie McFall | Upcoming Trends In M&A Post-Pandemic
    POSTED 6.30.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Christie McFall, Business Development Director of Great Range Capital. Based in Mission Woods, Kansas, Great Range Capital brings a unique combination of institutional-grade experience and Midwestern values to middle market and lower-middle market firms in the Heartland.

    “Our whole goal is to take a successful business that has a strong management team that is looking for some sort of succession plan, if it’s taking equity out of the business and slowing down, or just growing that business to the next level because they can’t. That’s one of the things that I find appealing from these businesses in the Midwest is you get to find somebody who’s talented, took an idea, and grew a successful company. But when they can say, I just don’t know how to get to the next level, and I need some help, those are the types of relationships we’re looking for,” says Christie.

    We chat more about Christie’s career and Great Range Capital, as well as:

    • Helping already successful businesses in the lower-middle market grow to the next level
    • Rep and warranty insurance
    • Upcoming trends in M&A
    • The importance of acknowledging the emotional aspect of selling a business
    • 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 Christine McFall, Business Development Director of Great Range Capital. Based in Mission Woods, Kansas, Great Range Capital brings a unique combination of institutional-grade experience and Midwestern values to middle market and lower-middle market firms in the heartland. Christie, thanks for joining me. Welcome to the program.

    Christie McFall: Hi, thanks for having me. I’m excited to be here.

    Patrick: Well, before we get into Great Range Capital which we’ll short to GRC, why don’t you tell us about you? What got you to this point in your career?

    How Christie Got to This Point in Her Career

    Christie: Yeah, so I’ve always done business development and marketing. And prior to the firm, I was at a company called UBM. It’s based out of London. You won’t find that name anymore because over the last three years it was bought and sold three times. I think it went from UBM to Informa to a company called NJH Associates. My role was when I was hired was to grow the company through M&A.

    And I was able to do that. I bought a couple of data firms and a few media companies to round out my portfolio. But in the process, they were buying and selling my group at the same time. So although I learned a lot and enjoyed the process, I wanted to stop being on the receiving end of the acquisition and be on the buying side. I really enjoy the process and I enjoy, you know, meeting new people.

    And that’s one of the biggest benefits of the role that I have is getting out into the marketplace and meeting business owners and influencers and deal brokers. And I like that a lot. I don’t necessarily love the integration part of being bought and sold, where you’re trying to figure out a new process, procedure, email capabilities, integrating your finances into a new business. So more of the operation side. I like being on the business development side.

    Patrick: Lots of ironing out the wrinkles. GRC has a real pride where they’re strong in the heartland in the region. Briefly, though, for you personally, are you originally from the Kansas area?

    Christie: I’m originally from Iowa, Des Moines, Iowa.

    Patrick: Okay. As a Californian would say, same thing. But

    Christie:  Yeah. Close enough.

    Patrick: So your travels have brought you around now. Now you’re here in Kansas. So tell us about Great Range Capital.

    What is Great Range Capital All About?

    Christie: We’ve been around for 10 years. It was founded by two gentlemen, Ryan Sprott and Paul Maxwell. They grew up in Kansas. They went to KU. They’re brothers in long so they’ve known each other since they were teenagers. And after they graduated, they both went to the east coast to learn the business inside and out.

    Worked for major firms, you know, did the billion-dollar deals. But along the way, they always knew in the back of their mind that they wanted to come back to the Midwest and felt strongly that the Midwest was underserved from a private equity standpoint as well. Yeah, a lot of people fly in, but not a lot of people actually live and work right here with the companies that are based here.

    Patrick: Huge competitive advantage.

    Christie: Very much so. And it’s really where we win. So our thesis is similar to others. We’re looking at lower-middle market companies, three to $15 million in EBITDA. Manufacturing is our sweet spot, but we’ll look at pretty much any company that doesn’t play an oil and gas or has some cyclicality to it. But the difference is we can sit down at a table and have that connection and that chemistry that a lot of folks who fly in for the day cannot have. We are, we drive there. You know, we only really look at businesses in the Midwest.

    So typically, the seven states that touch Kansas. And then we’ll go outside those seven states, but they have to be in the Midwest for the portfolio company. Add-on opportunities we may look outside of that geography, but really tightly looking at the Midwest. We drive there, we’re there in a day, we didn’t fly in our private jets. We are raising our families here. We understand the emotional decision that this is for an owner rather than just a financial.

    Listen, if it’s just a financial decision, meaning I want the highest multiple for my business, we’re probably not the partner. If you are looking, we want owner-operated businesses that are healthy and strong. Those folks usually stay involved at least for a time period and roll some equity in alongside of us to help grow the business. And we understand that that business is important to them. Their families usually work there. Lots of the people in the town or there. It’s a very big employer usually, so we are comfortable having conversations about how to maintain that business.

    We aren’t coming in to put in 10 new executives, sweep out the management team and start anew. That isn’t, our, we aren’t operators. We don’t want to run the business. We want them to run their business. We might bring in somebody who can grow it from a strategic level, either a CFO or CEO, some board members, but we don’t want to run the business. We want them to do what they do best. So it’s a chemistry conversation and it takes years, a long time to earn the people’s trust. But that’s our differentiator, which really are, we understand where they’re coming from. We can speak their language.

    Patrick: You guys have a commitment to the lower-middle market, middle market as a market segment, okay? Is that a choice? Or are you restricted just because that’s all that’s there in the Midwest?

    Christie: Yeah, absolute choice. There are so many businesses, valuable businesses here in the Midwest, we choose to focus on the lower-middle market, middle market range. for a few reasons. Obviously, you know, we like to say that we can drive to your business within a day. We don’t fly in from the east coast.

    We’re here in addition to Ryan and Paul being from KU, everyone else in the firm is from Kansas except for me, so they really went out on a limb hiring an Iowa girl. But we all are from here. We grew up here. We’ve all spent time either in Chicago, Milwaukee, Minnesota or Minneapolis, sorry. And East Coast, I was in LA myself. And we’ve all come back here to raise our families and focus on the businesses. So when we sit across the table from a business owner, you know, when we talk about shared values, we can say that honestly and mean it.

    We’re a firm based in the Midwest, we drove to visit you today. You are listening to and talking to folks that understand the value of your business. We understand the value of the employment here to the town, to the folks that work here. And we understand that this is mostly an emotional decision and not just a financial decision. And we find that that sets us apart. You know, the businesses that we target are, you know, within three to $15 million of EBITA range. We believe, you know, most of these folks are owner-operators that want to stay involved or help the business grow in some way.

    Maybe they just want to slow down and let somebody else come in and help them continue to grow that business. But it’s an emotional decision. And we focus on that size and that type of owner-operated business where we can sit down and have those relationship-driven conversations. That’s where we win and that size seems to be the most effective. We’re also wanting to be a majority owner first in on capital raise and so that seems to be the size where that’s really a typical arrangement.

    Patrick: You said a couple of things that stood out to me. And it’s the power of having focus in a particular market and enjoying that market that you’re in. One of them was that personal aspect that you’re, you’ve got boots on the ground and it supports the philosophy that I share is that mergers and acquisitions are not the combination of Company A buying and Company B, it is one group of people choosing to work and combine forces with another group of people. And when you put those together in an ideal situation, the intent is that the whole is greater than the sum of its parts.

    And so if people get together, cultures mix, interests mixing and align, it all works. And that’s usually the remedy for success. And so there are others out there, and I’m sure you’ve come across this where there are other competitors that are probably offering a lot more money than what you’d be offering but you just don’t have the fitness. One thing that’s just critical and you can’t overlook. I think the other thing is essential is that the lower-middle market is a lot bigger than people think it is.

    And the crying shame out there and the reason why we wanted to talk to you today and introduce GRC out there was that the lower-middle market is large, but it’s really underserved. And I mean underserved in a big way because if you don’t have in house core dev or you haven’t gone through a lot of transactions and you’re a founder, you don’t know where to turn. And by default, they’re going to pick the brand names, large institutions and go in that direction to seek help. And, you know, they’re going to find out that they’re going to be overlooked because of their size.

    They’re going to be underserved. They’re going to probably have somebody who’s condescending to them. And the large institutions, while they’re very large, they don’t have the bandwidth to handle the solutions or deliver an alternative to a smaller client. And so the lower-middle market company ends up getting some prepackaged solution. And so they’re not only overlooked and underserved, they exit poorer, I’ll put it politely, not as rich as they would otherwise if they partnered with a firm like GRC. So give us an example just of one of your deals where you guys added value, where that connection worked.

    Grand Range Capital Offers Honesty and a Personal Connection

    Christie: I mean, it’s hard to pick just one. I’ll highlight two. I, you know, all six of our portfolio companies are based in the Midwest. They were all owner-operated and relationship-driven deals. In Mountain Valley, Spring Water-based and Hot Springs Arkansas was owned by the JB Hunt family. All were relationship-driven.

    Met with them still to this day we, you know, we own, we just sold that company I guess a year and a half ago. still connected to that group, still send them opportunities when we see, you know, add ons for them that might look good. Fair Bank Equipment in Wichita, Kansas is owned by the Rei family. Cody Wright is the President and CEO. He’s been with that business for 20 years plus. He’s the grandson of the founder. And I think he eats Thanksgiving dinner with our two founders as well.

    I mean, these have become family members of ours talking about what we’re looking for from an owner-operator relationship. You know, it takes a few courses, you know, a few of these folks are looking to slow down. Well, they say they’re looking to slow down, they really do. They say they’d like to retire or slow down over the next three years. And the fact is, once we get in there, and the business starts to grow, half the time, they’re reinvigorated in the business and spend more time.

    So apologies to their families who they told that they were finally going to go to that lake house or that beach house in Florida and slow down because that’s rarely the case. Usually, it invigorates them to get back in the game and somehow find the energy to keep going, which is impressive. And that’s the case with most of our businesses. What they’re really looking to do is maybe take that second bite at the apple, and that’s really what we offer, you know, from our perspective. I think you’ve mentioned exiting poorer than when you started or not as rich as when you, as you’d hoped you’d be.

    Our whole goal is to take a successful business that has a great strong management team that is looking for some sort of succession plan, if it’s taking equity out of the business now, slowing down, like I mentioned, or just growing that business to the next level, because they can’t. You know, they’re very honest about that. And that’s one of the things that I find appealing from these businesses in the Midwest is you get, you find somebody who’s certainly talented, took an idea and grew a successful company.

    When they can say, I just don’t know how to get to the next level and I need some help, those are the types of relationships we’re looking for. And that’s really, when we can bring some value, and aside from just the capital, we can bring in a next-level CEO or CFO or strategy person that can grow that business. And then three, four years, five down the line when we sell that business, again, which we have, Mountain Valley, Springwater and Heartland Landscaping we sold again and those owners get another, you know, bite of that apple.

    They get another opportunity to financially benefit from the growth of their company. And that’s truly what it’s all about. We are not, you know, we’re not flying in for the day. We are here. We live here, we drove to visit you, we want to see you successful, we want to see your business grow. We all benefit from that. And it seems to be a win-win all the way around. We are connected to these folks. We deeply understand their business.

    And I would say that over the last, you know, six weeks as we have turned inward as a community and as a business, we have focused solely on keeping that business healthy and the employees that are healthy and how to see everyone through this time. I’m not on the, you know, quote-unquote investment team side. I’m on the business development side. So while they have really turned inward to focus on those companies, I have strengthened my relationships, looking to network and grow our deal flow. And people are hungry for interaction and talking. So it’s been an interesting time on both sides of the coin there.

    Patrick: With the number of deals that are going on with you, I’m curious as to what experience you guys have had with a product called rep and warranty insurance and whether or not that’s impacted you as it has. For those of you who don’t know, rep and warranty is an insurance policy that ensures the seller’s representation.

    So in the event the seller reps are inaccurate or breached, despite the due diligence of the buyer, and the buyer suffers financially rather than the buyer pulling funds from an escrow or trying to carve back money from the seller, instead they have an insurance policy that will pay the buyer their loss. Buyer gets certainty of collection, seller gets A, no escrow or very tiny escrow, and they get a clean exit from the deal. And so I’m just, it’s been a very exciting growing product throughout M&A, largely on the mega-deals. I’m just curious what experience you’ve had.

    Christie: Yeah, absolutely. I had a chance to talk to Ryan and Paul about this as well. And we’ve used it on our last two sales. We feel strongly that it’s great product. The cost is much more reasonable than it has been, you know, 10, maybe 15 years ago. So we expect to use it much more going forward. And we think the usage in general across private equity and M&A is going to just continue to increase. So we’re excited about it. It’s a really good product. Cost-effective and makes a whole lot of sense for us.

    Patrick:  Now, as we record this, we’re getting near the end, hopefully, the beginning of the phase of the reopening of America from COVID-19. Could you give us your best guess as to, or what trends do you see either globally, in the US or with GRC for M&A in the next six months to fall?

    The New Norms of COVID-19

    Christie: Sure. So I think there’s a couple of things. I think the biggest impact I see on it is truly on deal terms, specifically due diligence issues and the time it’s going to take to get a deal done. And what’s, and by no means were these deals ever quick. They take quite a few years, you know, weeks months. But I think that’s going to continue to take quite a bit of time as new modeling has to be done and things that we’ve never considered in the past are taken into consideration.

    So that’s going to have an impact. I think that the way these transactions are developed and negotiated are going to change. This is a business where getting everybody in the room literally has been a big part of the process. And I’ve spoken about it today. The relationship-driven aspect of our business is sitting across the table from somebody and making a connection.

    So that’s, we’re gonna have to do that different. That looks different. It’s technology, it’s how you and I are, are talking today. You know, the Zoom, the WebEx, the virtual meetings that, you know, not shaking hands when we can meet in person. There’s just going to be some changes that people will have to embrace. And so that looks different. From a Great Range perspective, we have a very focused investment thesis that we have followed for 10 years.

    You know, we don’t forget our roots. We don’t forget that thesis, even if something looks really great but it happens to be based in California, it’s just not a part of our investment approach. So we’ve been lucky in deal flow and continuing to see nice deals. We have based all of our time in networking and relationship-driven, not only from a deal perspective on with the owners, but also with influencers and brokers. So we’re still seeing those opportunities because we’re honest and straightforward and we’ll tell you right away, this is for us, this isn’t for us. We won’t beat around the bush.

    So we’ve been lucky to see deal flow continue. You know, and I think that’s because we have a tightly held thesis. You know, we’re only in those seven states. We only invest in the Midwest. We’re only looking at companies that are healthy, owner-operated. The size three to 15 million in EBITA. You know, those things are pretty tight and we’ve held true to that. So we continue to see some deals. So for us, it’s been okay. You know, we’re continuing to look at a few businesses we had under LOI prior to going into COVID-19.

    And we hope to continue with those businesses and close those deals, you know, within the next 90 days. So, I think It depends. I think there’s some larger private equity groups, global groups, where deal flow has come to a halt. People have backed out of some deals that were, you know, newsworthy if you will. But we’re chugging right along in the Midwest and we hope to continue knew to deploy capital. There is money to invest, and we have it and we would like to continue to see those good deals.

    Patrick:  I think that discipline, plan your work, work your plan has served you guys well. And so you’re not immune from the environment out here but you’re definitely protected against that. That would make you just a strong, vigorous, active and a solid partner for owners and founders out there.

    Christie: Absolutely. You know, we didn’t invest in distressed businesses before and that isn’t where we’re headed now. The industries we like to look at are, you know, manufacturing and distribution and business services and healthcare services. Those have been impacted certainly, but hopefully, will you know, rebound and stay strong, typically usually do. So that sets us up for a nice, hopefully, a nice future.

    Patrick: Well, I don’t think there’s gonna be any shrinking in manufacturing in terms of new ventures. And if there’s any place for manufacturers, it can be in the middle of the country, just cost-wise. You know, so I think that bodes very, very well. Christie, how can our listeners find you?

    Christie: Well, they can reach me a number of ways. So they could go to our website, which is or they can email me at And my name is spelled CHRISTIE.mcfall MC F as in Frank, ALL, Or the easiest way is probably my cell phone, which I don’t mind giving out. I’m in new business so I expect phone calls and I answer them even if I don’t know where the number’s coming from, strange. 913-952-3037

    Patrick: So if you can’t find Christie, that is your fault. Christie, thanks very much. I recommend everybody take a look at Great Range Capital. And thank you again.

    Christie: Thank you

  • COVID-19 Is Not a Black Swan – and Here’s Why
    POSTED 6.23.20 M&A

    You’ve no doubt heard of the best-selling book from author Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable.

    In it, Taleb denotes “black swan” events as those that are unexpected or unpredictable. Examples include the 9/11 terrorist attacks, World War I, the rise of the internet, and the fall of the Soviet Union.

    However, despite the worldwide, devastating impact on society, economies, entire industries, healthcare infrastructure, and more, the COVID-19 pandemic is not a black swan.

    Taleb himself says so, noting that many experts, including Bill Gates, who has closely studied and funded epidemic research, have long said a global pandemic like this happening was a matter of when, not if. Taleb says this is actually a “white swan.”

    This is not a black swan, despite the tumultuous times we’ve had in the face of this crisis, including economic downturns, widespread unemployment, travel bans, and more. We won’t go into the details here as to how this might have been prevented or who holds the blame, if anyone.

    We’re concerned with the results and what happens moving forward.

    As far as COVID-19, as countries see decreasing cases and are exiting government-mandated lockdowns, we can now see we are at the beginning of the end.

    Economic activity is set to return, as people go back to work and those businesses that survived, large and small, start up again.

    As I wrote previously, expect M&A activity to resume, but in a different form due to impacts of this crisis. We’ll see:

    • A shift to a Buyer-friendly market
    • Dropping prices of target companies due to declining valuations

    This strong M&A market is also a result of previously existing conditions, such as:

    • The amount of dry powder to inspire continued deal-making
    • Financing costs that continue to be low

    This is a recipe for PE firms to come in and find low-cost but high-quality gems to invest in and turn a profit, in many cases, faster than pre-COVID-19. Private Equity has the capital, resources, and expertise to take on the challenge of many struggling companies out there right now.

    This is not to say that the economy will not experience a downturn due to the pandemic. Its impact will be felt in many sectors for a long time, including companies, investors, and consumers.

    But there is opportunity. And this is very different than the 2008 Crash, at which time M&A activity slowed considerably for the most part.

    As Sander Zagzebski, partner with Greenspoon Marder LLP, put it in a recent article for C-Suite Quarterly:

    “Shrewd dealmakers will sense opportunities by purchasing discounted debt and providing debtor-in-possession financing packages. Smaller debtors may seek to take advantage of the new Subchapter V Small Business Debtor Reorganization provisions, which as drafted provide a more streamlined process for debtors with less than $2.725M in debt. As part of the recently passed CARES Act, that limit was increased to $7.5M for the next year.”

    Sander likens this opportunity to that which a select few savvy investors took advantage of in the 2008 crisis.

    “While capital market and traditional M&A transactions slowed significantly during the financial crisis, distressed investors became presented with numerous attractive options. Howard Marks and Bruce Karsh at Oaktree Capital were later lauded by The New York Times for their timely $6B bet on corporate debt during the height of the financial crisis, as was Leonard Green & Partners for its timely $425M minority investment in Whole Foods.”

    “Overshadowed in the media by high-profile, pre-crisis bets on the overheated real estate market by the investors profiled in Michael Lewis’ 2010 book The Big Short and others, these blood-in-the-streets bets at the bottom of the market later proved to be enormously profitable.”

    There are similar prospective valuable deals out there now… for those that can recognize them.

    As Sander writes:

    “Many investors are starting to view the world today as Karsh viewed it in 2008 and are seeking those unique buying opportunities.”

    Still, there is plenty of uncertainty surrounding deal-making, as future impacts of the ongoing pandemic are unknown. Watch for Representations and Warranty (R&W) Insurance, which had already been enjoying a renaissance amongst lower middle market deals, to be a strong presence in deals going forward.

    To discuss R&W coverage with a broker with hands-on experience with this product, I invite you to contact me, Patrick Stroth, at

  • Impact on R&W Policies From COVID-19 
    POSTED 6.16.20 Insurance, M&A

    The COVID-19 pandemic has changed trade, commerce, and business in so many ways already… with more changes to come. The world of M&A has reacted as well. But as I noted in my previous piece, No Significant Drop in M&A Activity During This Recession, we won’t see the slowdown happening.

    Instead, we’ll see a shift to a Buyer-friendly market. Also, watch for PE firms with plenty of cash to look for opportunities – and bargains… struggling companies they can turnaround.

    The pandemic will impact a key part of M&A activity: the due diligence process and the use of Representations and Warranty (R&W) insurance to cover breaches of reps in the Purchase and Sale Agreement.

    Just as with any insurance product, COVID-19 must be addressed with R&W policies. And expect pandemic-related questions from Underwriters in the due diligence process.

    Not every company, of course, has been affected by COVID-19 in the same way. For example, a software company that already had a largely remote workforce is in much better shape than a retailer forced to close brick-and-mortar locations.

    But overall, insurers are closely monitoring the impact of COVID-19 on operations of any acquisition target. This is how I expect it to impact R&W coverage moving forward:

    1. Expect all R&W policies to have some form of COVID-19-related exclusions.

    As a worldwide pandemic affecting billions, nobody can claim that COVID-19 is an “unknown” prior to a deal being signed. And R&W policies only cover breaches that were unknown, “historical,” or related to issues that were not disclosed by the Seller.

    The impact of the virus on the workforce, including layoffs and supply chain disruptions will be the focus on enhanced due diligence in particular, and not considered breaches. Claims related to a drop in revenue are right out the window. These will be excluded, but perhaps covered in another M&A related policy, such as business interruption insurance.

    That being said, you can limit exclusions for specific things related to the pandemic, not just anything COVID-19 – that exclusion would be too broad. Despite its seriousness, the pandemic can’t touch every rep. So expect very careful language.

    Since R&W policies are largely written for each individual transaction, a broker has the ability to identify the right Underwriters and products and make the exclusionary language in a policy as favorable/narrow as possible for the policyholder.

    Take the Fraud Exclusion for example. Fraud is absolutely excluded in virtually every insurance policy because it’s a moral hazard. However, savvy Brokers and Underwriters can create wording in a policy to provide legal defense of a policyholder accused of fraud until the alleged fraudulent behavior is proven. If there is no proof of fraud, the exclusion cannot be triggered, therefore, a policyholder benefits from the protection provided by the policy. Depending on the rep in question and the amount of diligence shown to Underwriters, a Broker can negotiate wording that can lessen the scope of a COVID-19 related exclusion.

    2. A close watch on lengthy interim periods.

    With some M&A transactions, there can be a long period between signing the Purchase and Sale Agreement and actually closing the deal, especially with large and complex deals. For example, it took months for Amazon’s acquisition of Whole Foods to win regulatory approval and close.

    Imagine if a deal like this had been done recently, and COVID-19 swooped in during that interim period. Remember, to be considered a breach, the issue must be unknown and/or result from failure to disclose a harmful issue by the Seller.

    But a change in the overall economic environment or the industry such as this pandemic, can’t be considered an “unknown” and therefore would not be covered.

    Thankfully, this is not much of an issue with lower middle market companies because interim periods between signing and closing are rare, and if there is an interim, it is likely measured in days, not months.

    3. Pricing and retention levels.

    One last thing to watch out for. For now, R&W coverage pricing and deductibles haven’t changed. They should be increasing as more claims are coming in in this time of crisis.

    The previous trend had been for consistently falling prices and its use in ever-smaller deal sizes – down to $15 million, which was one of the factors in its growing use by middle market companies. It’s something to watch out for.

    To discuss the impact of COVID-19 on R&W and other M&A-related insurance, I invite you to contact me, Patrick Stroth, at

  • Moving Forward in M&A After COVID-19
    POSTED 6.9.20 M&A

    Many people are concerned about the state of M&A when we get on the other side of the COVID-19 pandemic. Understandable. But as I pointed out in my previous article, “No Significant Drop in M&A Activity During This Recession,” I don’t believe M&A activity will be going south, post-crisis due to:

    • A shift to a Buyer-friendly market
    • Dropping prices of target companies due to declining valuations
    • The amount of dry powder for PE firms is still there, waiting to be deployed
    • Financing costs that continue to be low

    Now, a new report from Deloitte has shed some new light on the situation and reconfirmed my insights.

    In “Opportunities for Private Equity Post-COVID-19” they discuss how in these uncertain times and ongoing economic crisis, the organizations ideally positioned to help out the economy and business, and even countries get back on their feet, are PE firms.


    They have plenty of cash, and they are willing to go the Island of Misfit Toys, so to speak, and find gems to invest in. They have the patience to get in at a low cost and turn a company around.

    PE firms are unlike other investors in that right now, they have the capital, resources, and occupational experience to turn struggling companies into high flyers. That’s simply what PE firms do in good times… and have a unique advantage in these bad times to keep working their magic.

    A lot has been said in the poplar press about how PE firms swoop in on broken down companies then turn around and sell them for 10 times more. The perception is that they pulled a fast one or took advantage.

    I think this misconception goes back to the movie Pretty Woman and other depictions in pop culture. In that movie, Richard Gere plays an investment banker who buys companies and sells them off in parts after loading them with debt… in the process ruining peoples’ lives.

    What PE Brings to the Table

    Contrary to popular opinion, that’s NOT what PE’s do. They’re closer to house-flippers. They’re turnaround specialists. They do the good work of creating value where there was none before.

    In this crisis, I believe PE firms will be the heroes and instrumental to a broader economic turnaround. They do good work, and it’s needed now more than ever. And nobody else is going to do it, with Strategic Buyers biding their time and holding on to their cash.

    Companies struggling right now, and there are a lot of them, should not expect a government bailout. Most companies, even if they secure some of those funds, will not get what they need to move forward.

    Another issue is that employees are getting laid off and collecting more in unemployment and other benefits… and that employers are concerned they won’t be able to get their experienced people back.

    These are certainly uncertain times, and I think the attitude you should have moving forward is one espoused by Warren Buffett:

    “Be fearful when others are greedy and greedy when others are fearful.”

    We can also base this assumption of the rise in M&A activity tied to PE firms by looking to the past, specifically to the economic crisis of 2007 and 2008.

    Back then, PE firms, along with other investors, sat on the sidelines. There were many opportunities that were not taken advantage of.

    They’ve learned their lesson, and this time they will be aggressive in going after the low hanging fruit. PE firms are generally well ahead of public opinion on these sorts of things. The smart money gets in early, which, in this case, gives them a nice window in the next two years to get some great deals.
    Lower middle market companies, those most at risk and vulnerable in this downturn, in particular will see lots of activity. These smaller businesses are easiest to make a quick investment in, without many other suitors.

    The Role of M&A Insurance

    For investors buying distressed assets, Representations and Warranty (R&W) insurance becomes more important than ever. This coverage makes deals clear, smoother, and more affordable.

    For Sellers, not having the burden of a large escrow is a key benefit when they need cash to do other things.

    For Buyers, R&W insurance is a “back stop” for risk. If they are buying assets, they won’t get a remedy otherwise if there is an issue post-closing and the escrow is not enough to cover the loss. With R&W coverage you get certainty of collection if there is a breach.

    The great news is that R&W policies are now at the most favorable pricing they’ve ever been, and deal sizes as low as $15 million are eligible.

    If you’d like to discuss coverage, pricing, or market conditions, please contact me, Patrick Stroth, at

  • Ben Mimmack and Andy Waltman | How Founders & Owners Can Benefit From Private Equity Firms
    POSTED 6.2.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we chat with Ben Mimmack and Andy Waltman, Director of Investor Relations and Director, respectively, of private equity firm Baymark Partners.

    Ben got his start in banking in London before coming to the US to attend SMU in Dallas. After completing business school, he went on to work in finance at American Airways before ultimately being brought on at Baymark Partners. Andy got his start in accounting, earning a CPA before moving into private equity at Energy Spectrum. He also went on to attend SMU, where he earned an MBA before being presented with the opportunity to work with Baymark.

    We chat about private equity and working in the lower middle market, as well as…

    • What a private equity firm can do for an owner-founder
    • How rep and warranty insurance is changing
    • Opportunities for minority investments
    • How Baymark is going about navigating the uncertainty imposed by COVID-19
    • 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 Ben Mimmack, director of investor relations, and director Andy Waltman of Baymark Partners. Baymark Partners is a Dallas-based growth-oriented private equity firm acquiring growing middle market companies, providing owners with liquidity and resources to accelerate growth. Gentlemen, welcome to the podcast. Thanks for joining me today.

    Andy Waltman: Thanks for having us.

    Patrick: Now, before we get into Baymark Partners, let’s set the table and get a little context for our listeners. We can start with Ben here, but Ben and then Andy, tell us what led you to this point in your career?

    How Ben and Andy Wound Up With Baymark Partners

    Ben Mimmack: Well, Patrick, I grew up in the UK. You may be able to tell from my accent. Although I’ve been in the US for 10 years now. So I feel like it’s starting to disappear, but I did grow up in the UK. I went to university and law school. I was very briefly a practicing attorney. And then I worked in banking in London for several years before I came to the US and went to business school in Dallas at SMU. You’ll find there’s a very strong SMU presence at Baymark Partners. And in fact, when I was at business school, I interned with David and Tony at Baymark Partners in the early days of the life of the firm.

    After business school, I went and worked in finance at American Airlines and spent the last five years of my time at American in the investor relations team there. And then when I was looking to do something a little bit different than big company, public company investor relations, the guys at Baymark called me up and said would you be interested in doing some work for us? And I jumped at the chance and I’ve been in Baymark since November of 2019. So I’m still relatively new to the PE space, but I think it’s fascinating. The kind of work we do is really very interesting. And I’m delighted to be on board.

    Patrick: So it was a safe change from loss of airline miles you were getting to having your feet on the ground.

    Ben: Yes, it’s more like real life, I would say. But given what’s happening with the airlines right now, you could say it was a very lucky escape.

    Patrick: Very good. Andy.

    Andy: Sure, sure. So, I would say I have a not a very typical background for private equity. I started my career, I came out of Trinity University about 11 years ago now. I came out with more of a typical accounting degree. Went down the Big Four path. I started at Price Waterhouse Cooper. Spent two years there in the audit and tax departments. Got my CPA, but I realized that public accounting world was just not for me. I was very fortunate. I got an opportunity early with an oil and gas private equity firm, Energy Spectrum here in Dallas, which was a fantastic firm.

    I was there for five years. That was a smaller, about a billion, about $2 billion of assets under management, smaller firm and employee size. So I think we had about 20 professionals and I was in the financial reporting group there, but because of the size of the firm, I was able to do a lot there. And after a good again, five years there, I decided I kind of wanted to get out and do a little bit more of a wide range of investments rather than just purely midstream oil and gas.

    And so I also went to SMU while I was still at Energy Spectrum. I got my MBA there. And then I went and found the opportunity with Baymark. And I’ve been with Baymark now for just over four years at the director level and I’ve been helping from everything from due diligence, acquiring companies to continue to work with those companies and our kind of portfolio development process.

    Patrick: One of the things that I like to learn about what I’m meeting private equity firms is the founders are a lot more creative than in other industries such as the law or insurance. In those companies, they usually name their firms after the founders. It’s very boring. No creativity whatsoever. You can tell a lot about a firm by how they named itself. So, you know, tell us about Baymark Partners, how did it come up with its name. Give us a quick profile.

    Ben: Sure. Well, Andy and I had to go back to our founders, David Hook and Tony Ludlow and ask them because we weren’t around when the company was named. You know, I think the true process might even be lost to history. They had to think about it for a bit, but I think it’s connected to the fact that David Hook, one of our founders grew up in Bay Village, Ohio.

    So that’s probably where the bay came from. And he spent a lot of time in the Bay Area when he was a VC investor in the 80s and 90s. So it’s kind of a reference to those two. And I think, you know, they just wanted to make their mark when they set out. So you know, that’s where Baymark came from.

    Patrick: And then the area that you guys are focusing largely is middle, lower middle market. Tell me about the area that you target there?

    Baymark’s Primary Market Focus

    Ben: Yeah, I mean, I would say we’re a middle market firm. Probably if you want to refine it further, more of the lower middle market side then true middle middle market. But any company that two to $10 million EBITDA ranges is really in our sweet spot. We like margins of north of 10%. And, you know, really in terms of what we’re looking for in industries, we love services companies, we love tech-enabled companies, distribution companies, light manufacturing companies, you know, health care, anything in that kind of region.

    But really, we’ve pretty industry agnostic. I’d say the only things we really want to take a look at our hospitality, restaurants and brick and mortar retail. Everything else we’ll at least take a look at. And I think, you know, certainly, David is very much a deal-focused individual. There’s no company out there that he at least at first glance doesn’t think he can make something interesting or do something interesting with. so we look at a lot of potential transactions, we throw them back and forth to each other and spitball whether we can make something happen.

    And that’s, for a lot of us, probably the most interesting part of what we do. And, you know, we like the lower middle market for a number of reasons. You know, the companies that are populating in the middle market really are the bedrock of the US economy. You know, these companies that just provide 10, to, you know, 20 to 30 jobs in their communities that that do very interesting work to fill, you know, unheralded niches, a lot of times that you don’t even think that companies are required to fulfill. They do this work and in many cases, they’re entrepreneur-owned businesses that are looking to take the next step.

    The people who run these companies, they know that they need to expand and grow and diversify, but they just don’t know how to do it. We love those. We love those kinds of companies because they have a lot of potential. And in many cases, they’re small enough that the inflation, the valuations are not as inflated as they are in other parts of the market. So we feel our knowledge and markets we look at, we can get some very, very interesting and good deals in the segments that we plan.

    Patrick: Well, and there’s also a lot more lower middle market companies and unicorns out there. There are a lot more unicorns that people think.

    Ben: That’s very true.

    Patrick: I sincerely believe, and the reason why I reached out to you specifically is because if you want to make a difference, okay, the place to do it is in the lower middle market. And it’s sizable and it does as you say, it’s filling a lot of needs out there that otherwise wouldn’t be filled. People won’t even know they were there.

    But they play key roles in their communities. They play big contributions for the lives of a lot more people than you realize. And it’s just not fair because if these smaller firms, they hit a ceiling, they don’t know where to go. And what happens often is they’re going to default and pick up the phone or reach out to a brand name or the institutions out there. And that is just a recipe for failure for them.

    And, you know, and I mean that in a big way, because what happens is the larger institutions are scaled up, they’ll have limited solutions for smaller clients, they’re going to overlook them, they’re not going to be responsive. Whatever solutions they do provide may not be a fit because they don’t have the bandwidth to offer multiple solutions that could help fit a smaller firm’s individual needs. On top of all that, they’re going to overcharge them.

    And so they will get less and pay more. And I have a real passion for the entrepreneurs out there and the people that started with nothing and created tremendous value. So anybody that’s out there to help get them to the next level and make them multiples of where they wanted to be, that does nothing but good. And the more that we can go ahead and highlight the presence of organizations like Baymark Partners, all the better. And so we’re both on the same page there. Let’s talk about some of the things that a private equity firm can do for an owner or founder versus what a strategic perspective suitor might bring.

    What Sets Baymark Apart From the Competition

    Andy: Sure, sure. So this is, again, this is Andy. To talk about that, you know, we’re usually, I’ll kind of talk about what Baymark can bring and, you know, each private equity firm is going to be slightly different. And I think where Baymark is unique in relation to other private equity firms is our background. We just have for such a small firm, we have a very eclectic group of different backgrounds. I think we might have mentioned one of our founders, David Hook, had a lot of success out in the venture capital world.

    He spent 25 years investing in companies out there. I think he invested in about 50 startup companies from sometime around the mid-80s to the mid-2000s, the OSS, I guess they’re called. And about 14 of those ended up going IPO and going public. So he has a lot of experience of, you know, those are even earlier than, you know, lower middle market.

    Those are even smaller, you know, startup venture deals. And so he has a lot of experience, you know, growing companies, looking at the big picture saying, Hey, we’re here now, you know, how can we quadruple that in five years? And so, you know, we’ve had, you know, one company that had a great management team in place. We’ve had, you know, some companies that really need some other pieces, but we had one company we bought that had a really great management team in place. We don’t really have to make any tweaks there. The big thing that was missing there is just the vision.

    They just didn’t have the imagination. We bought this company, they were about, you know, 12, 13 million dollars in sales and $2 million of EBITDA. And today they are closer to 60 million in sales and six and a half million of EBITDA. So I wish I could say all of our deals look like that. But that was an instance where they would say, okay, what’s the plan? What’s the vision? And now let’s actually go out and execute that. And while I’ll give David and Baymark credit for helping with the vision, I will say that company had a great team and they executed it very well. So that’s one example.

    Our other founder, Tony Ludlow, he has a very eclectic background he has, he was an attorney for some time. He’s also a CPA. I think what really made him ideal for this world is he has a lot of operational experience. So he knows what it’s like to have a team of people working for him. You know, what it means to, you know, have to fire people whether they deserve it or not, whether it’s just something that has to be done, we have to cut 10% even if they don’t deserve it, you know?

    So he’s had to live through that. He really has had that hands-on experience that a lot of entrepreneurs face on a day to day basis. And so he doesn’t have that just kind of pure spreadsheet mentality of like, Okay, this is what the spreadsheet does, we’re going to do. He knows, he understands that there’s a human element to this. And so I think starting with those two guys, that’s kind of spread through the culture of our firm that we don’t just have a spreadsheet mentality.

    That we really try to understand what these entrepreneurs are trying to do and help them achieve those goals. But back to some more about kind of what the, what we can bring as a private equity firm, I think it depends on the company. We’ve had some companies where, a lot of the companies we work with we see this, where we have an entrepreneur who’s trying to wear every single hat in the business.

    You know, when we want to talk to the accountant, we talk to the owner. When we want to talk to the operations manager, we talk to the owner. When we want to talk to the CEO, it’s the owner. And so, you know, we try to come in and say okay, what are you passionate about? What are you good at? You’re obviously a sales guy. You know how to sell. You love working with customers. And every time I talk to you about the accounting you, I can see you pulling your hair out. So let us help you.

    We’re gonna bring in an accounting person, a CFO, you know, someone that can augment you, help your company, but we’re not looking to replace the entrepreneur. We’re not looking to bring in a whole bunch of people to kind of replace what he’s trying to do. It’s more of a, let’s take some things off that entrepreneur’s plate and really, you know, build out his team so he can focus on what he’s good on and we can have other skilled people in position to help build that company. Some of the things we’ve done with companies, we, you know, we obviously have kind of some of the typical benefits.

    We have, obviously, access to financing, we have good relationships with banking. And Patrick, as you mentioned, you know, while we’re not a big firm at Baymark, we do work with I think, right now we have about nine portfolio companies in total that we work with. You know, we have scale in that regard, right? If we’re trying to negotiate new insurance terms we say Hey, we, you know, we’re looking to make these changes for a lot of our portfolio companies. And so that’s something, you know, we can get better deals because it’s not just a single small company doing it.

    Sometimes it’s a whole portfolio companies who are looking to make a change. Or also act as an outsourced m&a department for our companies. We think the best way to grow a company if the owner thinks that we need to go out and make some acquisitions, we go out, we work with the brokers. Our network of brokers, business intermediary, then try to go find those acquisitions that fit the goals that we’re trying to do with our company. So each company is different, depending on what that company is, we try to help fill that hole, whether it be us or with adding people. So

    Patrick: What I see there is you’re flexible enough where the portfolio company, particularly if they’ve got good management or whatever, if they need some day to day help, you’ve got resources there, or if they just want to be left alone, just get him some capital so they can execute more and then find other targets for growth. You can do that?

    Andy: Yes, yes, while we do have operational experience and we’re comfortable in that role, that’s never what we’re looking to do because we have such a small firm, you know, our goal is to kind of set the plan and, and have the management teams execute that plan. But we do have the comfort to go in and be more hands-on if that’s what’s required. But again, it’s usually the ideal if we can, you know, help with the vision, help with the strategy, get the right people in place and then we try not to micromanage and let the companies execute the plan.

    Patrick: Describe your ideal target. What are you looking for either, you know, as a portfolio company or for, you know, a partner to exit one of your portfolio companies? Either way.

    Ben: Yeah, I mean, I can take this one and I think I addressed it earlier a little bit when I said, you know, we like the services, tech-enabled, distribution, manufacturing part of the world. You know, I can kind of go into a little more depth on that, but we like what everyone else likes. We’d like established and recurring revenue streams, we like to diversified customer base and higher retention rates and a competitive advantage, a nice moat, company based in part of the world that’s easy to get to. So all the usual requirements that everyone wants, but certainly I think we are willing to look past perhaps some issues that other firms may not be.

    We certainly, as David is certainly more than once, we like companies with a little bit of hair on them for a couple of reasons. One, I think, as Andy mentioned, we have the expertise in our firm, I think to deal with issues that maybe other firms aren’t comfortable dealing with. And second, you know, you can often buy a good company for a very reasonable price if there is some issues that, you know, other people have been a little bit scared of. So, you know, and we’ll look at any of those companies that we think we can do something interesting with.

    And I think one of the things that Baymark does a little bit differently than other companies and one of the other reasons we play in the lower middle spaces, if you can buy a company with a good multiple, then you don’t have to load it up with a huge amount of debt and then spend your whole time trying to pay the debt off before you exit the investment. We like to grow our companies. And it’s a lot easier to grow a company if you bought it for a more reasonable multiple and haven’t had to load it up with debt. So we’re certainly always looking for companies we can grow.

    That’s how we like to make money is to increase revenues, increase profitability of our portfolio of companies. And then, you know, we like to send out companies on the way into the world, in better shape than we bought them. We’re not interested in buying a company that someone has spent years and years building up and then, you know, taking all profit and leaving it in a bad state. We want to buy a company, improve it, grow it and then sell it. And if we can make money doing that, then we’re very happy and if the company is better for having been owned by us, then that’s great.

    Patrick: One of the big trends that’s out there nowadays is deals are now being, the rest is being transferred out through the use of rep and warranty insurance. I’m just curious because now the eligibility requirements for rep and warranty have come down from middle market down to lower middle market deals are now eligible. Tell me good, bad or indifferent, what kind of experience has Baymark Partners have with rep and warranty on any of their deals?

    Where Rep and Warranty Can Be Beneficial

    Ben: So we’ve used it on one occasion with a deal that we did actually quite early in the life of Baymark. And the reason we used it is because there was a kind of an asymmetric risk profile between the sellers, one of the sellers was going to take a lot more risk with the representations and warranties. And he wasn’t comfortable kind of being point man for some of these reps. And so we use the insurance as a way to kind of even the playing field amongst all the sellers.

    So, you know, in those circumstances where you have a kind of asymmetric risk profile, then it works out very well. One of the other reasons we like it is, you know, it removes the escrow requirement. So that can be a way of getting a deal done that can be something that stands in the way otherwise. So, yeah, absolutely. We think there’s a place for it, where appropriately, we absolutely will use it. And certainly, you know, have had positive experiences with it in the past.

    Patrick: Now, that was my second deal I ever did. That’s the exact scenario we had. We had a tech company that was being acquired by a publicly-traded company. And the tech company, you had one investor that had the lion’s share of the risk and you had 10 other investors, but their shares were so much smaller that that one lead investor, he was the deep pockets.

    And so he was directing that. And fortunately for us, we had a very affable working buyer that agreed to go forward with rep and warranty to help out the seller because they wanted to make them happy. And, you know, it was simple. The seller paid for the premium, was happy to do it, the buyer was happy to not have to cover that expense but had a very happy acquisition target and the team came over. And it went very well.

    So we can see that was been fortunate. The development that we’ve seen come through is not only is rep and warranty available for the sizeable deals but now it’s gotten to the price point where it’s not a bad idea for add ons. And so now as more frequent transactions are happening with add ons, if there’s that tool for an add on and that brings, you know, some cost benefits there’s another usage for it. So we like to trend as it’s going and we expect to see it become about as common as title insurance in real estate.

    So as we record this today, we’re hopefully on the downside of the COVID-19, settle in place. You’re based in Texas and you’re on the verge of opening up. We’re in California. We hope to open up sometime next year, the way things are going. So give us your thoughts in the next 60 to 90 days and next quarter, what do you see is M&A trends either for Baymark partners or you guys, you know, getting yourself all geared up to get, you know, hit the race, or get out and start unboxing sprint or wait and see. What are you seeing out there?

    Navigating Uncertainty

    Andy: Oh, that’s a good question. Right that, we’ve heard that question a lot. And we’ve been asking ourselves. We kind of talk about it weekly. And I would say it’s still early. We’ve actually had we’ve had to had kind of some deals in all parts of the pipeline that have been affected by this. And so we’ve had a couple that we were pretty far along in the process and we’re still trying to complete those deals, even with some of the uncertainty, we’ve been trying to monitor the company’s performance in this time and just trying to get an understanding of the core business and what, and how it’s, you know, how it’s navigating these times.

    And so I would say right now, a lot of the lenders have been slow to react, or have been kind of, I guess, getting a little tense and a little tighter, which is understandable and something we would expect to see in this market. But we are working with some lenders who are still doing deals.

    And another thing that slowed down some of the lenders we work with is obviously some of the banks we work with have been kind of underwater, trying to process some of these cares, PPP loans. So a lot of factors that have been, I would definitely say slowed the process down. But we still have, I would say pretty good visibility on a couple opportunities that we think will close over the next few months. You know, as far as new opportunities that we’re looking at, we do see some sellers who are still very interested in selling. They’re very confident in our business.

    And I think the private equity firms that are going to do the best are going to have the ability to get a little creative, you know, build relationships in this time. I think, starting a deal from today and trying to buy it, it’s going to take a little more time than it normally would, but it’s important. You know, we’re really trying to build relationships with the companies, with the owners, try to keep expectations in line and do what we can to, if the company does go off and has a blip because of this, because of the Coronavirus, we try to do what we can to say, okay, we’re going to give it some time, see if it comes back.

    Or, you know, develop some kind of creative structure where, you know, the seller’s still getting kind of what they wanted for their business even if they’re being slightly affected by what’s going on. So, you know, I think for now, it’s going to be a little bit of a slower process, but we’ve definitely been talking with again, other firms, other lenders. And deals are still going through, deals are still happening, just a little bit of a slower pace.

    Patrick: With the result of this pandemic, it wasn’t a situation where we had a structural fiscal problem or something with the banking and the financial infrastructure here as opposed to 2008, 2009. So I think that even though you’ve got this headwind of all this activity for lenders right now, I think eventually they’re going to get back to what they usually do. They’ve got the resources to do it. I think that the one thing that’s been said about private equity for the last four years is they’ve got their stack of dry powder and it hasn’t gotten any smaller.

    So I think as target prices start coming down and valuations come down a little bit, there could be some opportunities to move quickly if organizations are clear in their thing and what they want, and they’ve got a willing partner on the other side of the deal. I think we could see an uptick in activity. Maybe not immediately. However, I think as things start coming back to normal, there are some that are going to lead the trend and lead the activities and then others are going to be needing to catch up. And so that kind of activity can kind of build upon itself and get us a little momentum. So that’s an optimistic side from my perspective.

    Ben: I know for one Baymark is very, very keen to continue doing deals. So, you know, we certainly see, you know, an opportunity in the next few months.

    Patrick: Well, there are people out there that maybe wanting to reach out you to have that kind of conversation. Ben, Andy, how can our listeners find you?

    Ben: So we’re on the web at and we’re very easy to contact by email. I’m Andy is So, you know, we are always available to chat, to have an email exchange if you are interested in what we do and want to learn more. We’re happy to talk.

    Patrick: Gentlemen, thank you very much. Absolute pleasure meeting you. And ladies and gentlemen, please look out for Baymark partners.

    Ben: Thank you.

    Andy: Thanks a lot, Patrick.


  • Drew Caylor | Making a Difference in Private Equity
    POSTED 5.26.20 M&A Masters Podcast

    Drew Caylor, managing director, and the rest of the team at private equity firm WILsquare Capital have a passion for helping lower middle market companies grow bigger and better.

    He says it’s all about the leaders at these companies and their commitment to making a difference to their people and the communities they’re in.

    At WILsquare, they help create value through hands-on work with carefully selected businesses. It’s a level of service you won’t get at “brand-name” PE firms.

    We take a deep dive into that topic, the post-pandemic M&A scene, and…

    • The first place they look for future investment in a business
    • 3+ questions they ask about every company they work with
    • Why they view Representations and Warranty insurance as imperative
    • Their management philosophy and how it differs from other PE firms
    • 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 Drew Caylor, managing director of the private equity firm WILsquare Capital. Based in St. Louis, WILsquare was established by private equity and operational executives dedicated to provide financial capital and operating experience to lower middle market companies in the Midwest and South. Drew, thanks for joining me. Welcome to the show.

    Drew Caylor: Yeah, thanks a lot, Patrick. Appreciate you having me too.

    Patrick: Before we get into WILsquare, let’s start with you. Just give our audience a little bit of a context. How did you get to this point in your career at Wilsquare?

    How Drew Ended Up With WILsquare Capital

    Drew: Great question. So my path to a career in private equity is not one that I think many in the industry would consider typical. You know, I think a lot of people begin their careers and fields like ibanking or public accounting and make their way to private equity. Instead, I started my career in football. My first job out of college was playing for the Pittsburgh Steelers.

    And after a short stint in the NFL, I ended up moving to St. Louis and working for a wealthy family that was making direct investments in lower middle market companies. Along the way, was asked to be president of one of their portfolio companies. And at the age of 28, I suddenly had 65 employees and had no idea what to do. At that point in my life, I was really better prepared to read defensive friends that I was to manage people.

    But after six years of operating the company, we lucky enough to sell the business to a strategic acquire and all things had a happy ending. So, you know, that experience of operating that business has provided a really nice foundation for me when I think about my career in mergers and acquisitions. Following the sale of that business, I resumed my career making direct investments in lower middle market companies. And in 2019, I was lucky enough to join the talented team at Wilsquare.

    Patrick: Well, let’s go on to WILsquare. By the way, as we record this, we just completed the draft for the NFL and I can’t let this go without asking you. So you were drafted by the Steelers. Where were you drafted?

    Drew: So I was drafted in the sixth round. And I always like to tell people that I was selected a few picks before Tom Brady. He was drafted in a different year, but I was drafted slightly higher in the NFL Draft. So that’s something I suppose,

    Patrick: Well, there, that’s something a lot more of us cannot say, so good for you. Tell me about a WILsquare Capital. Before we get into that, I always like to learn a little bit about a firm by how it’s named. Because if you’re in the legal community or insurance, you’re boring. You just name your firm after yourself or the names of the founders. Tell me about WILsquare and, you know, its focus and so forth.

    How WILsquare Stands Apart From Other Private Equity Firms

    Drew: Yeah, so, you know, WILsquare’s name isn’t that innovative, but it’s really the first syllable in the two founders’ last names, Wilhite and Wilson, hence the name WILsquare. But, you know, more important than the shared syllables of the name is really, I think the values and the commitment to the lower middle market that I think everyone on our team shares. You know, we just really love this space and we do for a number of reasons.

    You know, for me, I had the opportunity to operate a lower middle market business. And that gave me a profound appreciation for the challenges that leaders of businesses in this space face. It also taught me that, you know, value creation isn’t really achieved through simply buying low and selling high. It’s really more about rolling up your sleeves and doing the things that are necessary in order to build bigger and better businesses.

    And so, you know, I really got to experience firsthand the responsibility that I think leaders of lower middle market companies have for their people and the importance that stewardship, when it comes to selecting the right partner for your business has. And so, you know, I just decided early in my career, this is where I wanted to spend my time. These are the businesses where I think there’s talented people and all kinds of opportunity. And I think everyone at our firm has a story like mine for why they fell in love with the lower middle market and the people in this industry.

    Patrick: Well, I’m not a millennial, but there’s no doubt the belief of a lot of millennials is rather than just going out and finding a career and contributing, they want to make a difference. That’s a big focus for them. And when I think about that, if you really want to make a difference out there in American business, I think you’ll look to the lower middle market because there’s a vast number of these organizations out here. They are the biggest employers in terms of overall aggregate number of employees.

    They are oftentimes the soul of a community that, where they serve. And it’s a shame because if you’re in the lower middle market, you’re not involved with mergers and acquisitions on a daily basis. You don’t have in house court dev facilities and resources. So when the off tuning comes or the idea comes to think about an acquisition, and everybody thinks about acquisitions either to be acquired or to acquire. They default to the brand names and the institutions out there.

    They don’t know any better because they haven’t been around. And so unfortunately, when they turn to the larger institutions, what ends up happening is they’ll go to an institution who will overlook them. So they won’t be as responsive. The institution’s nothing wrong with them, but they don’t have the bandwidth to order, deliver a variety of different solutions that fit those little lower middle market companies.

    And they may not be able to just roll up their sleeves and get in on a day to day basis and so forth. So they’re not going to be served there. But on the contrast side, also, the lower middle market company is going to end up either losing money or spending a lot more going to the institutions. And I think where they really get the true value is going to be with organizations like WILsquare, where you’re focused on that.

    That is your passion and it’s where the best fit is. You have the resources available. The more the companies are aware of the great access to solutions that are provided by you that they didn’t even know existed, I think they’re better served. So any way that we can go ahead to promote and highlight organizations like WILsquare Capital that serve this community, I think is a win-win. So I really do appreciate that. Drew, tell us a couple of things on how WILsquare provides solutions on that lower middle market. What can a lower middle market company get from you that they couldn’t get elsewhere?

    Drew: Great question, Patrick. You know, I think what they get from WILsquare is really a diverse set of perspectives. You know, our team is comprised of, you know, not only finance experts, but, you know, also people with operating backgrounds like myself. And I think there is a collective willingness to roll up our sleeves to actually add value to these businesses. We’re not financial engineers. Most importantly, I think cost is not our focus. You know, we look for opportunities to play offense and opportunities to invest in these businesses. We just think philosophically, a focus on costs is not an enduring strategy.

    You can only cut so much cost. What is an enduring strategy is focusing on growth and that’s what we do. Sales and marketing is the first place we look for future investment in a business that we buy. We think about what new products, what new capabilities should this company have? How can it access new markets? And then, you know, we are lucky enough to have a pool of capital to put to work and so we also contemplate, you know, what acquisitions for a particular company could make sense?

    And is there a value-creating combination that can be formed? And, you know, I think the other thing that’s important is a lot of operators of lower middle market businesses like to operate their business. And they don’t want to do it with someone looking over their shoulder. And I think that’s not what we’re about. I think we’re really about being a resource for these operators. And, quite frankly, we think if something makes sense to do in a business, we just ought to do it. There shouldn’t be a lot of bureaucracy. If it’s for the benefit of the business, we just ought to do it.

    So when you think about private equity firms, I think there’s really a spectrum of firm involvement. There are some that are heavily involved in the operations of a company. There are some that are not involved at all. You only hear from them, you know, once a year. And then there are those who are somewhere in between. You know, I think we’re probably in that middle portion. We’re somewhere in between, who we think it’s important to invest in the management teams and ultimately let them run the business that they are the experts in. Truly, we simply aspire to be a resource for these management teams going forward,

    Patrick: So you’re not fund it and forget it and you’re not micromanaging. So two extremes. You’re in the middle. And I’m sure it just varies from company to company, right?

    Drew: Yeah, I think that’s right. I mean, I think we would never buy a business without having some sense for what we can bring to the table. So I think our swim lanes are generally well defined going in and we try and communicate that well with the management teams that we seek to partner with.

    Patrick: Tell us what’s your ideal profile for a target company?

    WILsquare’s Target Company Profile

    Drew: Sure. So as a firm, we focus on businesses generating between three and 10 million of EBITDA. And we like businesses that are situated in markets that are less cyclical and in industries that are growing, I would say we’re simply not a turnaround shop. You know, we’re not out there looking for bargains. We’re truly looking for healthy businesses that are growing and businesses that we can help continue to grow.

    One of the variables we think is truly important is human capital. You know, it’s just a key variable in unlocking the value in any company. And so chemistry really matters to us. We found really great companies that are run by people where there just wasn’t a chemical fit and we opted to move on. But we just think it’s important that we all be able to row the boat in the same direction with the management team. And so we call ourselves a firm with Midwestern values because that’s the truth.

    We don’t view ourselves as very fancy people. We really probably rather eat in a sports bar than a steak house. And I think we really feel a shared responsibility for others and humility to know what we don’t know. And to us, that’s just a simple way of characterizing people in the Midwest. And so that’s how we market ourselves. That’s how we think about ourselves. Are folks that care about others and have a humble sense about them along the way.

    Patrick: That personifies the view I’ve always had had when I first came into M&A on my front was that it’s not Company A buying Company B, it is a group of people over here choosing to work and combine forces with a group of people over here. And to the degree that they can successfully integrate, get along, get their culture moving and handle those human skills, they’re going to successfully move forward. And the ideal is one plus one equals three. The whole is greater than the sum of its parts.

    So it always comes down to people. And I think that anybody that overlooks that aspect and just focuses on either the financial or the technology is really missing something. Drew, tell us what experience have you had one of the tools that we use out here for mergers and acquisitions from the insurance world is a product called rep and warranty insurance. That has gained quite a bit of traction in the last couple of years, driven largely by private equity. And so I’m curious as your thoughts, good, bad or indifferent. Your thoughts on rep and warranty for deals.

    Drew’s Take on Rep and Warranty

    Drew: You know, it really only takes one experience to make you a believer in rep and warranty insurance. And I was lucky enough or perhaps unlucky enough to have that experience quite early in my career. There was a breach wrapped in a small deal I was involved in where it led to a costly legal battle that distracted the management team and cost the business all kinds of opportunities.

    Yeah, I think it’s pretty easy for a lot of people to view rep and warranty insurance as expensive. It is relative to very small deal sizes. But even if you aren’t a believer in the value that these policies can bring, more and more I think providers are being pretty innovative and generating products and policies that are a lot more affordable and tailored to the lower middle market. So, as a firm we view rep and warranty insurance as imperative.

    Patrick: Now as we record this, we’re hopefully on the tail end of the Coronavirus pandemic sell in place process. We’re now beginning to start seeing states not only begin to open but having long-range plans for so. Hopefully, this will be over. But in light of how this is literally touched all the lives of people across the country here, give us your perspective on either for you or WILsquare Capital on deals you’re looking at or where you see the M&A environment going forward. Choose short-term long-term. Give us your thoughts.

    Post-Pandemic M&A Scene

    Drew: Yeah, sure thing. First, I have to acknowledge I don’t have a crystal ball, so I’m not sure I have a ton of insight into what the world will look like. But I can tell you the way that we’re thinking about it is we think that the health of an industry is critical to look at. And we’re focused not only on how long will it take these industries to recover. I think we’re focused on a more important question, which is, how will these industries change?

    What will be different? And that is where I think there is a ton of opportunity. It’s not about, you know, how long will it take people to get on planes again? It’s what will they be doing instead? Every industry has a has a different answer to that question. But that’s the question we’re focused on as we review new opportunities.

    Patrick: I agree that it’s just going to be different. I think the other thing that people are really accepting is that things can change from week to week and you got to be okay with that. And if you’re okay with that, then you’re less encumbered in looking at opportunities out there. And I sincerely believe there are going to be quite a few of them. There is going to be a much more buyer-friendly market going forward.

    And private equity firms have the dry powder. It never went away, to my knowledge. And there are firms like yours that have been most likely taking very, very good care of their portfolio companies and handling their concerns through this process. And the next step is going to be, you know, have an abundance mentality and look for opportunities out there. I think that there’s just quite a bit and just like you said, it won’t be the same, but it won’t be bad.

    So hopefully, all of us optimists will be proven right. Of course, I also projected a month ago that Disneyland would be open the first week of May, so I might have been, yeah, I might have been a little optimistic there. But, you know, we’ll see about some other times though. Drew, how can our audience reach you?

    Drew: Your listeners can find me at our website which is That’s Or you can reach me by email at That’s

    Patrick: Drew, it’s been fantastic. Thanks again. It was just a lot of fun talking to you and I really deeply encourage folks to look for WILsquare Capital. They are a firm out there in the Midwest, but they’re not stuck there. They’re looking at a lot of stuff and couldn’t be happier to have you with us today.

    Drew: Thanks a lot, Patrick. Appreciate it.


  • Trevor Crow | M&A Tips for Family Businesses
    POSTED 5.19.20 M&A Masters Podcast

    Trevor Crow works in the M&A space, specializing in what he calls an “underserved” area: lower middle market companies. He says bigger firms chase bigger deals because of high overheads and other internal costs.

    But as a boutique firm, he’s able to work closely with owners and founders of what are often family-owned businesses.

    Trevor says Buyers and Sellers at this level are savvy and smart – a pleasure to work with.

    He talks about the biggest benefits a small firm like his can offer companies, including quick response times. Tune in to get all the details on that, as well as…

    • The last person you should hire to shepherd the sale of your business
    • Strategies for balancing risk and the cost of appropriate insurance
    • One of the most “dangerous” potential liabilities for companies today
    • The biggest obstacle to closing a deal – and how to overcome it
    • And more

    Listen now…

    Mentioned in this episode:


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

    Today I’m joined by Trevor Crow, founder of Crow Legal, a Denver-based law firm specializing in the purchase and sale of businesses, private securities offerings, tax, and other transactions for the lower middle market. Trevor, welcome to the podcast. Thanks for joining me today.

    Trevor Crow: Thanks, Patrick. Looking forward to it.

    Patrick: Before we get into your practice, and you’re focused on the lower middle market, let’s get a little context for our audience here. Tell us what got you to this point in your career.

    Trevor: Okay, yeah, so I grew up in Denver, for the most part, and bounced around a little bit on the East Coast when I was really young but grew up in Denver and went to the University of Colorado at Boulder for undergrad with a degree in finance. And after that, I worked for three years before going to law school doing several different jobs.

    But most notably, I worked at an auditing firm doing the consulting side of an auditing firm. And then I went to the University of Denver law school. Which it was, if those of you who remember 2009, it was not a great year to be graduating law school or really coming out of school anywhere.

    It was right at the downturn. And so the firm that I was at, or I had clerked at, at that point, you know, I was doing just transactional work, getting a lot of great experience, but a lot of transactions died in 2009. And so the firm I was supposed to go to kind of said, “Well, you know, we don’t really have transactions going on, but if you want to do litigation, we’ll bring you on.”

    And so, you know, my start in my career was actually in litigation, commercial litigation, which was an interesting place to start and, you know, good experience as well, I think, because I was able to see how contracts blow up. And prove with arguments that people can make in court on what a contractual provision says when it seemed clearly written the other way, in my mind, but so that was one experience.

    We found out pretty quickly I didn’t want to do litigation and, you know, I kept working towards doing more deal work at the firm I was at. Leaving there, I went to a couple other firms doing just transactional work, M&A work. These were all mid-sized firms in Denver. So most of our deals were lower middle market deals.

    And so that’s kind of where I cut my teeth and kind of grew to love that area. I started this firm in February of 2018, after I had made partner at another firm in town, another mid-sized firm. And, you know, I just wanted to strike out on my own and develop more of my corporate practice. The firm that I was at did a lot of real estate work and so I was kind of the corporate guy to the real estate firm.

    And it was harder to develop the M&A business. And so I started my firm in 2018. And now we have a couple of attorneys working here as well. And just been kind of doing mid-market M&A deals, lower middle market M&A deals, private securities offerings, and that sort of work. So we’re kind of a boutique transactional firm.

    The M&A Mistake the Lower Middle Market Makes

    Patrick: Well, tell me why you focused on the lower middle market as opposed to other segments. What is it about the lower middle market you like?

    Trevor: The lower middle market is a unique area in my mind because, for one, I think it is underserved. There’s not a lot of… Big shops don’t chase those deals, they’re chasing the bigger deals because they have high overhead and a lot of other things that they need to cover so they want to chase the bigger fees. And so this lower middle market is underserved.

    I also like it because you get to deal with sophisticated buyers and sellers. Really smart people who build businesses, a lot of family-owned businesses. So you get to hear, you know, the interesting stories on how they’ve been built up. There’s a lot of smart people that you’re working with, but they’re also the type that are gonna roll up their sleeves and get involved.

    It seems like a lot more than these, you know, higher ticket deals. And so I like that. There’s usually less ego and each deal is unique. And so those are sort of the, what’s kind of attracted me to this market.

    Patrick: I agree with you that the lower middle market is underserved. I mean, there are thousands and thousands of these companies out there. And because they don’t deal in M&A transactions on a daily basis, they don’t have in-house corporate debt. They’re not used to the services that are available out there.

    So what they usually do is they default to going to a brand company or Big Four accounting firm or the major top 10 law firms. Nothing wrong with them. It’s just you’re not going to get the value with those organizations. They may have tons of resources. But those resources are built and designed for major-size deals.

    And you know, the lower middle market members, they’re going to get shortchanged. Not only are they going to get less response time and get overlooked, they’re going to pay a premium, and they’re not going to get solutions that are really fit for them.

    The larger firms don’t have the bandwidth to have multiple solutions, whether it’s on a quality of earnings, whether it’s on some legal diligence or other services out there. They don’t have a lot of solutions or a wide enough variety of solutions out there. So you end up paying more and getting less.

    And I don’t think that’s fair for a lot of these owners and founders who, you know, took it upon themselves to create something where nothing existed and just build tremendous value. It’s just not as large as Walmart. Okay, so that’s where I passionately feel about wanting to serve that community.

    Now, Trevor, explain what a boutique firm like yours can do for the lower middle market. What are the types of things that they’re looking for that you deliver that possibly the other larger firms aren’t going to be able to satisfy?

    Trevor: Yeah, so I think you kind of hit on a couple of them there with response time. I mean, when you’re a small fish in a big pond at some of these larger service providers, they don’t provide you the time and attention, typically, that you need in an M&A transaction. As anybody who’s involved with M&A knows, time kills deals, and so you want to be efficient, and you need to turn around, be able to turn around, documents from a lawyer side.

    That’s what we can do is turn around documents quickly, we answer the phone, you know, so when somebody calls, whoever our client is called, somebody’s going to answer, and we’re going to be able to schedule a time to talk, and we’re going to prioritize, you know, those deals that we have in our shop and that we’re trying to get through.

    So I think response time is big. One of the, you know, my pet peeve is seeing people not hire the right team. And that happens, not at any fault of the people that are the buyers or sellers. So a lot of times it’s usually just because they don’t know, and so they either end up hiring people that are not specialists in this area, or they’re going to the big shops and not getting treated well.

    And so that’s kind of a pet peeve of mine and I, you know, it just breaks my heart to see when these companies have built a lot of value. You can see deals die because of it, either because it’s a, you know, a family-owned shop or family-owned business that has grown up with an attorney when they were nothing that was kind of a general practitioner, and they helped them with some commercial contracts, maybe some employment issues and that sort of thing.

    And then that’s just who they know and so they try to use them for an M&A deal and it can lead to a train wreck, and sometimes it can kill the deal honestly, and I’ve seen deals die because of the counsel, and that’s a problem. You know, you can also hire those big shops and then they can totally over-lawyer, you know, a $5 million deal.

    And we’ve dealt with that plenty of times on the sell side representing sellers to, you know, private equity companies and things like that. And so that, I just hate to see that. And so we strive to be, you know, the firm that we come in, we don’t have an ego on the documents, you know, we take a practical approach to it.

    These are M&A contracts or an allocation of risk, right? Which you know very well, Patrick, and how that works. And so these, with allocating risks back and forth, you’re not going to get an agreement that takes all your risk away. And so you gotta, at some point, I think a good attorney who’s experienced in this area is going to be able to come to their clients and say, “Hey, here’s where we’re at. Here’s the risk of going this way. Here’s the risk of going that way.”

    And there are certain things that I would consider are more legal, but there’s… Ultimately, a lot of it becomes business decisions, and it’s navigating the client through those. “Alright, here’s the risk of this way, here’s the risk of that way. You know, what do you think? How do you feel as far as taking those risks?” And helping them guide to that as well as, you know, telling them what kind of market is out there, what do you see in typical deals.

    And I think we’re uniquely positioned to provide that sort of counsel to clients. We have, you know, I’ve worked on at larger firms, I’ve worked on $200 million deals, you know, I’ve been on these larger deals, and it’s, so I have the experience and, you know, the other attorneys here now have developed that experience as well to deal with these M&A transactions. And I think we’ve just kind of been laser-focused on it, which has allowed us to do them efficiently and help deals actually get closed.

    Balancing Risk & Cost

    Patrick: With what you’re doing there, as you were talking about this, a thought struck me because the parallel I would have is with insurance. When you see startups, startups need insurance, a variety of policies, but the thing is, you can bankrupt a fledgling company by over-insuring them, getting every possible line of coverage out there where you have to go ahead and balance and there’s an exposure here, we’re not going to insure it today, such as Directors and Officers Liability.

    Let’s wait until you get funding. Okay, when you get some outside funding, when you get some outside person that’s going to sit on your board, then we will think about a D&O policy, but you’re privately held, let’s get you up and running first, you just, you’re not that big a target, so why lump you up with it?

    So I see where you try to find that balance, where you don’t want to under-represent them, but, you know, they’re not going to be taken to the Supreme Court for, you know, a nine-figure, you know, penalty.

    Trevor: Right.

    Patrick: Yeah. And so–

    Trevor: You’re absolutely right. You gotta fit the market and the deal, and again, I think, you know, there’s just not, there’s not a riskless transaction, so at some point, there’s some risks allocated to you in that contract, and you just gotta take it with your eyes wide open. And that’s what our job is, I feel like, is to educate the clients on here’s the risk you’re taking. And if there’s a business risk you’re going to do or that you’re willing to take, then let’s move forward.

    Patrick: Yeah, and you’re not going without a net here, there’s going to be some stuff that they’re going to need and just the expert weighing all… prioritizing the exposures out there and then addressing those, I can imagine that you also have a network of other resources. They’re not in-house, but if they need a quality of earnings report, or they need some other diligence documents, you’re not directing them to the Big Four accounting firm, you can find things that make sense.

    Trevor: That’s right. Yeah, we have a set of resources, you know, a network of resources that we can direct clients to, whether they need to queue up, you know, they need valuation experts to come in, they need a regulatory expert. You know, we’ve done deals where patent portfolios have been an asset.

    And so we’ve had to bring in, we don’t have any patent lawyers in-house, but we know them. We know patent lawyers that can come in and evaluate those patents and whether they have value or if they’re defensible, that sort of thing. Or if there’s other regulatory issues, like, you know, we did a healthcare deal where there were certain Medicaid issues that we needed to have looked into.

    And so we brought in another attorney who was a Medicaid expert who could help with transferring those licenses over. And so yeah, we just, you know, part of the problem with M&A is that there’s so many issues that can come up, and so from an attorney’s perspective, you really can’t be…

    Your M&A attorney needs to be like a quarterback in some senses from the legal side to say, “We need to talk to this person here. You need to talk to this person there. Or we need to bring in an expert on this piece.” Because there’s just so many things that can come up in a business or in an M&A transaction that may require an expert in another area. And that’s why the, you know, the team is so important, I think, in an M&A deal.

    Patrick: Well, let’s provide some context here because we’re talking about lower middle market or almost micro middle market. In terms of transaction value, what’s your range of your typical client?

    Trevor: So our typical clients, most of our deals are, you know, in the 3 million to 15 million range, I would say. And so that’s, you know, it depends how you define it, but I thought people would define that as the micro middle market or even just, you know, lower market.

    And it’s, you know, it’s not quite mainstream deals, like, you know, selling hair salons and things like that, but we’re, you know, we’re doing businesses that are 3 million and you know, the big shops really don’t want to touch those sometimes. And we get referrals, actually, from larger law firms that say, “Hey, you know, this one, this is probably a good deal for your firm, but we would charge too much on fees to handle this one. So we’ll refer it over to you.”

    But yeah, that’s the market. I would say if a $25 million deal or a $30 million deal came in, we would probably take it and be able to handle it very well, depending on, you know, the industry and what other needs that the client may need for that transaction. But I would say the bulk of our deals are in that 3 to 15 million range.

    Patrick: Well, now, our focus on the insurance side for M&A is using rep and warranty insurance. And even though rep and warranty insurance eligibility thresholds have come down, so now you can have deals that are as low as $10 million transaction value, where it can be insurable for $2 to $5 million in the full $10 million transaction value when the fundamental reps can be there.

    Rep and warranty isn’t always a fit for everybody. There are other things that can be done where, like you said, you can’t cover all the exposures. Well, let’s value which ones are there. So there are rep and warranty light type products out there that are available. What kind of insurance problems do they run into?

    Trevor: A lot of them. D&O insurance is a big one, a lot of them just don’t have it. And so we have to talk to them about that and getting D&O insurance because we also do private securities work where we’re helping companies raise money and then, you know, a lot of times that’s when it pops up is, you know, where you got either large angels who want to come in and they want a seat on the board or sometimes VC funds are coming in and they want a seat on the board and they’re gonna require it.

    And so, you know, a lot of times we’re talking to clients about the D&O insurance so that’s a big one. Rep and warranty insurance is something that we’ve looked into and, you know, you and I have talked about it a bit.

    And so that’s, you know, I’m glad to see that those prices are coming down and can be a fit for some of these transactions that we’re working on now because it’s a huge [inaudible] attorney standpoint in that it makes negotiating the reps and warranties provisions a lot easier and that’s the heart, you know, that’s the biggest negotiated section of a purchase agreement is typically the reps and warranties and indemnification. And so, you know, to the extent we can make that simpler and get us to that closing table quicker, that’s huge.

    Patrick: Anything with cyber, is that becoming an issue with what you’re saying?

    Trevor: Cyber insurance, you know, we recently had a client asking about cyber insurance, and, you know, we had trouble finding it honestly. And maybe I needed to talk to you about it. But that was about, gosh, a year ago when we were looking into that, and we were having trouble finding it, at least one that fit.

    And so, yeah, that’s, I mean, data privacy and protection is becoming a huge issue right now. It’s, you know, all the continuing legal education providers out there are doing events on this, there’s no specialist in this area, because, you know, GDPR, you got California, just, you know, passed new laws on it.

    And it’s kind of a, given how the internet works and how it goes, you know, across state lines easily, you kind of got to comply with the most stringent requirements. And so this is becoming a big issue and more and more it’s something that, yeah, more and more clients are asking about. So we’ve run into it. And you know, now I’m glad we have a connection with you that they could talk more about that.

    Patrick: Yeah, that’s one of the things with the lower middle market is you’re allocating resources because everybody’s got finite resources. And so you’re not necessarily going to be buying a multitude of insurance policies.

    Whenever you start getting and realizing new exposures, it’s usually not until you get to, you know, a transaction, and then all of a sudden, you have to start taking inventory. And so now you’ve got these new developments. And there are a lot of policies out there that suddenly you now need to just check the box.

    And you don’t want to spend a ton of money on that. But at the same time, you want something that is viable, that, post-closing, is going to respond to a claim, and you’re not going to get a call in the middle of the night saying, “Yeah, that policy bought for a thousand dollars.” Yeah, that’s not valid for what you have, I mean, you need something that’s gonna be there.

    But it’s very important, particularly for the smaller organizations out there where, again, you don’t want to bankrupt them with buying too many policies for every exposure, but then when they need coverage, you’ve got to get itemized specific things.

    There are some real laser, finite, purposeful documents and products out there that can provide the coverage and at a good value, I mean, less than what having a policy for ten years would cost. So there are things out there, and it’s important that everybody is aware of that.

    Trevor: Let me ask you this, Patrick, if you don’t mind. I don’t mean to turn the tables on you here but they, you know, in any M&A deal nowadays, there’s going to be a rep and warranty about data privacy and that you’ve got laws and, you know, any buyer is going to push for that in there and obviously, you know, from my standpoint, if we’re representing a seller, we’re trying to push back on those and make carve-outs to the extent we need to, but how does that work with say, you know, you have a seller who doesn’t have cyber insurance, they have that rep and warranty in there, but they want to get rep and warranty insurance. Will that cover that or is that carved out?

    Patrick: Yeah, a lot of times, the rep and warranty policies are now trying to carve out the cyber, what they will prefer doing is encourage the seller to go purchase a standalone cyber policy, liability policy. Those usually are anywhere from $3500 in premium to $10,000 in premium depending on the size of the company and how your records look.

    Okay, that’s purchased. Then what if that is in place and the seller has to have cyber policies and procedures just for protecting data, they have to have, you know, basic firewalls? They have to have policies and procedures among their team, that, you know, that information is weak.

    And there’s a protocol so they have to have some things in place similar to employment issues where you’ve got to have an employee handbook if you got fifty employees, okay, you can’t just, “I have an insurance policy, but we have no handbook.” Okay, so you have to have some common-sense policies and procedures in place.

    If you do, and you have a cyber policy, a rep and warranty policy will just literally sit on top of that cyber policy. If the rep is breached, and this does happen quite a bit, is post-closing, you don’t know about a breach until months after it happened. And you have no knowledge of it at all until something erupts six to twelve months later, and then you’ve got people coming after you.

    Well, if you’ve got a cyber policy in place, they will respond to those claims. The rep warranty policy will then just sit as an excess policy right above it. So those damages usually can be contained within the rep and warranty policy, within the cyber policy primary, and then the rep and warranty.

    Keep in mind, rep and warranty insurance policies usually have a deductible that’s 1% to 2% of the transaction value, so you could have a minimum retention of $150,000 on your rep and warranty policy. Cyber policy might only have a $10,000 retention. So you want that early attachment point at that, you know, three to seven thousand dollar premium item, then you’re gonna have the rep and warranty supplement. So that’s how they’re addressing those.

    Trevor: Well, that’s good. That’s a good point on the deductible piece, you know, to have that and a good reason to have that cyber policy.

    How COVID-19 Will Impact M&A

    Patrick: Yeah. Now, as we’re sitting here right now, as we’re recording this, we’re midway through the COVID-19 settle-in-place. At least I hope we’re on the latter half of it now. And I usually ask my guests what they see trend-wise for M&A or their particular specialty.

    I’m just curious from your perspective on the lower middle market. Let’s say we get back and up and running, we start opening up in late June, early July. I mean, we’re from California. So we may be shut down until August. But for the rest of the country, probably getting out May into June. What do you see trend-wise for you? How fast or slow? Do you think activity is going to pick up for you on the transaction side?

    Trevor: I’m hopeful that things are picked up and going like they were in June. I think that’s hopeful. But I don’t know if that’s going to be the case. And I think, you know, it’s tough to predict now, how it’s going to go, but I know that we had a bunch of deals that were in the process in early March, and those deals have been put on hold.

    Actually, one did go through and closed. But the other, you know, four deals are either on hold or they may be dead, I’m not sure. As of now, I think that my hope is that there is a quick recovery. I think it’s gonna affect different industries differently. In other words, there’s a lot of talk about, you know, is this going to be a U recovery, is it going to be a V, is it gonna be a W, you know, a lot of letters thrown out there.

    And recently I heard somebody say, maybe it’s gonna be a Y. And I think that’s kind of what I’m thinking it might be, whereas there’s going to be an uptake, I think, hopefully, a quick uptake on certain industries, whereas other industries are probably going to stay down for a while, you know, retail, restaurants, things like that.

    I think we’re gonna have a tough time managing this shutdown and coming back, you know, there could be others, but there’s other industries that I think are going to pop back in, you know, start doing deals again.

    And so I’m hopeful that that’s how it, you know, at least as part of the economy starts coming back, certain industries come back and deals start going again, I think that, you know, there’s obviously a lot of private equity money out there, and there’s, you know, reports of a ton of private equity money out there ready to buy and so, you know, there could be some, a lot, of shoppers out there looking to get good deals right now, you know, they can push on valuations and hopefully pick up some good deals.

    And so that could help get the M&A market back, I think, quicker as well. So, hard to say, hard to have a crystal ball here. But my hope is that by June, certain industries are going again and M&A is picked up.

    Patrick: Trevor, how can our audience find you?

    Trevor: Find us on our website: Or you can email me directly, it’s just and so there’s no “dot com” it’s just a “dot legal.” And you can catch me there or, you know, call me directly (720) 230-7123.

    I’m happy to talk to anybody who’s out there in this market–service providers, buyers, sellers, anybody. We love doing deals here, and I think that we provide a lot of value to the lower middle market. So if you need anything from me, please send me an email or give me a call.

    Patrick: Fantastic. Trevor, I appreciate it. Great talking today, and we’re going to talk again real soon.

    Trevor: Sounds good. Thanks, Patrick.

  • Michael Butler | An Optimist in Today’s Crisis
    POSTED 5.12.20 M&A Masters Podcast

    When it comes to M&A, lower middle market companies often get overlooked and overcharged by big institutions. But Cascadia Capital is an investment bank that specializes in working with this underserved market.

    Chairman and CEO Michael Butler explains how they help “stage the house” for a company about to go to market, including the financial, legal, and operational aspects, among others.

    We also talk about Michael’s unique take on the current financial crisis, including the key differences between what’s happening today and what happened in the Great Recession of 2008 and 2009. He says he’s optimistic about a quick turnaround… including a significant increase in M&A activity this summer.

    We go into depth on the reason for that pickup, as well as…

    • The underlying factors that make the quick upturn in the economy likely
    • Personal financial planning an M&A deal – and how to minimize tax obligations
    • What companies should be doing right now in the downturn to spot opportunity
    • The role of Representations and Warranty insurance – and why it’s become a must-have in deals today
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick. 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 Michael Butler, Chairman and CEO of the investment banking firm Cascadia Capital based in Seattle.

    Cascadia Capital is a team of transparent, client-focused, trusted advisors with deep expertise in a broad range of industries. Michael came to my attention following an article he posted in response to the coronavirus pandemic just a week ago, with the title “Opportunity Does Not Go Away, It Only Changes Form.” We’ll link to this in our show notes. Michael, thanks for joining me today. Welcome to the show.

    Michael Butler: Thank you, Patrick. Thank you for having me.

    Patrick: Before we get into Cascadia Capital and the article you posted, let’s give our clients a little bit of context. Tell us how you got to this part in your career.

    Michael: Sure, Patrick. I’m a Seattle native. I went to the University of Washington, then went out to Philadelphia to get my MBA at the Wharton School. And then after that, went up to Wall Street and worked on Wall Street for eighteen years with Lehman Brothers and Morgan Stanley. And then in 1999, with two small kids in New York City and a wife who didn’t want to raise a family in the city, moved back to Seattle and co-founded Cascadia Capital.

    Again, that was in the middle of 1999. All was good for about a year, year-and-a-half and then we hit the internet bubble burst. So not good timing on my part, but I think you’ve got to make the leap at some point, and I did so in 1999.

    Patrick: Well, at least now you and I can both say that we’ve gone through three… Now, this is our third real big shock to the economy because we had the dot com issue there, then follow that with the banking crisis in 2008/2009, and the one that we’re going through here.

    Michael: Yeah, I agree, we’ve seen a few. I think it makes it easier. You know, you’ve seen this movie before. And if you’ve seen the movie, you kind of know what’s coming next. You kind of have an idea of how the movie is going to end, and it enables you to be proactive and look at the opportunities rather than just focusing on the challenges. And that’s what we’re trying to do here.

    Patrick: Yeah, I completely agree. I mean, that’s the thing is that, unlike some other people in the society right now, if you’ve gone through this, you know, the lights will go on. And so you have to have that in your mindset that this isn’t Armageddon and we’ve got a long way to go.

    Now, tell me about Cascadia Capital. I always like finding out how you came up with the name. And then talk about what the focus is because you’re not agnostic being a generalist. You guys are very specific on a couple of specific areas.

    Michael: Sure. So Kevin Cable and I co-founded Cascadia in 1999. We couldn’t decide whether to call it Cable and Butler or Butler and Cable. I bought a house on Cascadia Avenue in Seattle, Washington. And Cascadia is kind of the name for the region that encompasses Vancouver, BC, Portland, Seattle, and Boise.

    And so I said to Kevin, look, maybe it’s a good omen that I moved to Cascadia Avenue. Why don’t we just call the firm Cascadia Capital? We thought that was a great idea. And that’s how we came up with the name. It was no brilliant thinking. We didn’t hire a, you know, marketing firm. It was kind of a coincidence of me moving to Cascadia Avenue and that being a name that just got to describe this region that we live in.

    Patrick: It’s also helpful nobody took the name ahead of you.

    Michael: Absolutely. Yeah, sometimes you got to be a little bit lucky. What Kevin and I originally tried to do was focus the firm exclusively on the Northwest. You know, our thesis was the Northwest was going to become a great region, and we were focused on the Cascadia region. That plan worked well for about fifteen months until the internet bubble burst.

    And then we quickly realized we had to broaden our footprint and we became a national firm over the years. We also determined that the day of a generalist was going away and that you had to have domain expertise and really understand the industries you worked in to add value to your clients. So those were a couple of the big lessons we learned from the internet bubble burst.

    M&A Experts Who Will Prioritize You

    Patrick: And your commitment, in terms of the sector of the industry that you’re looking at, in terms of size, is lower middle market, the middle market?

    Michael: Yes, our client base tends to be at least 75% non-institutionally backed. So entrepreneur-owned businesses, family-owned businesses that typically have an enterprise value of between 50 to 500 million. I would say our sweet spot is 75 to 200 million. Again, we’ll do deals bigger than that and smaller than that, but that’s really the sweet spot for the companies we work with.

    Patrick: I think that sector is a great sector and some people may think it’s on the larger side, some think it’s on the smaller side. I sincerely believe that that lower middle market, under $70 million transaction volume, is a vast and underserved market. And so the more people who find out about specialists such as Cascadia, I think it’s nothing but helpful because, unfortunately, a lot of these organizations, if they’re not doing M&A all the time, they’re not aware of organizations like yours.

    And they make the mistake of defaulting to the big institutions and the brand names. And what ends up happening is they get underserved. They get overlooked. And they also get overcharged. And a lot of times, there are solutions for the middle and lower middle market that are out there that the big institutions just don’t provide.

    And it’s in the interest of the lower middle market members to really find out the specialists like yourself because you’ve got solutions that are beyond the bandwidth of the larger organizations that would alternatively just go ahead and pull out some stuff off the shelf canned product for them because they just don’t have the bandwidth to handle that one service.

    Michael: I completely agree, Patrick, what we found is, there’s a different set of circumstances that impact lower middle market companies compared to larger companies, you know, typically they don’t have the infrastructure that a larger company will have. They might not have the CFO or the processes or procedures.

    So when we work with a company, a lot of times it takes months and months to get them ready to go to market because we have to help them think through their infrastructure and their people and their processes to kind of get them ready to be able to go to market. That takes a lot of patience.

    It takes experience. Having done it before, I think the larger firms just don’t have a business model that allows them to spend that amount of time with a company.

    Patrick: Give us a couple examples of what you did with clients like that where you literally have a face to house before it went on the market.

    Michael: Yeah, exactly. So what we try to do is put together a team to help a company. And that means bringing in the proper accounting firm, it means bringing in at least a temporary CFO, if they don’t have a CFO that is up for the task. And it also means bringing in a good law firm.

    So it’s going through the various contracts that they have with suppliers or customers to make sure that those contracts are in a form that will be acceptable to a buyer. It’s making sure that they have the right checks and balances in their financial function. And robust books that can withstand the diligence process don’t need to go through.

    It means making sure that their strategy, their operations, and their financials all tick and tie, right, that the financial model reflects the operational model that reflects the strategic direction of the company. And so after you’ve done this, you know, the number of times we’ve done it, you kind of know where to look for issues. And once we find those issues, you know, we know who to bring in or how to help them solve the problem.

    Patrick: That avoids surprises during the diligence phase or during the negotiations, doesn’t it?

    Michael: Exactly. What we tell our clients is, you want to take as much time as needed to get ready to go to market. Because if you go into the market and you’re in diligence and the buyer finds a problem, they’re then going to look for the next problem, right? It lessens their confidence in the company being a clean company, so to speak.

    So we spent a lot of time making sure clients can withstand the diligence process. The other thing we find, Patrick, with our client base is a lot of them have not done the personal financial planning that they need to do to minimize taxes or to maximize, after tax, proceeds.

    And so we also recommend that they work with, you know, a financial advisor or personal attorney to make sure that their own personal house is in shape. So that when they go through this process, they can maximize the after tax return to them. And that might mean gifting shares to their children, it might mean setting up trusts. And that all takes time to do.

    Patrick: That’s nice because you’re caring about the people, not just making sure the deal gets done and then that’s, the owner or founder, that’s their business. We’re not going to touch that. I mean, that could be everything.

    Michael: Yes, it absolutely can be. The amount that an owner of a business can save by having the right tax structure in place is immense. And these clients become our friends. We realize that, in many instances, this is somebody’s life’s work. Or it’s several generations of their life’s work.

    And we take that pretty seriously. And so we make sure that we spend the time to get to know them, understand the objectives, and make sure that they’re well-positioned to maximize the returns for what for many is the biggest financial decision of their life.

    Patrick: I always think of M&A, ever since I got into it a few years back, was I always thought about the people aspect myself, just as you do, where it’s not company A buying company B or merging with company B. It is one group of people deciding to trust and combine forces with another group of people.

    And in an ideal situation, the new whole is greater than the sum of its parts. That’s where it’s “win win win” out there, and it comes down to trust when it comes down to people.

    Michael: It always does. Every time.

    Why Representation & Warranty Insurance Is a Must-Have

    Patrick: Yeah. With this, you mentioned the financial impact for owners. As an insurance person, we always look also just on how can we reduce mitigate risk which is very, very boring. But it can be the key to having a successfully executed deal.

    And that’s where we ensure the transaction itself through rep and warranty insurance. A product’s been out there for years then very, very popular recently. If you could–good, better, and different–share with us any experiences you’ve had with rep and warranty on your deals.

    Michael: So we look at reps and warranties as the new quality of earnings. So about three, four years ago, buyers demanded quality of earnings reports, which are basically a Good Housekeeping Seal of Approval from an accounting firm around a company’s finances, and they become just part of the transaction.

    Almost every deal we work on has a quality of earnings. And what it does is it gives the buyer comfort in the seller’s numbers. And it’s a risk mitigation strategy for the buyer. And it’s something that every seller needs to do. We think rep and warranty insurance is on the same trend. We think really every deal is going to have rep and warranty insurance, the cost-benefit is immense.

    The cost is really minimal. When you think about the benefits that the insurance provides, it means less money has to go into escrow. That means more goes to the seller on day one, it allows the buyer to have comfort in case something goes wrong because they have the insurance.

    And so it’s going to become, in our view, standard for every deal we work on. It makes so much sense. It just makes too much sense not to become the case and it, you know, again, from a cost-benefit analysis it’s, in our opinion, a no-brainer.

    Is a Quick Upturn in the Economy Likely?

    Patrick: Now as we record this, we’re hopefully, you know, who knows from week-to-week, but we’re hopefully on the downside of the shelter-in-place environment with COVID-19. And that we are, you know, with the term of your article there, you know, there’s going to be an end to this and we’re going to go forward.

    Just to put this in a little bit of context for folks, in your article, you talk about the comparison contrast between the great banking recession of 2009 and the current environment we’re in right now, and you have a unique take on it. So if you could summarize to share that with us. I appreciate that.

    Michael: Yeah, there are similarities, but there are a lot of dissimilarities. The Great Recession of 2008 and 2009 was due to financial weakness in the mortgage market, in the high yield market, and so there was instability in the financial system, which caused the recession.

    The situation today is different. The government essentially put a healthy economy on hold. And it was a choice the government made, not because of any underlying financial weakness, but because of a health issue. So our view is that there’s an underlying strength in the economy that will begin to show once we get through the quarantine, and even in the last week, we’re starting to see what we call some green shoots.

    Deals are moving along a little bit better than they were three weeks ago. We’re starting to see companies looking to potentially come to market in the next four to eight weeks. We have a couple new deals that are in market and received good bids. So I think there’s some green shoots.

    The biggest difference I see between 2008 and 2009 and the situation we’re in today is this feels like a movie that’s on fast forward, everything seems to be happening so much quicker today than it did in 2008/2009 or in 2001 through 2003 when we had the internet bubble burst, you know, it took time for those downturns to kind of cycle through.

    And today, what we’re seeing is, the things we saw that took six to twelve months to happen, and the last two downturns are happening and, you know, six weeks in this downturn, and it just feels like it’s on fast forward. So we’re going to move through this one, in our view, a lot more quickly than we did the last two.

    Patrick: Well, that’s the type of message, that optimistic message for a quick turnaround that we all want to hear and it’s not, you know, Pollyanna. This is fairly realistic, but, Michael, back, we spoke about what’s going to happen, when this does end, and it will. And you characterize the coming period as “July is the new January.” Tell us what you mean by that?

    Michael: Yeah, so I didn’t coin that. I can’t take credit. We are hearing that in the marketplace from investors and buyers. And there’s a view among investors and buyers that by the time July rolls around, things will begin to be back to normal, and then activity will peak and pick up.

    Typically, what you see each year is just kind of a rush to look at new deals in January because the period from Thanksgiving to year-end tends to be very slow. People put down their pencils, they don’t really look at new deals. So you get a lot of pent-up demand in January because people haven’t really done much the prior six to seven weeks.

    And I think the view is by July, the deal market will open up and buyers and investors will have pent-up demand because they haven’t done a lot of deals over the preceding two to three months. So the thing we keep hearing from, again, investors and buyers is that July will be the new January, meaning there’ll be a lot of activity, a lot of pent-up demand. And you’ll start to see the log jam break.

    Patrick: And you’re open for business and ready for anything that’s coming. Even now, you’re not gonna wait till July.

    Michael: No. So, you know, there’s a lot of things you can do. Right now, you can help companies think through strategy. You can help them think through operations. We have a couple of companies that were looking to go to market in March, and we advised them not to go to market, and now they’re looking to be buyers.

    They’re saying, look, this might be a great opportunity for me to buy some of my struggling competitors, integrate them, and go to market, you know, in a year with a business that’s one-and-a-half times as big then as it currently is now. And so there’s a lot you could be doing during this downturn to prep and get ready for the expected upturn.

    Patrick: Very, very helpful. Michael, how can our listeners find you?

    Michael: So I’m available on my cell which is (917) 865-0962. And the email which is

    Patrick: Michael, it’s been very informative. And I really appreciate the optimistic tone we have here just because I’m getting a little tired of seeing all the COVID-19 warning emails I’m getting from all the law firms. So every now and then it’s nice to have a nice, sunny, happy report.

    Michael: Well, I can say I’m a realistic optimist. Let’s hope I’m right.

    Patrick: You and me both. Thank you very much.

    Michael: Thank you very much, Patrick.

  • Gaurav Bhasin | How Investment Bankers Play A Role In M&A
    POSTED 5.5.20 M&A Masters Podcast

    In today’s episode of M&A Masters, I sit down with Gaurav Bhasin, managing director of Allied Advisers– a Silicon Valley-based investment banking firm with team members in Irvine, Tel Aviv, and Mumbai. Allied Advisers specializes in M&A advisory services, or middle-market companies, particularly in the technology space.

    Gaurav and I met when he engaged Rubicon to provide rep and warrant insurance for a client of his that was being acquired by his commercial partner. Ultimately, the deal closed, but what stood out to me and the reason Gaurav is on the show, were the lessons on the role of an investment banker in an M&A deal.

    We’ll chat with Gaurav about what it’s like to work in the middle-market, the types of services he offers that set him apart, as well as…

    • The common themes of M&A processes
    • How he manages to reach out to 100+ people per deal
    • Gaurav’s ideal client profile, and how he narrowed it down
    • When to reach out to an investment banker in the M&A process
    • 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 Gaurav Bhasin, managing director of Allied Advisers, a Silicon Valley-based investment banking firm with team members in Irvine, Tel Aviv, and Mumbai.

    Allied Advisers specializes in m&a advisory services for middle-market companies, particularly in the technology space. Now a brief description on how we met, Gaurav, is you engage Rubicon to provide rep and warranty for a client of yours that was being acquired by his commercial partner.

    Ultimately, the deal closed, but what stood out were the lessons on the wall of an investment banker such as yourself and get a complacent buyer to take action and how important it is to have an advisor in your corner, particularly where there’s a massive buyer 1000 times larger than his target company and negotiations and I put those in air quotes, the negotiations between those parties at that different size can be, let’s say a bit one-sided. Gaurav, welcome to the podcast. Thanks again for joining me today.

    Gaurav Bhasin: Thank you, Patrick, for having me. Pleasure to be speaking to you.

    Patrick: Before we get into you and Allied Advisers, let’s set the table and describe the deal that we’re talking about that brought us together.

    A Lucrative Acquisition

    Gaurav: Yeah, Patrick happy to. So first of all, thanks for stepping in on that deal. I know our client was quite happy with the work you’ve done on the reps and warranties insurance for them. So how we got engaged with that company was they were a software company which was in commercial partner with the eventual buyer for a long period of time. Our client didn’t have a big sales team, so a lot of their revenue was coming from this commercial partner. The commercial partner had told our client that they would buy them at some point.

    But after several years of hearing this, our client got a bit tired and engaged us as advisers. When we got engaged, what we did is after talking to the commercial partners slash eventual buyer, we quickly realized that there was no sense of urgency on their behalf to move forward. So what I suggested to my client is we should reach out to other buyers in the sector and generate interest. We prepared some materials, we reached out to other buyers.

    And luckily for us, we got a couple of buyers interested in the company. And we got some offers as well. Once this happened, we let the commercial partner know that we have multiple parties interested and also let them know that some of these parties actually competed with this buyer and didn’t want to support them post-transaction.

    What this did is it basically got the commercial partner worried about losing access to the technology, which was supporting a big product line of theirs. And then we ended up getting a term sheet, which was a pretty attractive valuation and eventually got this complacent buyer to move forward and close the acquisition with my client on terms that my client was pretty happy with.

    Patrick: The interesting thing that I didn’t realize on that is you have an organization there where they had a situation where the target was attractive because it was something that they’d been outsourcing to, and they probably figured they’d get a more favorable economic outcome if they just brought them in house.

    But then I guess they had the feeling well, why buy the cow if we can get the milk maybe now for free, but we don’t spend as much as the cost to buy the cow. So it was a decision that they can put off as long as they wanted. And unfortunately, that leaves that private merging tech company kind of dangling out there. And that’s not a cool place to be. So it’s great that you came in, you got them out there got a highlight on them and definitely increased the interest level.

    Gaurav: Yeah, I certainly agree with you. I think, you know, the fear of missing out was what sort of prompted them to move forward. You know, they didn’t want to lose this partner. And a partner, frankly, our client also wanted liquidity. You know, they’ve been doing this for a long period of time. So it is, you know, good for us to get them to come to a conclusion that worked for our client.

    Patrick: Well, let’s define the market that we’re both actually targeting because you don’t want to be all things to all people necessarily because there’s a real true value that you can bring in particular segments if you focus on niches. Tell me, you know, about your target with the middle market with the emphasis on technology as opposed to all other, you know, flavors of business out there.

    Why Allied Advisers Focuses Exclusively On Technology

    Gaurav: Yeah, happy to. So Allied Advisers is hundred percent technology. That’s all we do is technology. One of the things better given in the valley for a long period of time and most of the exits that companies have is through m&a. In fact, over 97% of the exits over the last five years have been through m&a compared to IPO. Naturally, where we focus in is on m&a. I’ve done IPOs before at larger banks, but by and large for the last decade, I’ve only been working on m&a.

    The next thing we do is we focus on middle-market, a broadly speaking middle-market. You know, we target these below 150 million, I would say the bulk of our deals tend to be below the hundred million dollar range. If you look at the size of the market, you know, there were about 2500 tech deals annually below hundred million. So as you can expect and imagine there’s a lot of transactions which are happening in that space.

    And what happens in this 150 million dollar and below market is that it’s an underserved market. A lot of the larger banks due to their infrastructure and cost tend to go for bigger deals because that generates a bigger fee for them. But what happens is in this lower middle-market, none of the banks kind of lose attention or don’t pay focus on it. Or worse, you may have a young associate or a VP driver deal and kind of learn on the clients’ nickel.

    So we specialized in this space and I think in this space, you want to have experienced advisers and legal team on staff because the buyer on the other side have pretty experienced development teams and legal stuff. So, you know, us playing in the market, which is underserved, kind of helps our clients and entrepreneurs. So all we do is technology focused on the middle-market almost all m&a.

    Patrick: Another thing that I think you and I should emphasize here is just because of our passion for this segment of the market, where it’s the middle-market, lower middle-market, is that I, you mentioned being an underserved market, we really want to be there to support and provide services and value to the entrepreneurs out there who really aren’t getting the service that they deserve.

    And it’s just because there are so darn many of them. And that’s not a bad thing for us. There’s enough business out there for everybody. And when you got the smaller market and you can provide the attention that they need, hold their hands, bring in the great expertise and experience that they otherwise would have to pay, you know, multiples for, they really appreciate it.

    And you know what, a lot of what we do and why we enjoy doing the deals is that we get great favorable feedback and appreciation from these clients. So why not focus on the people that you love to work with, rather than working with the Apples and the Walmarts of this world? Let’s go out there and there’s no shortage of those clients. And the beautiful thing is they’re underserved. We’re ready to serve them.

    So that’s what we want to do. We do that on the rep and warranty, not only on the transaction side, but other insurance products that may be necessary brought to bear as we do your client. But in light of this huge underserved market graph, explain what Allied Advisers can do and what you bring to the table that the large institutional bankers, you know, aren’t doing or are reluctant to do due to cost.

    What Allied Advisers Offers That Large Banks Do Not

    Gaurav: Yeah, absolutely. You know, as I mentioned, the larger banks due to the overhead and cost, can’t serve the middle market clients like you and I can. So for us, you know, our clients’ success is our success. We are fully motivated to get them over the finish line, to provide an exit to them which they worked so hard to build a business. So, the things Allied Advisers can do is we can provide access to buyers and investors.

    You know, we work hand in hand with our clients and find out who the right seller-buyer is for them. Is it a strategic buyer or is it a private equity buyer? Or is it a strategic buyer backed by private equity? We have done deals with all categories of buyers and, you know, having this access to the buyer is helpful for them. You know, clients are busy growing and building their business, having a banker who can do the outreach on their behalf and get them in front of the right sort of buyers and investors is quite valuable.

    The other thing we can do is we can help them in positioning their company appropriately to each buyer group. You know, strategics will look for different things than what a private equity might look for. Even in private equity, there are some private equity firms that will look for profits and there’s some private equity firms that will look for growth. We know what the hot buttons are, what the buyers are looking for, and what are the valuation drivers for your company and sector.

    And having this kind of knowledge, we can help position your company appropriately to get the top valuation for your company. The other thing we do is we also entrepreneurs like our clients, we started our own firm, we’ve been at bigger firms. And we work with a client every step of the way. There’s a lot of twist and turn that comes during the process and we help you think through this. Think of us as a client, friend during the process. We are working hand in hand with them for six to nine months.

    And then, you know, where we add additional value is we help them negotiate in terms of the deal. You know, founders and the CEOs have worked so hard to build this business and in some ways, they are emotionally tied to the deal. Having an outsider who has kind of done this many times before can be very helpful. We can advise the founders what is market, what’s not market. We can push for things the founders and CEOs find awkward asking their potential future buyer and bosses about.

    They also know they will end up working for the buyer slash private equity firm for two to five years. And negotiations can sometimes be very strenuous and emotional. And you want to preserve your relationship with your future boss. So having a banker kind of manage that for you helps preserve your relationship but at the same time, you know, get your deals done which you may not have been comfortable asking for.

    And last but not the least, you know, you only know what your value for company is by talking to many buyers. I’ve done many transactions in my career. And I’ve seen for the same company different buyers value completely differently and pay value differently. So the only way you know you’re getting a fair value is by doing a proper market check and making sure you’re getting the best value for the company you and your team and investors have built.

    Patrick: Yeah, and I want to emphasize two of the points you made there is that this is very emotional for the buyer and to have the buyer and the seller, excuse me, but for the target company is unbelievably emotional and can distract them from their jobs. So, which is to run and grow their company, not to sell it.

    And so that avoids a distraction. And having that intermediary between the two parties is helpful for filtering out communications, getting, you know, discussions going and getting the process moving without taking things personally, because that, as you know, is part of the process. And the other thing I’d emphasize is there are very few, there are some but they’re very few first-time buyers.

    There are a lot of first-time sellers that haven’t been through this and so they don’t necessarily know what to expect. So to rely on somebody that can walk them through the process, as you said, step by step, be the sounding board is all the difference in the world. So give me some examples of, you know, the types of services and the case studies and what you did for these middle-market companies that set you apart. Just highlight how you do things because there are I’m sure listeners out there wondering whether or not this is a fit for them.

    What Sets Allied Advisers Apart From The Rest?

    Gaurav: Yeah, so I’ll give you two examples. And the interesting thing about m&a processes is no two processes are the same. They have some common themes, but they have variations. So in one case, one of my clients had received an offer from a former company and the company actually was the investor into this, into my client as well. So they had interest in acquiring the technology they had built. When this prospective client came to me, what we did is we did a look at the landscape of other potential buyers who could have interest in this company. And we quickly reached out to another set of buyers.

    Luckily for us, the technology was well received and there was a need for this technology in the marketplace. We actually got another bidder who wanted to buy this company and offered 70% higher than the initial offer, which came from the first buyer. And as a result of that, we were able to improve the initial offer from the buyer from where they started twice over the course of the process and sold the company 70% increase to the initial offer.

    So if you look back, the fees they paid for us was tiny compared to the increase in value they got for the company. And I think the lesson learned here for us was that, you know, companies if they really generally want a technology, they’re willing to pay more. The first offer is not the last offer, but you need to read competition for the buyer to sharpen their pencils. So, that was an example where, you know, the buyer had an inbound interest and we were able to use that to start a process and get additional value through presence of another bidder.

    And then, there was another company, which was a SaaS software company recently sold, it was bootstrapped. The owner and his wife had run this for several years. And the company had grown nicely, it was profitable, but all their eggs were in that basket in that, you know, they had essentially invested all the life savings into growing their company and building their company, but they had preserved essentially all that equity. In this case, they reached out to us and wanted to get some liquidity.

    And they were not even aware of, you know, the types of folks who will have interest in their company. We reached out to a whole bunch of strategic as well as private equity buyers and got multiple offers from both categories of buyers. There are benefits of going with strategics. There are also benefits of going with private equity firms. And then, you know, given they had multiple offers and multiple options, the owner was able to make a wise decision. And we sold that company at a pretty nice healthy premium of 10 x multiple of the trailing revenue. So that’s another example where the client was extremely thrilled about.

    Patrick: When we talked a while back on this second scenario, you mentioned that you were probably reached out to some 100 potential buyers or interested parties on this.

    Gaurav: Yep. That’s right.

    Patrick: I mean, who has Yeah, who has time to do that and keep all those relationships going and all those lines of communication open? You can’t possibly do that and run your company effectively. So

    Gaurav: Yeah, exactly.

    Patrick: I would also say, and this is not to say, we don’t mean to inject any kind of politics whatsoever into this. But it was interesting in your first example where the first offer don’t jump at that first offer. Not long ago, I was checking out the book, The Art of the Deal. And many of Donald Trump’s real estate successes came because he bought properties very, very low, artificially low because why? Because the properties didn’t go on the market. He managed to have relationships with the building owners and came in to step in and offer deals on the buildings without it going to market.

    Had the buildings gone out to market, he said he probably would have still been able to afford it, but he would have had to pay many, many millions more. So definitely in this market, whether you’re aware of your value or not, it’s always best to get, you know, more than one prospective buyer at the table, even just for a look, whether it’s a fit or not. And Gaurav, tell me what’s your ideal client? Give us a profile of that. And then with that in mind, given the time frame on when they should reach out and engage you.

    Who is the Ideal Client for Allied Advisers?

    Gaurav: Yeah. So our ideal client is ideally a company which is, you know, a SaaS software company or an internet company which is, you know, growing nicely in a large market. You know, I think for us, we are excited to work with middle-market founders who are creating businesses from nothing and, you know, getting revenue traction, customer traction.

    For us, we encourage founders and investors to get to know us early on. It helps us build relationship with you. It helps us advise you on market dynamics. And also when is the right time to exit. Is it better to exit when you are extra revenue or whether you need to improve your margins or your services? This allows us to take on more of an advisory role versus a transaction role. And also, we can kind of work with you hand in hand to find out the best way to maximize exit value for the company.

    So what we encourage is, you know, get to know us early on. There’ve been many times where we’ve gotten to know client three, four years ahead of them formally engaging us. We can keep you updated on market insights and address questions as they come up. And then, you know, as you mentioned, Patrick, anytime you have a bond with the company, you know, you should definitely check and make sure that they are, who else could be interested in your company.

    I think anytime you get additional offers, you want to do yourself a benefit in the exit value. And then there could be situations where, you know, we get to meet founders, investors that have grown a company to a certain level and they feel that they either need to get some liquidity, to cash in some of the savings, or they need some capital for growth where it could be better suited to be in the hands of a larger buyer. So those are some scenarios where, you know, a foreign investor can approach us, engage us and in front of you happy to meet with folks and give them my point of view.

    Patrick: So it helps for people even if they’re not planning on some imminent transaction or some imminent exit, is to maybe reach out and call you, get to know you a little bit, just some conversations, get some ideas, and then just have that dialogue on and off again periodically throughout the future. And then when some situations arise, you’re prepared with to have some intelligent conversation. You don’t have to start the relationship from square one.

    You could also tell whether or not I, Gaurav, you’re nice enough guy, whether, you know, there’s a connection there. And having a conversation here or there, always starts, takes 10, 15 minutes. And I think it’s a first step and it’s an easy step before there’s all this pressure on you where you have to do something now because you’ve got some need for capital or you got an unsolicited offer just landed on your desk and, you know, you don’t know what to do. Gaurav, how can our listeners find you?

    Gaurav: Yeah, it’s quite easy to find us. You are welcome to go to our website. It’s Allied ALLIED Advisers, ADVISERS. On there you can see the Contact Us button. You can fill out the form and one of us will get in touch with you. You can find us on LinkedIn. And we look forward to hearing from you and developing a relationship with you.

    Patrick: Yeah, if you go to LinkedIn it’s Gaurav GAURAV BHASIN, that’s the easiest way for some of us who are not as good at spelling on these things for LinkedIn. That’s how they can find you. And I would recommend, you just, it never hurts having a conversation. You never want to, you know, start talking to an attorney when you’re receiving a lawsuit. It’s always nice if you could meet a couple of attorneys, get some ideas just on what’s out there with the landscape, show interest in what they’re doing.

    And you’ll know whether or not there’s connections. You never know when you might need it. And if you’re an owner, founder of particularly a technology company, there’s definitely going to be the need. You may not think it’s now but down the road there’s going to come a time for a potential exit and you could do nothing more than help your situation with Gaurav on your side. Gaurav, thank you very much. It’s a pleasure speaking with you. We’ll talk again.

    Gaurav: Thanks for taking the time, Patrick. Really appreciate it.

  • No Significant Drop in M&A Activity During This Recession 
    POSTED 4.28.20 M&A

    We are entering into a serious recession due to the ongoing worldwide pandemic. The economy has taken a big hit, and it’s not over yet. But I see opportunity out there, especially in the M&A world.

    Let’s put this in context first. Think back to the last recession – The Great Recession of 2008/2009.

    There were lots of opportunities for businesses back then too, but there was no money. This time around, thanks to conditions prior to the downturn, there is plenty of dry powder available, not to mention very favorable lending terms.

    Will there be opportunities to invest and acquire? We expect and hope, but we’ll see for sure soon enough.

    Pace of Deals Now Versus What’s to Come

    It’s true that currently the pace of deals has fallen off a cliff. Deals are not simply being delayed… but actually cancelled. That’s bad, of course, and it has people worried. But conditions are already shifting.

    We’re moving from a Seller-friendly market to a Buyer-friendly market. Like everything else in the near term, prices will be coming down.

    As a Seller, you may have had a potential deal in the works. But, due to recent events, the Buyer is reluctant to move forward. Understandable, given it’s a time of uncertainty. And, many Buyers are reevaluating and focusing on other priorities. On the upside, if the price comes down low enough, Sellers in a bind will have other suitors. It’s a Buyer-friendly market, after all.

    Why PE Firms Are Sitting Pretty

    In this environment, PE firms have the advantage. PE firms may have been more aggressive price-wise in the recent past, while Strategic Buyers were spending more freely. Now the tables have turned. Strategics will be less aggressive while looking at takeover targets because in the near term they’re trying to protect as much cash as possible.

    This opens the door for PE firms and other financial Buyers to make lower offers and pick up those targets themselves (and then sell them later for a premium).

    This is all set against a backdrop of declining valuations.

    Some of these target companies have had recent valuations of seven to 10 times EBITDA. Just a short time ago, they were valued at 10 to 15 times EBITDA. A company with $10M EBITDA was being targeted at $100M to $150M. Now that the price tag has dropped below $100M, there are a lot more interested Buyers. That’s one of the reasons this looming recession is still a good environment for M&A. And, as I mentioned, it’s a Buyer-friendly market… especially for financial Buyers.

    A Foundation for Continued M&A Activity

    Despite this pause in our economy, let’s look at the underlying forces that support robust M&A activity:

    There is a lot of dry powder among buyers, specifically financial buyers.

    Sellers were demanding record high valuations – and getting what they wanted. Those valuations will be coming down because we are seeing fewer Buyers. This gives remaining Buyers more leverage.

    Financing costs continue to be low.

    The dynamic of aging owners and founders that want to exit.

    Continued digital transformation and tech disruption in every industry. Companies have to upgrade their tech at some point with regards to IT security, cloud computing, and more. Those lifecycles and disruptions will continue.

    These market conditions are out there, no matter what… despite COVID-19.

    That’s why I think that once we have falling metrics regarding the spread and impact of the coronavirus and a stable stock market for three weeks, we’ll be right back in business, and M&A activity resuscitated. Spring has come.

    Another factor to consider is that there are a lot of distressed businesses out there in industries like transportation, restaurants, hotels, retail, etc. There are a lot of capital raises out there now – funds set up to go after good – but currently distressed – acquisition targets.

    How R&W Insurance Fits In

    Under these current conditions, I see Representations and Warranty insurance as being a very favorable benefit because it factors into a few areas:

    If a Buyer has more leverage in a deal, they will impose broader Reps and Warranties and other conditions. If a R&W policy is covering the deal, the Seller doesn’t really need to worry about more Buyer-favorable terms because it’ll be insured anyways. (A caveat: Underwriters are still conducting normal due diligence in these cases. They are not lowering the bar or loosening eligibility standards.)

    Cash is still king. Getting R&W insurance means Sellers get more cash at closing and don’t have to worry about money being tied up in escrow for a year when they have to satisfy creditors or wish to invest elsewhere.

    In distressed acquisitions, M&A Buyers need R&W coverage because often they don’t buy whole companies, just the assets. And the Seller may not have a choice. Having R&W is kind of like having protection for those assets if the Buyer has done diligence, but they are later compromised unexpectedly.

    Without R&W coverage, the Buyer has no recourse to go after the Seller because they already took the funds to pay creditors. R&W insurance is the backup. Whatever dollar amount it cost for the policy… it’s more than worth it in those cases.

    The longer a deal sits and doesn’t get closed, the greater the chance it will fall through completely. R&W insurance will accelerate negotiations all the way to closing.

    Next Steps

    It remains to be seen for sure, how this pandemic will impact the economy as a whole, and M&A activity in particular. But I feel confident that we’re shifting to a Buyer-friendly market and smart Buyers will take advantage of this opportunity.

    In that case, it’s more important than ever to get Representations and Warranty insurance to cover deals for the protection of both Buyer and Seller.

    If you’d like to discuss coverage, please contact me, Patrick Stroth, at

  • Codie Sanchez | M&A In The Cannabis Industry
    POSTED 4.21.20 M&A Masters Podcast

    We have a very exciting show for you this week! In this episode of M&A Masters, we’re joined by Codie Sanchez, the managing director of Entourage Effect Capital Partners and one of the most sought out speakers in the cannabis business.

    Entourage Effect is a unique private equity firm as it was the first to focus exclusively on the cannabis industry. Since 2014, Entourage Effect has invested over 100 million dollars in over 40 companies!

    We’ll chat with Codie about how she got into the cannabis industry, what sets Entourage Effect apart from other private equity firms, as well as…

    • The entourage effect
    • What potential investors should ask about cannabis
    • The way cannabis is viewed as an investment
    • What makes cannabis different than other agricultural products in terms of due diligence and the M&A process
    • Entourage Effect’s ideal target market
    • 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 Codie Sanchez, managing Director of Entourage Effect Capital Partners, a very unique private equity firm which was the first to focus exclusively on the cannabis industry.

    Since 2014, EEC formerly known as Cresco Capital Partners, has invested over 100 million dollars in over 40 companies. Codie is one of the most sought out speakers on the business of cannabis so I’m thrilled to have her with us today. Codie, welcome and thanks for joining us today.

    Codie Sanchez: Wow, thank you for having me, Patrick. Lovely, since I’m working from home this week, like everybody else, this is a perfect opportunity.

    Patrick: Gotta love technology here. Now before we get into EEC and Canada’s overall type of industry, how did you get to this point in your career? Because it’s got to be a great story.

    How Codie Got to This Point In Her Career

    Codie: Yeah, well, I don’t think very many people wake up as a young teen and decide that they want to go be in drug financing, so I’ll tell you that it wasn’t my high school counselor that I talked to about this. I really started out my career as something completely different from finance. I was actually a journalist. I worked on border issues along the US-Mexico border, particularly narco-trafficking and human violence and atrocities along the US Mexican border.

    And so I did that for a few years. And then as one does, realized that it’s really not enough to shed light on people’s stories and to raise awareness. I wanted to make some real change. And it seemed to me like the way to make actual change was to go to where power flows from. Which, at the time, I started to realize was largely monetary. He who had the biggest checkbook made the biggest changes in society.

    And so with that, I sort of pivoted my journalistic focus and moved to finance and kind of worked my way up some of the larger companies in the financial realm. Everybody from Vanguard to Goldman Sachs to State Street until my last firm where I ran our emerging markets division, specifically in Latin America. And that’s when I really started getting interested in these nations and emerging markets. We did really well in Latin America. And so when I was exiting that business, I was looking for what was the next nascent and emerging asset class.

    First I was looking at it from a profitability standpoint and where did I actually think we could make more money on, from an investment standpoint, and then I was looking at it from a standpoint of where you can make an impact. And I sort of lucked into cannabis by feeding this first fund back when we were Cresco Capital Partners in 2014. And tracking in the cannabis industry from there. That’s when I saw how profitable this industry could be and the sort of what we call generational wealth opportunity.

    And then secondly, I’m actually married to a military man in the Special Forces. And so I saw the impact that it had on veterans with PTSD, which we’re very involved with. And so that got me really interested in it from a societal standpoint.

    And from a total return standpoint, it made me comfortable enough to take the leap and actually make moves in this industry that was capital-starved, had a huge latent demand within it, was over-regulated and also had a large amount of innovation coming from the proliferation of products from both cannabis and hemp.Patrick: When we think about context of time with this 2014, California probably had medical marijuana legal. Had they gotten direct recreational by then?

    Codie: No, they had not gotten to recreational yet. So, you know, at that time, this really looks like a big risk. Not to mention the fund was actually headquartered out of Texas, which certainly loved its veterans but was not interested and still hasn’t made major moves on the cannabis front.

    Patrick: That’s really prescient being able to, you know, be ahead of the curve there and see where it is because it’s easy falling back today and being able to predict expansion of this industry. But, you know, six years ago, that’s something, is really, really prescient there. But with the focus exclusively on cannabis, that’s not too much different from other private equity firms that may be focusing on a vertical as well. Other than the exotic vertical that you have, what is it that sets EEC apart from other private equity firms?

    What Makes Entourage Effect Different From Other Firms?

    Codie: Yeah, so first and foremost, it was certainly originally that we were in cannabis. And I was not dissimilar from many institutional investors at the time. I had only really worked with pensions, sovereign wealth funds, endowments. And at the time in 2014, I wasn’t public with my engagements in cannabis. I invested as a passive investor.

    And, you know, continued to do that through the GP up until 2018, when I actually went public and became more comfortable with the legal ramifications of that. But it certainly took me a while. Matt Hawkins, our founder, was the one who took a lot of the early risk, was putting his name out there. That, I think, has pretty much gone by the wayside. When we talk to investors there aren’t very many any longer that are worried about legal ramifications. So that has changed wholeheartedly, even in a couple of years since I’ve been full-time focused on this business.

    And so, you know, that’s one of the big differentiators is one, we know where all the bodies are buried because we’ve been in this game a long time and it is still a cottage industry where you can pretty much reach out and touch about any of the major C suite executives across the industry if you’ve been in it for a few years. But the biggest differentiator, in my opinion, is that we really have been preparing for this moment. Did we expect a pandemic?

    Absolutely not. I wish that we were that forward-looking. But what we didn’t expect was a major valuation reset in the cannabis market. We thought the market was simply too expensive back in 2018 and 2019. And so we started structuring our terms more like a distressed investor with a lot of financial oversight with the ability to take over companies if milestones aren’t achieved with larger check sizes coming out and that has just accelerated for us as we continue to launch new funds that are focused exclusively on distressed opportunities.

    I haven’t seen in this industry, very many true distressed and turnaround experts. And thankfully, we have a few on our team. Tiffany Lifs and Joe Blizeddie are the two that came on to really head up this segment of it that are from some of the bigger distressed shops in private equity. And so this ability for us to get into a, you know, generational wealth creation event industry like cannabis, it’s growing at a 25% tagger.

    Right now with Coronavirus hitting, the industry from a sales perspective is up anywhere from 100 to 160%. It’s a vise industry which is, has some, you know, historical insinuations of being recession-resistant. And then on top of that, it experienced about a 90% downtick in the valuation of public stuff which trickled to private companies. And so if we can take advantage of those distressed companies to do turnarounds, like we have in a few of our portfolio companies, I think that we’re positioned probably similar to how some of the big PE firms were positioned post-2008 that had capital to deploy.

    Patrick: Well, I think you’re bringing in both the resources and the commitment to this sector. I mean, 40 companies investment in the last few years, probably more than that now, but you’re definitely walking the walk. Talk about the element that you and I discussed earlier about the entourage effect. It’s more than just some series from Showtime. What is the entourage effect? And how does that encapsulate what you guys do?

    What Is the Entourage Effect?

    Codie: Well, yeah, thanks. I mean, I think it’s probably apparent that we’re all finance nerds and not exactly marketing geniuses because you would have laughed if you listened to any of our phone calls about changing our names once we had merged our two companies together. There’s another large cannabis company in the space that we’re friends with called Cresco Labs that we kept getting confused with.

    And so we changed her name to Entourage Effect and it turned out to be kind of perfect because what it means, this is a medicinal term in the cannabis realm, which means that the whole is greater than the sum of its parts. And so there’s this odd effect in cannabis within the plant where, if you know much about it, inside of the cannabis plant are things called cannabinoids, and these varying cannabinoids up which we haven’t even charted all of them, but there are upwards of 60. When they come together, you have an effect that people talk about in the cannabis plant that helps with let’s say, nausea, or it might help with inflammation or it might help with sleep or anxiety or all the things that people use cannabis for.

    And what we found Is cannabis, very interestingly, if you were to pull out one of the cannabinoids, like THC, that’s the psychoactive portion of it is a cannabinoid, CBD nonpsychoactive, now more mainstream, is another cannabinoid and you were to use both of those independently, the effect is not as strong or comprehensive as when you use the whole plant. And that is what’s called the entourage effect because it has all those 60 cannabinoids in there working together to do more for you than if you took any one of those cannabinoids individually.

    Patrick: And tell me how the entourage effect works for one of your portfolio companies.

    Codie: Right. So the way we thought about this from a venture capital and private equity perspective is the Japanese have a thing called karatsu. And this has been sort of brought over to the VC landscape which is kind of like a gang of people that all get together and they help one another as a grouping of companies create unfair advantages. And we think about our entourage as stuff like that as well. We’ve actually invested now in over 64 companies.

    And one of the benefits that companies have when we invest in them as let’s say we give a company $10 million. They certainly are happy, yes, perhaps about that. But one of the other advantages is those 64 companies that we’ve invested in, they are many of them now the largest names in cannabis. And since the ecosystem is one-modded, so you can’t have out you know, external forces coming in and playing in cannabis yet due to a federal illegality, those 64 companies play a huge part and are very interconnected in the ecosystem.

    And so for instance, we have a company called Sublime. They have a product called Fuzzies. It’s one of the top pre-rolls, or is the number one pre-roll which is a pre-rolled join in California. And this company when we invested in them, we put in the capital, we helped them from an operating standpoint, we did a bit of a turnaround with some efficiencies inside of the company.

    And then we went on to introduce them to our largest MSOs and vertically integrated company, which means companies that are dispensaries, so they’re the ones that are the retailers giving out the product to consumers. And we were able to take those Fuzzies into some of the biggest retailers in space, and we can immediately add millions of dollars to top-line revenue by engaging them within our portfolio company ecosystem. And those companies are willing to put those products on their shelves because we continue to fund them. And so it’s a beautiful unfair advantage that happens when you become an EEC company. And the same thing is true of ancillary services as well.

    Patrick: Yeah, you just get all that automatic infrastructure and channels open that otherwise weren’t accessible and it’s all established. I think it’s also impressive that, particularly on the turnaround side, you’re not dealing with exclusive cannabis people that have worked in cannabis that know turnaround or finance or some for cannabis. You’re funding financial experts, turnaround experts, legal experts outside that we’re doing things for larger institutions. And they’re taking that skill set and that knowledge base and bringing it to bear on this underserved market.

    Codie: I think that’s crucial. Yeah. I mean, if you were to look at some of our chief restructuring officers that we bring on board, or, you know, the CEO of a company like Sublime has, his background is in semiconductors and also a time at Amazon and rolling out the Kindle. So we’ve sort of moved to professionalize some of the management in the industry, paying homage to the institutional knowledge that comes from those that have been in it for a long time. But onboarding those who have worked at the largest, most efficient companies out there.

    Patrick: Explain how cannabis is viewed as an investment. What do you think of it you know, what should potential investors think about cannabis?

    Codie: Sure. Well, I mean, I think one of the best ways to think about it is if you’re looking to invest in a private equity fund or a venture capital fund, you first look at the math, right? So if you were to replace cannabis with the word widget and you were to say that you have an industry that is doing 25% tagger, or average growth each year, it’s been doing that for the past six years, that you have a 200% increase in consumer adoption year over year that in this pandemic, let’s say, it’s listed as now an essential service right up there with doctors and grocery stores and gas stations.

    And in tandem with that, you have an industry where capital is nowhere near a commodity. The industry is completely capital-starved and so investors get to drive the terms in a way they never should be able to with an industry that’s doing double-digit growth and it’s the number one employer, actually in the US, for the past two years from a new employees growth perspective. And so

    Patrick: Yeah, that’s not getting reported.

    Codie: Yeah. No, it’s not. It’s actually, if you Google it, you’ll see Codie’s not making it up. But you can see there’s a couple Forbes articles that show you about eight to 10,000 cannabis jobs are being created a month. And those actually are not reported at the federal level because of the illegality. So if I was just to tell you those numbers, and I didn’t tell you cannabis, you’d probably be thinking and that’s really interesting. What industry is this?

    And we should probably have some exposure. And if I was then to tell you, oh, by the way, the industry just had a massive reset, in which it is down 90% from its highs across the board, and is now trading at a very standard, let’s call it consumer staples, consumer discretionary level, but people would be stampeding into this industry. But the beautiful part for us and for other investors is that the big boys can’t invest yet due to vice clauses and the legal status.

    And so we can invest now but to be frank, you know, Patrick, I think I’ve got two or three more years left of this because if, you know, if governments are willing to list cannabis as an essential service right now during a pandemic, how much longer can they say that it should be federally illegal?

    Patrick: There’s something that makes cannabis different as you’re looking just from an m&a perspective. So we’ll talk about that. How, what makes cannabis different from other, you know, other ag products or other businesses in terms of either diligence or whatever you have to go through for an m&a process?

    Cannabis Is a Diverse Commodity

    Codie: Yeah, well, one, I think it’s important to say you’re not wrong by saying that some parts of cannabis are, you know, an ag type product or a commodity. You know, in fact, flower prices continue to decline and that’s all baked into our models. But the part that I think is important to look at is, you’re not really looking to make your margin on the individual flower, which is what we think of as the cannabis products, they call it flower. And that’s when it’s just in its raw form that you go and smoke with or cook with, or whatever the case may be.

    But that segment of it is a commodity and is agriculture and is declining from a margin standpoint, no doubt about it. The part that’s really interesting, though, is that as we move, you know, downstream towards the consumer and away from the actual growing of the plant, that’s where you pick up all your margin. And you pick it up and things like brands, and retailers and all of this is very similar to consumer staples or consumer discretionary or alcohol or tobacco. And so that’s one differentiator. And then you also have an industry in which it takes consumer goods, right?

    You can, it also touches beauty because the cannabinoids such as CBD are now proliferating around beauty products. The third aspect it touches is nutraceuticals. So people are using different types of cannabis plants in order to not do medicinal changes to their bodies but to do some changes from a nutraceutical standpoint like a vitamin.

    Then you have the medicinal component of it. GW Pharmaceuticals, billion-dollar-plus company which uses a derivative strain of THC to deal with one type of medical issue. So we have, you know, pharma and medicine. And then you add on top of it the fact that hemp and cannabis, the actual plant itself, the fibers and the stocks can be used for everything from construction departments to clothes and even Levi’s. Levi’s, for instance, is making you know, hemp jeans. And so it really goes across a, I wouldn’t say majority but quite a slew of sectors in order to have impact.

    Patrick: You are having members of this industry, still to this day, coming out of the shadows, and they need somebody to help, you know, walk them through that process I imagine.

    Codie: Oh, absolutely. I mean, the due diligence in this space is one of the most critical aspects of it. And you just have to assume, you have to assume that every rock needs to be overturned, that most of the books and records are not going to be complete in and of themselves. If they are complete, they’re probably not done exceptionally well. And, you know, many of the providers, for instance, couldn’t tell you by individual view, what is the margin that they make on each of their underlying products.

    And so there certainly is a level of sophistication that has to come into the industry. And inside of that chaos lies the opportunity for those that are diligent. You know, if you’re wanting to come in and make quick, fast money. cannabis is not a great place. But if you were wanting to come in and you have expertise in other similar industries and an ability to do financial modeling. I mean, we’re not talking about really complex Silicon Valley, you know, let’s say advanced data collection or AI. We’re talking about a better than industry with some of the highest margins out there.

    Patrick: Who’s your ideal target now for EEC. What are you guys looking for?

    What Entourage Effect is Targeting Now

    Codie: So from a company perspective, what we’re really doing right now is we are 100% focused on growth equity. And so no longer are we investing in companies that are seed stage, or really early stage because the capital is so needed, that we can de-risk our investments quite a bit.

    So when we go on the market right now, what I’m looking for as a company that’s doing 10 plus million dollars in revenue, that has some distressed aspects to them or a real need for capital where we think that we can come in and they’ve already found their product market fit, they just haven’t made it incredibly efficient. They perhaps need some professional management on top of it, and they need capital yesterday. And in those instances, we can really provide huge value and turn around a company to profitability with a quite impressive speed.

    Patrick: Well now return over to the business of cannabis. Just as and, you are as of this time right now, one of the foremost thought leaders in this space, that’s why we’re very, very excited to have you here today. What are you seeing? I’m glad also that we’re not having this conversation two months ago because I’m sure it’d be very different from today.

    But what do you see as a first-quarter 2020 in the beginning, hopefully, the middle innings of this Coronavirus pandemic. But what do you see for the cannabis industry, either segmentally, product wise, whatever, for the future in the next 12 to 24 months? You did mention something about valuations. But give us a, give us your picture.

    Codie: Yeah, I mean, I think every single industry that can be disrupted will be disrupted in the near future. And I think that cannabis is no different. And so what I would expect is more pain. You know, this industry and every other industry is at an unprecedented place today and that is that the economy has officially really stalled. And even though cannabis sales are up, eventually as jobs continue to be furloughed or people are fired, nobody’s going to be spending. And so in my two cents, we have a really unique opportunity right now to take advantage of the fact that there are going to be distressed companies left and right that cannot continue operations by themselves.

    That means we are going to come in and we’ve been building a war chest specifically to do this, to take over companies that are in this position and make sure that they can weather the storm and build platform companies that are big enough to while everybody else is buckling down, they can start to sprint. And so what do I expect? I expect not much different than what most economists do, which is that we are going to have a very severe sort of V that’s going to happen in the economy.

    And that next quarters GDP numbers are going to be probably some of the worst numbers ever. And the only difference I think that I see is I don’t think the government will continue this for months and if I’m right about that, then we will see more of a V-shaped recovery and these companies will do incredibly well on the upside. And so that’s kind of what we’re preparing for. We’re putting capital to work and markets like this with companies that are at bottom-level valuation and making sure that they have enough capital to buy for the next 12 months and to really sprint as we get out of this unprecedented period.

    Patrick: What can you tell us about products? Anything in the research development area on products?

    Codie: Yeah, I mean, there’s a couple different things. One, there’s, this is a little bit specific to cannabis, but there’s a company called Cellibre that we invested in. They’re a biosynthesis company, I definitely think they’re worth a look. Biosynthesis, essentially is, you know, for you guys, if anybody else does, say fish oil products, or krill oil products, and you think you’re getting fish oil on this little tablet.

    What you’re actually getting is a synthesized version of fish oil that is created using a strain of algae. And Cellibre, which is a portfolio company of ours, is doing something very similar with varying types of plant strains to create different cannabinoids from THC to CBD to CBG to BGA. And if you can imagine that it costs you one-tenth, let’s say, to synthesize in a lab, the same amount of THC or CBD as it does for you to grow it.

    You can see the opportunity herein. We think that Cellibre actually is multiple farther along than one 10th the cost with a level of consistency in the product that’s pharmaceutical grade, which means if they do what they say that they’re going to do, companies like this biosynthesis company could be some of the biggest wins we’ve had in the portfolio thus far. So that’s on the science biotech side. The other side, you know, everyday users can think about are the, you know, edibles. The different way that we consume cannabis is fascinating. You know my 93-year-old grandmother has arthritis.

    She uses creams from some of our portfolio companies at Harbor Side and Urban Leaf in California to help with her arthritis. You know, we have many of the moms that are investors of us or partners of investors, of EEC who used edibles from a company called Thunderstorm. They have these edibles called Kanna that are microdose very, very low levels of cannabis that help people sleep and with anxiety. So these edibles are going to be the future of cannabis, in my opinion. It won’t be smoking flower, they will be there but we won’t really consume cannabis in either drinks or edibles in the long term for the mainstream of people.

    Patrick: That’s a lot to think about. That is just amazing. And really what I wanted to hear and to share with our audience today is just coming into this topic in this subject, speaking with you opens up to all these other areas we didn’t even contemplate. So it’s very, very exciting. Codie, how can our listeners find you?

    Codie: So I think the easiest is probably if you want to hear more investing and market news that would be LinkedIn. I’m just Codie Sanchez, CODIE Sanchez, SANCHEZ. If you want to follow along to some of our portfolio companies, I’m probably more active on Instagram with that, which is the. Just my name. And then if you want to learn more about the fund family in our firm, it’s

    Patrick: Codie, thank you very much for just an action-packed 28 minutes and really appreciate it. I look forward to speaking with you again soon.

    Codie: The pleasure was mine. Thank you, Patrick. Hang in there with all this craziness.

    Patrick: You do the same.

  • The Future of Cross-Border Acquisitions
    POSTED 4.14.20 M&A

    Since last year, trade tension between the U.S. and China, as well as other countries, has been at a high-level. After the signing of the so-called Phase 1 trade deal with China earlier this year, that feeling has slackened somewhat, although the full, final deal is still being negotiated.

    As part of this deal, China has agreed to buy more American agricultural goods, as well as oil and gas, pharmaceuticals, and other manufactured goods. Yet U.S. companies are still looking for alternate supply chains and manufacturing hubs. For example, Apple has been seriously looking at moving at least some operations to South Korea.

    This is not the only impact.

    Many companies are signaling that ongoing global trade disputes like this one – and the uncertainty they bring – will continue to influence their M&A strategy going forward. (The impact of the coronavirus pandemic remains to be seen.)

    In a survey conducted by Deloitte and highlighted in their The State of the Deal: M&A Trends 2020 report, 40% of respondents (which include Strategic Buyers, as well as PE firms) said trade disputes would not change their M&A strategy. But it’s important to note that 30% of those surveyed said they would focus more on domestic deals instead of going overseas for acquisitions.

    PE investors in particular are worried that tariffs will have a significant and harmful effect. 70% of those surveyed in the Deloitte report said that “tariff negotiations are having a negative impact on their portfolio companies’ cash flow.” The same percentage felt tariff troubles were harming portfolio companies’ operations, too. That’s compared to 55% and 58%, respectively, in 2018.

    This decline in M&A deals abroad is not new and not tied to the coronavirus impact on the economy. As I wrote in March 2019:

    “Cross-border activity decreased in 2018, hitting the lowest level in four years, continuing a trend that started in 2017. There were only 2,192 cross-border transactions worth $655.6 billion in 2018, compared to 2,983 in 2015. There are a few factors at play here:

    • Global trade tension
    • Tariffs
    • Anti-Trump rhetoric
    • A push for anti-globalization by the U.S. government, as well as other countries, i.e. protectionism
    • Brexit, which has caused European companies to be cautious to spend on acquisitions
    • Potential recession in Germany and France (based on economic indicators)

    All of these factors are still at play.

    As we reported earlier this year, M&A activity is expected to hold strong in 2020. But U.S. companies and PE firms will be looking at domestic acquisitions more than cross-border deals. This was true before the coronavirus and now is even more so as the pandemic spreads across the globe. You can’t ignore the impact from interruptions to manufacturing, trade, and economic activity from interruptions like this.

    This negative impact also creates even more uncertainty surrounding emerging markets, where U.S. companies are increasingly hesitant to invest.

    The other problem is that already emerging markets were already more risky investments than they had been in the past, with companies earning less and less returns.

    There is a caveat here.

    Look for increased M&A activity where U.S. companies invest in European Union acquisitions, excluding Germany and France. It will be Italy and Spain instead, because they have smaller companies, i.e. small targets. European companies are being adversely affected by Brexit and that will make them ideal value opportunities for U.S. acquirers.

    With smaller deals happening domestically and internationally, insurers have responded by offering Representations and Warranty insurance for those under $15M to $20M in transaction value.

    For more information on this specialized type of insurance with a host benefits for Buyers and Sellers, you can contact me, Patrick Stroth, at

  • Tash Meys and Viv Conway | Instagram vs. Facebook. Which One Wins?
    POSTED 4.7.20 M&A Masters Podcast

    In today’s episode, we sit down with Tash Meys and Viv Conway, who provide consulting and execution services dedicated to fast-tracking a company’s Instagram growth and engagement.

    “I think if you’re not using social media, it can be overwhelming with which platform to choose,” says Tash, when asked about what Instagram is and how it’s different from other mediums.

    We’ll talk with Tash and Viv about how to learn about Instagram, why Instagram is an important business tool, and…

    • The true difference between Facebook and Instagram
    • How to create trust and engagement with your brand on Instagram
    • Why Instagram is great for targeting individuals in the financial sector– such as private equity, brokers, investors, and business owners
    • Why you need an ideal client profile
    • The impact of good content, as well as…
    • The importance of monthly analytics

    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 Natasha Meys and Vivian Conway, better known as Tash and Viv, founders of Ace the Gram. From their home base in New Zealand, that’s right The country in New Zealand, Tash and Viv provide consulting and execution services dedicated to fast-tracking a company’s Instagram growth and engagement.

    Now, what excites me about this entire subject is this challenge that all business owners have, not just emerges and acquisitions, but attorneys, bankers, private equity. The challenge is how can you separate yourself, your firm and your message above all the others and cut through the clutter to distinguish yourself to your ideal clients. And so we’re always interested in finding new tools, or new processes or new platforms.

    And this is one that, you know, I didn’t think about, but contrary to conventional wisdom, Instagram isn’t just for millennials. Business owners right now are racing to find ways to better connect their customers, prospects, as well as colleagues and influencers through this most powerful new social media platform. So Tash, Viv, thanks for joining me today and welcome to the podcast.

    Viv Conway: Thanks for having us. Patrick. Very happy to be here.

    Tash Meys: Yeah, thank you so much for having us. We’re excited to chat about all things Instagram marketing today.

    Patrick: It’s got to be eye-opening, to say the least. Before we get into Instagram, and, you know, Ace the Gram and other Grams that might be in the discussion today, why don’t you tell us about yourselves. Also do identify you know, which one is talking every now and then so we can get a feel for that. But tell us how did you get to this point in your career?

    Tash: Yes, sure. So for reference, it’s Tash currently talking.

    Viv: And this is my voice. I’m Viv.

    Viv and Tash Taking Instagram By Storm

    Tash: So we started our business Ace the Gram about four years ago. We met when we were studying at Otago University, which is in New Zealand. We’re actually studying Food Science at the time. But Viv began a sportswear label, a sportswear brand. And she started using Instagram to market that business. And she was finding that she was getting a lot of website traffic and a lot of orders from Instagram from people finding her brand on Instagram. And simultaneously, I was starting a creative account on Instagram where I could showcase my photography and my healthy food and recipes.

    And so gradually, that became what some people call an influencer account and I was doing collaborations with various brands. And Viv was getting more sophisticated with her Instagram marketing techniques for business. And then we kind of went down the line a little. We were consulting a lot with each other. And we started taking on clients and helping them do what we had done for our pages for their business. And then eventually, we combined and then four years later, it’s kind of been a crazy journey. But yeah, we’ve learned a lot.

    Patrick: And Viv, you want to throw in anything?

    Viv: Yeah, no, I normally let Tash give the backstory there. And I suppose Yeah, just does make us unique coming from that brand and influencer point of view. I think that’s what a lot of our clients enjoy about the way that we work with the general understanding of how it works from both sides in terms of collaborations. And I think as well, one of the favorite things about what we do is we’ve worked with such a range of industries.

    So from, you know, real estate agents, to consultants, to product business owners, to events companies, every Instagram strategy is so different. And we tailor an Instagram strategy exactly for the company because that intention is really different. So we really like, you know, the creative way that you have to think of different strategies for each specific industry or company.

    Patrick: A lot of us aren’t real social media savvy right now. We’ve just either by choice or intimidation or whatever just haven’t gotten into using social media as, you know, the younger folks have. Do me a favor for the audience, describe what Instagram is, how it’s different from some of the other social media platforms. And then also, if you could talk about what are influencers and some of the other jargon that’s out there, relative, that would help us as we learn more about Instagram?

    Viv: Yeah, great question. I think when, you know, if you’re not using a lot of social media, it can be really overwhelming with knowing which platform to kind of choose. And it really depends on where is your audience? Where do they spend the most time? You might find that your audience spends a lot of time on Twitter or Facebook. But Instagram has just hit more than a billion monthly active users.

    So which is a massive number and it just means that your audience is on the platform. So it’s about in our position, how can we get in front of our audience because we know that we’re, that they’re there, and they’re using the platform. We’re seeing some different platforms come out at the moment with the gen z really leading the charge around the Tik Tok sort of era at the moment, but a lot of people are still, you know, advertising on Facebook with pay to play because people are still there and so on.

    Tash: Yeah, so I think the differences between the main platforms, and so Facebook actually owns Instagram, they bought them quite a few years ago now. And Facebook’s more for information and, you know, to your friends with all your friends and family. You might like a few business pages, but Facebook is different now because to create any impact as a business on Facebook is pay to play.

    So you won’t be shown to that audience and who likes your business page on Facebook without paying. And you’re gonna get shown into I think 0.01% of those organic reach at the moment, whereas Instagram is a more visual platform. So it’s more about the visual content that you’re putting out. And you are on a level playing field with a normal user. So if you have a business account, you’re shown an algorithm to just as many people as a personal account would be.

    And so we’re seeing that because you’re not getting penalized for that and because Instagram has such a high engagement rate, which means various people using the platform tend to action more than other platforms. So for example, all you can do on Instagram is scroll down a fate of images and like or comment as you go or watch stories.

    And that means that the engagement on the platform is really high because they’re laser-focused on this one piece of content at one at a time, which can be super powerful for brands. And a picture speaks 1000 words so when a brand has a grid of images that, you know, display, they came messages in visual form, and then they’ve got some captions and some other assets to back that up, then that can be amazing for, you know, a business’s messages and to show those messages to their target audience.

    Patrick: Well, the goal for business owners, and I’m coming from the platform of LinkedIn, which is the more business CD’s resume display out there and it’s amazing how many people are on LinkedIn that don’t even have a picture, which is a tremendous, you know, hurdle for a lot of people to deal with. But, you know, the goal for business owners right now is to get out there and they want to develop trust, and then also create sustainable relationships with both clients and I guess centers of influence is what we used to call our influencers. How can that be accomplished in Instagram? How does that work?

    Building Trust and Sustainable Relationships on Instagram

    Viv: Yeah, that’s a great question as well. We was having a chat with. I’m not sure if you’re aware of Sabrina Phillips. She’s a woman’s business coach. And part of what she talks about a lot, and she talked about it on our podcast a little bit was that, you know, a website can only say so much. And it can be often static. But the thing about social media and the thing about Instagram in particular, is that you can give people insight into more than just your services are offering.

    So you can take them a little bit behind the scenes, you can really build trust and through authenticity and relatability, build a connection with someone at like a one to many ratio, not just a one to one. And with that being said, it also allows, you know, it also becomes a channel that you can communicate with people back and forth as well instantly. So it’s a massive tool that can be used in this space as well.

    Tash: Yeah, so Sabrina has a multi-multi-million dollar consulting business company, and she credits a lot of that to her Instagram and her social media personal branding presence. So she not only talks about, you know, say she’s running a big business mastermind in Bali or Morocco, then she’ll take her audience in a more intimate form through that experience so that then they want that experience too so they’ll buy it. So they’ll see that displayed on stories and various posts, she’ll talk to the camera, she’ll show that whole business journey, which you can’t really do as well on any other platform.

    So Instagram, that’s Instagram’s superpower, as you can show the whole holistic of, holistic picture of your business more than you can on any other platform, which really resonates with people. Because I think in 2020, and for brands to be successful, they have to take more like people and for people to be successful, they have to act more like brands. And it’s that intersection which we’re seeing. So we’re seeing those, you know, those key business leaders often have a really strong personal brand, or they’ve bought a strong brand and personality into the business. And Instagram can showcase that incredibly.

    Patrick: Okay. Well, you mentioned Sabrina. Let’s talk about business applications because a lot of our audience are going to be in the financial sector, between the private equity business owners themselves, investors, bankers, particularly investment bankers, and m&a attorneys and other corporate attorneys. Give us some examples of how a business owner or a professional in this space that you’ve worked with has engaged you and what you’ve done for them.

    Tash: So I think, for example, if you’re a lawyer or an accountant, so we’ve worked with an accountant who was like, okay, cool, we’ve got this big accounting company, corporate and they want to get their name out there more and attract that target audience using Instagram. So a lot of that came about, okay, how can they provide the best value to the audience so that they’ll choose them above their competitors and they’ll have multiple touchpoints with that company? And one of those ways was education.

    So it was thinking, Okay, what are these little tidbits that people can find out about the accounting world, that’ll just give them quick fixes that we can make visual for Instagram? So then we made like branded tiles, which were just little text, colorful in your face sort of visually appealing tiles that we could post on their account with little fix and little helpful tips for the target audience. So that was one content pillar.

    And then another content pillar would be, you know more about the people that they work with and showcase some of the brands that they work with and the story behind them. And then the third content pillar was more it’s kind of if your audience has heard of Gary Vee, it’s that jab jab jab right hook mentality on social.

    So it’s value value value, and then you offer your service or what you can offer someone that they can buy from you. And then that would be the fourth content pillar or the third content pillar. So we break down an Instagram strategy into what that person’s intention is and then who the client is. And then the best value that we can give that client and then what that looks like in the form of content and captions. And then we can either run it for them and do all of that, or we can consult with them on the more strategy level.

    Viv: And you’re actually an advantage when you are in an industry, which can be confusing for the end-user. So you know, if you are the expert, and you’re either the attorney or say you are the accountant, there’s a lot of information in your field that other people or your clients find really confusing. So for example, that accounting firm I saw being put up, you know, a story the other day saying, Hey, did you know minimum wage is going up on the first of April? You know, and it’s just little tips like that, that are actually really helpful and relevant to the audience. And they just been seen as providing constant value, which is awesome.

    Tash: Yeah. And I would say that as well for investors who want to create more value for the companies that they’re investing in is you look at someone like Mark Cuban and he talks, he’s got a strong personal brand. And if he uses a platform like Instagram, if he then starts to showcase some of the brands that he has invested in, then it’s suddenly giving them more traction and them more audience eyes because he’s then providing value to them and then, therefore, making them more valuable to help himself. So it can really benefit in that way as well.

    Patrick: So you can be an investment banker or an investor in a company, you could be that company’s Kardashian as the Ambassador going out and really pushing up the profile of a company.

    Tash: 100% it’s like it becomes a self-fulfilling prophecy. It’s like how Gary Vee prides himself on being, you know, investing in Facebook, or Snapchat or whatever it is, and then watching them blow up. And now he’s so influential that when he, you know, has invested in Tech Talk and then says, I’ve invested in Tech Talk, so, therefore, it’s going to be so big and successful and all these companies who say him as an opinion later in social media, therefore, jump on Tech Talk. It is the self-fulfilling prophecy for him. And that’s what he’s created purely from his social media presence.

    Viv: I love the Kardashian of the company analogy. That’s great. We’ll use that.

    Patrick: Very good. It’s all yours. I steal from a lot of other people and other things. So that’s quite alright. Would you define what’s your ideal client profile for Instagram?

    Viv and Tash’s Ideal Client Profile

    Viv: Yeah, awesome. Okay, so the best, when we really gel like we were really in our zone of excellence is when we are working with often marketing teams, we’re often working with public companies and larger corporates. And we’re working in with a marketing team on working out, okay, how can we front for your brand messages?

    How can we get across to your audience? What we want to share because often a lot of larger companies are actually doing really positive initiatives in the community. So it’s about not only sharing what the in terms of key message is but actually, you know, spreading the good work that they do as well. And it’s, we’ve seen some really good results in that area as well.

    Tash: Yeah, I think it becomes, you know, there’s obviously the ma and pa businesses that have their business and want to showcase its key messages and that’s really important for their direct sales. Whereas when it comes to a bigger corporate, it’s actually about all these things that’s happening behind the scenes of the businesses, you know, the things that they’re sponsoring the clients, they’ve taken on the initiative that they’re doing the core messaging, and it’s about streamlining all of that information into, you know, what do we actually want to share?

    And what do we want to get out to our audience and prospective people? And how can we do that in a really value-giving impactful way? And I think that’s what we specialize in for that type of client is streamlining what is actually going to resonate with people on social and then curating a fade around that.

    Patrick: Okay, so essentially, it’s going to be not just a publicly traded companies, it can be all sized companies, preferably somebody with either chief marketing officer or they have some resources toward marketing already, just not this particular channel. And organizations or founders or investors, they don’t need to create content or create their identity from scratch. They have a message. They can fine-tune it, but they know what they want to say. They’ve got it. It’s just I don’t know how to get this message onto this platform.

    Tash: Yeah, differently. And I think what we’ve realized is so many of these big companies, they have this cool message, which is why they started. But this seems to get sort of diluted and lost across all the different things that they’re a part of. Whereas what Instagram does is it brings it back to that core message and their core reason that they exist and then it streamlines the messages that reflect that into the world to then resonate with those people as to why they started the business.

    And so that’s why, yeah, we like to work with people who already know the brand and know their identity, but they’re like, okay, you know, marketing managers are often so swamped with all the things that they have to do. And founders don’t have time to suddenly learn about this social media platform that they should be on. And that’s where we can take the reins for them.

    Patrick: And then I just think with the requirements, you have to post certain things. What do you post? When do you post? If there are responses coming in how do you deal with them? I mean, it’s just somebody that organizes that kind of platform is would be most helpful for somebody who’s done it already. So you kind of can set up the process or the schedules, the timetables, for the activities and so forth.

    So I think that’s really good. What does, if you’re bringing on this ideal client, okay, what is an engagement look like? What’s the time frame? If they’ve got a message, they haven’t done any videos or anything yet, which, you know, they could pretty much do that fairly quickly, but what’s it like timeframe-wise, onboarding, what does that look like? Because I can see a lot of people very interested in this to get a feel. So what’s it like, engaging with you guys?

    What Ace The Gram Can Do for Your Business

    Viv: I like that you bring up content. Because often, you know, we could start, you know, we could have a chat with someone and break down a strategy session in an hour or so and get started on an Instagram tomorrow. But the reality is it comes back to content. So the, you know, the basis of any Instagram account comes back to you in value. So we need to understand what kind of content they’ve got available, what kind of, you know, photos, videos, whatever it is, what different key dates are coming up, what needs to be covered in the stories and how. And also where we’re sort of hidden.

    So it’s about will we be creating content? Have they got content already? Like you said, it can be created. It’s about bringing it back. And then with the captions, understanding that brand’s tone of voice so really diving deep into those brand guidelines and figuring out how we’re going to best push it out there and going a little bit of, you know, getting approval in terms of drafts. And then, but the turnaround time always comes back to strategy sessions as well. So that would happen the first time. And then every month, we continue to sit down and, you know, figure out what’s working, what can be improved on and go from there.

    Tash: Yeah, so I think timing-wise, it would be about three and directions. So it’d be initially just, you know, testing the waters, seeing if it’s gonna work. We only take on clients that we actually see that Instagram could create a powerful impact for because we want to do best for the client. And so the first interaction and then second interaction, as you’re on board, it’s all happening, we’re strategizing, we’re getting the content color and getting everything sorted.

    And then in between the second interaction, the third interaction is when that that marketing manager or founder is getting together all of the content assets or they’re taking that content and we can instruct them how to do that. And then the third interaction is basically cool, we’re up and running. It’s all happening. And this is what we’ve learned. This is what we’re tweaking. Do you have any feedback? And then it’s all go.

    Patrick:  The question I have as a prospective client would look at this is okay, right, I’ve got the content, we’ll have our strategy session. How long from the strategy session until we’re actually on Instagram, number one. So that could be three to four weeks if we, if everything else was kind of in place, you know, tell me if I’m right or wrong there. In addition to that then, when do you get the feedback? Okay, we’ve posted on Instagram, how long does it take to get feedback?

    Tash: So we give it, we do monthly analytics reporting every month. So and that’s also to keep us really fresh with those key dates coming up and what we want to push for that company in that month. So if we did our strategy call and you had all the content ready to go, then we would start your Instagram account that week. And then would be posting, say, five times a week. And then you would get your first report the month after that strategy session. And then from there, you would get a report every month and we would tweak things every month.

    Patrick: So, I’m sorry, so if you say you’re posting five times a week, so Monday through Friday, there would be an Instagram post.

    Tash: Yeah, yes.

    Patrick: Okay. And then, does that go on the whole month or is it just one week of that, and then a week off, and then another week? What’s the pattern?

    Tash: It’s, yeah, five times a week, four weeks in a month every month. Yep.

    Patrick: Wow. Okay. All right, man, that’s a lot of messaging. Well, give me your, that’s not oversaturating a message either. I can just see people would post on LinkedIn, you know, every day and that starts to get a little monotonous. But this is nice and fresh because I guess it’s instant as the messages go through. But the, what’s the timetable for a client response or market response out there? I know you’re doing the analytics. But can somebody expect that maybe they’ll get pinged or liked or somebody will reach out to them within a certain amount of time?

    There’s No Silver Bullet Growth Hack 

    Tash: Yeah, that would definitely straight off the bat because we’ll do it hashtag strategy to get them in front of the right people, etc. so they’ll start to get like straightaway. But from the inquiry standpoint, then it’s often about gaining that traction and building that trust over time. Because as we know, social media platforms, there’s no silver bullet growth hack to make you incredible overnight. So it is that gradual build of trust in touchpoints and getting that traction with people who might be your clients.

    So then we would say, then would start to get probably messages in inquiries after maybe two months, and then we would hope that that would increase more and more and then we would look at what we’ve done the previous month and have a look at what was generating the most feedback. So the most engagement and inquiries and then we would double down on that.

    Patrick: Well, your honesty on the no instant gratification is helpful. I guess what happens is because those posts are going out each day, you’re gonna just have a greater sample size and you’re going to find out a lot faster if a particular content piece or a thought piece that went out, did it resonate or not. So I think that’s helpful.

    They also like, I really think you should push the analytics because I think that’s a very, very helpful thing for those of us that have marketing messaging, but we don’t have the capability for the analytics. So I think that’s a tremendous value add. Anything else you want to tell us about Instagram, how you came up with the name, stuff like that?

    Tash: How did we come up with the name? That’s a great question.

    Viv: It was a reference to cards.

    Tash: But do you want to know something funny about Ace The Gram, is so Ace The Gram is and when we were thinking about this way we’re thinking, you know, the ace card.

    Viv: King queen ace.

    Tash: King queen ace. When you do something ace you do a good job and then obviously Ace The Gram because Instagram. But a couple of times people have been a bit suspicious of our business because of the word gram. And so once we got all these company stickers sent to New Zealand to seem to us with our logo on it. And then they went missing and we’re really confused as to why. And then a couple of months later, a cop called me and they said, Hey,

    Viv: Because this is New Zealand and so like, the Cop knew Tash who was involved. This is New Zealand.

    Tash: Yeah, the cops. Did you ever get stickers made for your business? And we’re like, yes. Oh, if you found them, we’ve never found them. They never turned up. And he said, Well, we’ve actually just done a drug bust and we’ve found your stickers on one of the boxes of drugs. And we were like, oh my gosh.

    Patrick: Man, I know that’s colorful.

    Viv: Yes, yes, definitely a different story. Definitely a different story. It was so funny.

    Tash: Yeah, but safe to say we have nothing to do with drugs. But um, but yeah it was a bit of a

    Patrick: Not that there’s anything wrong with that because there are certain things that are now legal that in the past, were in the gray area we should say. And so what, you know, you’ve got your labels and you’ve got your stickers and everything. And I can also advise people I wouldn’t worry about the time difference between New Zealand and California anywhere thanks to technology. That’s a bridge this easily crossed. As a matter of fact, it’s probably easier speaking with you on a strategy session than driving from Silicon Valley into San Francisco. So that isn’t an impediment of any type. Ladies, how can our listeners find you?

    Viv: Great question. We are available at and on Instagram at Ace The Gram Podcast.

    Tash: Yeah, and if you’d like to email us it’s just

    Patrick: Okay. So it’s just a simple Okay. And then your podcast can be found on Apple, all those other podcast places as well?

    Viv: It’s all the places

    Tash: Yep. Just go to Ace The Gram. Have a listen.

    Patrick: Very good. Really appreciate it. It was a lot of fun learning about this and I wouldn’t be surprised if a certain m&a insurance firm is going to be participating on Instagram in the not too distant future. So, ladies, thank you very much and I encourage everybody to have a look.

    Tash: Thanks so much for having us, Patrick.

    Viv: Thanks Patrick.

  • Jordan Selleck | Why Valuable Content Matters
    POSTED 3.24.20 M&A Masters Podcast

    In today’s episode, we sit down with Jordan Selleck– the founder of 51 Labs. 51 Labs provides digital marketing services to the lower-middle market and were founded based on a string of failures that blossomed into success. Our guest, and 51 Labs, focuses on generating quality and engaging video content for their clients through using original ideas and avoiding “templated” content.

    We’ll chat about why LinkedIn doesn’t work for 51 Labs’ target market, the biggest mistakes people make when marketing on LinkedIn, and how to be front of mind to the advisor community…

    As well as:

    • Being the go-to marketing firm for the lower-middle market
    • LinkedIn engagement strategies
    • Using Vlogs in your marketing strategy, and
    • Sourcing deals from LinkedIn

    Listen now…

    Mentioned in this episode:



    Patrick Stroth: Hello there, I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here, that’s a clean exit for owners, founders, and their investors. I’m really looking forward to today’s conversation because it covers a topic that is near and dear to my heart, which is marketing slash business development. I’m joined by Jordan Selleck, founder of 51 Labs. 51 Labs provides digital marketing to the lower-middle market. And I’ll let Jordan tell you more about that. But first of all, Jordan, welcome to the show and thanks for joining me today. 

    Jordan Selleck: Thanks a lot. 

    Patrick: To give our listeners some context why don’t you tell us how you got into 51 Labs? What led you to this point in your career?

    How Jordan Got to Where He is Today

    Jordan: A string of failures. So it’s been this crazy, crazy journey. I got to college into 2007 and went to Merrill Lynch, Private Wealth Management. Nobody in their right mind was going to give someone 50k who was fresh out of puberty, like in 2007 2008. And so I actually met a person at a Christmas party in 2007. She taught English in Italy, and I thought that was much better than doing Merrill Lynch, Private Wealth Management at 22 years old. So I actually headed to Shanghai. And I taught English in Shanghai for 18 months. 

    Met a guy at a bar who did investment banking, and then made that kind of seamless transition from teaching English in Shanghai to banking in New York. I did six years, two months, eight days of investment banking. And it was, yeah, it was, I forgot the hours. It was actually an awesome experience and it really taught me how to market myself and how to do development. You know, we were in the New York office, we will get hired by a, you know, a Japanese private equity firm to sell a business for them. Part of what we would be doing is contacting global buyers. 

    And in the New York office, you know, we would be helping to contact the US sponsors, the US Corp dev teams, in addition to being hired on US all sides. So did that for over six years. And then my former boss gave me the swift kick in the tail, which I actually needed. He basically said, like, I know you are interested in doing your own businesses. I know you’ve probably been doing it for a couple years, like, here’s three months severance. 

    Best of luck, and I’ll support your first business. And it was actually the swift kick that I needed. He paid for two of my early events. He’s one of my customers now, one of my clients now at 51 Labs. And so this kind of brings us to February 2016. And I’m kind of wandering in the desert trying to figure out what the heck am I going to do with my life and my career. And then in late 2016, I started a business called DebtMaven. So basically think about a platform that connects private equity firms with lenders. 

    Have 400 lenders in the network. And the whole idea is that, I mean how do you basically be the eHarmony of lower-middle market debt financing? So raised $100,000, built a team, we sourced 750 million dollars of deal flow. And actually half of that came from LinkedIn for free. So with DebtMaven, ran it for a couple years then just decided that I don’t think I was as passionate as I needed to be about the technology platform. 

    Didn’t raise enough money, failed with vision and just a whole bunch of, you know, first-time founder mistakes. But, you know, this was at the end of 2018 when I decided to really shut down the technology platform, but kept the brand open. And I’ll come back in a couple seconds why that’s important for keeping the brand open. But at the beginning of 2019, my wife and I were talking, and actually wasn’t really talking. It was her telling me you have one week to find $15,000. 

    So I first asked her do I need to do it a legal way. She confirmed that I did. And then at the beginning of 2019, I just had to really think like, what am I best at? And what I was best at is sourcing deals through LinkedIn. And that goes back to how 50% of the 750 million dollars and around 55 deals that we source, half of that came from LinkedIn for free. And so at the beginning of 2019, I was really just freelancing because the people from my network, you know, I’ve been in the financial for now, 10 years, they just saw what I did on LinkedIn. 

    They were kind of curious. And they basically said, you know, here’s five or 10,000. Can you just do whatever you did for us? You know, one thing led to the next and, you know, actually some of our earlier clients, our earliest clients who really got us off the ground were firms like, SPS, Compufit, Middle Ground Capital, Nipson, my former investment bank at DDA Partners and Live Oak Bank. And so one of the things that I was really curious about is like, is this going to work for, you know, outside of me? 

    And at the, on the second half of last year in 2019, that’s when our clients started to say the first post you did for me, got me four new deals. Another client said the first post you did got me five new deals. In fact, you know, I’m down here in LA right now and we’ve been on a week of pitching new business. And in every single meeting, the managing partners are mentioning how they see our videos, they see our posts on LinkedIn, even though they don’t like or comment on the post, they definitely view that. 

    And so, you know, I’ll kind of get into some of the tactics here in a couple minutes, but to kind of round out the story with 51 Labs, I really started because I, out of necessity, you know, I don’t have a marketing background. I come from investment banking and doing a FinTech platform. And I just kind of felt my way, stumbled my way into this. And so now we have a team here in the US, we have a team overseas, a couple videographers. And what 51 Labs is best at are kind of two swimlanes. 

    Number one, LinkedIn and number two, video. So for example, on LinkedIn, how do we get you 10,000 views a week for free and then on video, how do we make sure you have a quality brand video that doesn’t just suck and it’s this corporate with getting suits and ties and pretend like we’re something that we’re not. You know, our vibe, our tone is kind of the anti-corporate. And I think that kind of leads to an interesting topic that we can explore in terms of the state of the market with today’s m&a community versus the last vintage and kind of the earlier decades. 

    But yeah, we’re focused on LinkedIn and video. And that’s kind of the life story. I think one other thing to note is a couple years ago, I started a nonprofit called Elite Meet. Co-founded it with a former navy seal. And, you know, that’s a passion of mine is helping transitioning veterans. This nonprofit Elite Meet helps transitioning special operations, veterans as well as fighter pilots and intelligence agencies. Veterans for communities to get jobs. We found 200 people jobs, have a million dollars of sponsorship and have 800 members, done 55 events. And people can check out the organization at a Elite Meet, just kind of googling that.

    Patrick: How about that. And I would encourage our audience, I mean, I’m a visual person, we’re talking about digital marketing, we’re talking about visuals, I would strongly recommend anybody to go into LinkedIn and look up the company 51 Labs, and you’re going to see probably about a half dozen of the videos that, the digital marketing videos that you’ve done for a variety of private equity funds, the lower middle market ones, and I got to tell you, they are absolutely professional. 

    They are not templated where each video looks like the other one. So it’s not, you know, insert name here and have the same couple shots. Sweeping cinematography, great audio, which you can kill a video by having lousy audio. And it’s absolutely professional. And you know, people need to kind of put a face to the names they see on XYZ Capital. And let’s talk about real quick the market out there for the lower-middle market. I mean, the need is for lower-middle market private equity funds to stand out from the crowd. How many are out there and tell us the value that they get from doing this kind of thing? 

    Jordan: Yeah, actually, if we could rewind just a little bit on the company page. So this is actually a very interesting takeaway for everyone to remember. I don’t have a website right now. We’re launching it next month. Our company LinkedIn page is actually not that good. And this is really, really important. 

    There is a misconception in the market that when you’re active on LinkedIn, it needs to be company down, but that is the opposite of what works in our market and the opposite of what works on LinkedIn. So what does work is if you go to my LinkedIn page, my personal LinkedIn page, just type in Jordan Selleck on LinkedIn, and you go to my post, the post in a given week for me are getting, you know, five to 15,000 views for free. 

    If you do those same posts on your company page, you might get a 10th of that if you’re lucky. And that’s because the algorithm wants you to pay for that. So we can come back to kind of some of the top mistakes on LinkedIn. In fact, here are three very, very easy ones. So, you know, I was actually looking through your posts, and like one of the quick fixes for your posts, Patrick, are not doing external links. So that’s kind of mistake number one. 

    And Mistake number two that people make is sharing. On LinkedIn, sharing is not caring. So for example, if you close a $50 million deal, do not post to your company page and then share it to your network. It won’t work. I’ve seen it for three years, personally and with our clients. Number three, and I think the biggest mistake, is people produce boring content. If you just get your PR Newswire link from the hundred $200 million deal that you did, you copy and paste it and you press post, it sucks. 

    Like, just be honest with yourself. It’s bad content. And so we’re in this new era of private equity, private credit, the m&a community where people don’t do business with brands. They do business with other people. And this is particular to the lower-middle market. An example of that, let’s say a well-known lawyer from one firm jumps to another and they have a great tech practice. A lot of clients aren’t going to stay with that same law firm. They’re going to follow, you know, Jane Smith, who’s going over to the new firm, because they like Jane. 

    They’ve been working with her for 10 years, they feared all the ECGs, she posts online and it’s her brand. And that’s a really interesting takeaway for our market is don’t focus on the company, focus on your personal brands, because it is what the market longs for. They want to know who are you, not the brand in the lower-middle market. And secondly, it just doesn’t work on LinkedIn to do company posts unless you’re going to throw 10s of thousands of dollars behind it. That’s more like core middle-market and Large Cap. 

    Patrick: Well, let’s talk about your ideal client in terms of the need is to set yourself apart from the rest of the competitors, the other players in the market. And let’s give the audience an idea how large is the lower-middle market for private equity, number one. And then number two, how does this help them separate themselves?

    Size of the Lower-Middle Market for Private Equity and Standing Apart From the Competition

    Jordan: Yeah, so, you know, you’re in private equity and private credit. You’re talking to thousands of firms, right? You can have anywhere between, depend on how you slice and dice it, funded or independent sponsor, which is now a very large community. You’re talking two to 5000 firms, depending on how you slice it. 

    The fundamental argument to the firms that we’re speaking with, is that, you know, I’ll come in there to do a vlog, you know, 20-minute video interview. And they’ll usually start off saying, the reason why we are different is that we have an operating bitch. I’m like, cool. I have never heard that before. Okay, no, no, the reason why we’re different is that we focus on entrepreneurs and founder on businesses. Like cool. I’ve never heard that before. And so they say no no always focus on the lower-middle market, like, you know, sometimes we’ll go a little below that because we’re really really focused on that side of the market. 

    And I say, cool. I’ve never heard that before. And so one of the things that, you know, the state of the market today is that equity capital and credit is commoditized. It’s just a reality. I think people know that, but they don’t really know what to do about that. For example, if you just zoom into industrial, lower-middle market private equity, we could probably rattle off 50 firms that are either solely focused on it, that’s one of their three target areas, or they’re generalists and they do a lot of industrial deals. 

    So if you’re in an auction process, if you’re in a, you know, a small process, like what’s really separating you? How are you different to the sellers? How are you front of mind with the advisor community? How are you doing something different to LPs? Because you’re one of 50 plus industrial-focused private equity firms. And one of the things that we’ve discovered is that the market wants to follow the journey. And they’re kind of two things. Number one, awareness. And number two, reputation. Do people know about you? And do people like you and trust you? 

    For example, with reputation, one of our clients sent us out to their portfolio company to shoot some video, and we’re talking to the seller who had the business for over 40 years. And I asked him on camera, why did you sell to this firm? And without flinching, he said, Well, you know what, you weren’t the highest price, but I really, I did a lot of research. I saw your videos and I saw kind of what you have online and it just made me feel that you really understood manufacturing. So that to us, number one I verified who that was. We were recording now that great testimonial let’s get this one.

    Patrick: Oh, that’s a one in a million Yes. 

    Jordan: But when if you have 10 private equity firms that are all in industrials, and let’s say all their information is the same, like, who to do business with? You’re going to do business with the person you consistently see in a positive way. And price is not the only variable. So the, it’s been really interesting actually because, you know, honestly, I did not know the aspects such as LPs wanted to see this. I didn’t know that our clients would show this at their AGM. I didn’t know that, here’s actually another really cool case study. 

    One of our clients did a post about a manager at one of their portfolio companies. It got something like 25,000 plus views over a couple of posts. That manager saw the post. And then she did a before and after post in the manufacturing facility about an area that they cleaned up and they improve and that they’re applying Kaizen principles that post got like 275 likes on LinkedIn and 50,000 views. 

    So what is this really saying? A manager at a private equity-owned portfolio company feels more deeply connected to the private equity owners. Now, the private equity owners get to show a completely different image to their LPs, to the sellers who say like, do they actually care about their businesses, the shop manager and the others at the portfolio company now think like, our owners really care about us. So it’s a win all around. 

    Patrick: I can imagine that as people watch these videos, they’re picturing themselves being interviewed or being highlighted in this way. I can only imagine. There is a private equity firm out of Chicago called Parker Gale and they have a podcast and one of most popular podcasts actually. And they would interview people throughout m&a and technology and so forth. Well, their most popular podcasts, were conversations with interns that were working for them, then going off to business school and then being recruited back. 

    And you can get the feel and now they’re doing the same thing where they’re doing interviews of their portfolio companies, the principles of the portfolio companies and talking about it. So I think it has a great cumulative effect along the way. You had brought this up earlier, but why don’t we just briefly go over how have things changed in digital marketing, particularly for private equity in the lower-middle market in the last 10 years? 

    Four Factors of a Comprehensive Digital Marketing Strategy

    Jordan: So I have a thesis called BD Version 3.0 and BD Version 1.0 was, you know, multiple vintages ago when your partners and principles are responsible for doing their own deal sourcing through their fast beat networks. Version 2.0 happened, you know, five or 10 years ago, really in the past five years, where BD became a distinct function and it became a whole career track. 

    And then version 3.0, which really happened I think in the past year, is when the BD and investment professionals generally are starting to realize that they can’t just do what everyone else does in terms of relying on the Rolodex of people that they’ve known with a few people go to the same conferences that everyone else is going to and do things in a very one to one way. 

    They have to do things in a one to many ways that complements the one to one. And that’s really where the digital marketing skillset comes in. And it could be a little bit nerve-wracking like, Okay, what the hell do I post? What do I even say in an email blast? Do people even care about what I’m doing? 

    Or is this spammy? I thought this was private equity. I thought this was private credit. But we’re not in that air. Like, those days are gone. You need to make a decision as a firm. Are you going to be private and you truly don’t need a website? Or are you going to be where we’re at today, in this new reality of BD version 3.0, which is using the digital marketing skillset with what you have been doing and building on top of that. So what does that kind of specifically mean? One are you doing, do you have a LinkedIn strategy? 

    And are you consistently executing as a small team or firm-wide, including the administrative assistants? So with LinkedIn marketing, do you have a video strategy? For example, we just did a study of private equity firms and 95% of sponsors do not have a single video. If you look back on LinkedIn, 77% of the 330 individuals that we study 77% have never done a single post on LinkedIn. 88% have either never done or they rarely post. 

    And that’s not even talking about the quality of the post. Because when people do post, it’s usually boring content. They just copy and paste an external link. So number one, sponsors, lenders, bankers, everyone else in this m&a community, you need to have a LinkedIn strategy that you’re consistently doing. Number two, you need to have some type of videos, whether it’s one brand video and 10 quick creatives that are easy to do, you need to have something because people will see it and they will see others who have it. 

    Number three, you need to have an email strategy. So this is more than just your one to one communication. You need to have quarterly, at least quarterly email blasts that go out to a targeted group that is pulled from your CRM. A lot of firms, I think they have, the vast majority of our market has come up to speed and not leveraging CRMs effectively. But it’s not integrated into the other stuff that they should be doing. So, you know, breaking it down and kind of rehashing this one LinkedIn strategy, two, video marketing, three having email marketing and four I just completely forgot. 

    Patrick: I think those three or three more than what most companies are doing right now, so I think you get it.

    Jordan: You could actually, here’s why this is important though. It’s important because if you’re a small fund, and if you’re an emerging manager, or if you’re just generally a smaller fund especially, you need to use these tools to leverage yourself because you can only go to so many conferences. You can only do so many calls and meetings in a day. 

    And here’s from this trip, there is one quote, that stuck out to me this entire trip to LA. and that’s what I went to ACG Orange County, and a managing shareholder of a law firm here said, I think I’ve talked to you, maybe two times, but I feel that I know you better than anybody else in this room because I follow your posts on LinkedIn. And that’s when it sunk in that this is what our market feels. They’ve been watching the story, even though they never like, comment, but they definitely view the content. 

    Patrick: I can second that. I can absolutely second that with our audience and both on our podcast for M&A Masters and our content pieces they go out where I will come across people and they, and you can’t tell whether or not they downloaded or they open things but they’ve seen it. and they’re Oh, you’re the firm. 

    Yeah, you do these every month or you do these every couple of weeks, okay. And so and you never really know until out of the blue, they come up and they show you a whole bunch of your content or they reply to your email blast to say I have a deal, I have a quick question for you. And they’re replying to your email blast, which is a lot of fun and very heartwarming and so forth. 

    Jordan: Well, yeah, I have another thought here which is if you are a BD professional, what percentage of your job is telling people about what you do? Like literally half of your job. Your job as a BD professional is sales and marketing. And, yes, there is the part of it where you are true like assessing deals, you’re working with your IC, you’re working with the rest of your team and thinking through deals, but half of your job is just getting your name out there and staying in front of people. So why would you not use tools that make your life easier and give you leverage and that are one too many to complement what you have been doing for five to 10 years? 

    Patrick: Absolutely. Well, why don’t you briefly tell us, because I’m sure there are now many, many of our listeners here who would, are interested or you caught their attention. Talk about the engagement process. How do you onboard the client? What’s that look like? And, you know, give us the profile of your ideal client. 

    51 Labs’ Ideal Client Profile

    Jordan: Yeah, our clients are exclusively within the private equity, private credit, general lending, m&a community. It’s really like how can I be the marketing firm of this, of the lower-middle market plus, I think like the Oprah Winfrey of lower-middle market, like that’s what I’m trying to be. So a typical engagement will be, for example, like we’re going to like next week, we’re flying out to Chicago to do a shoot with one of our private equity clients. 

    On Wednesday, we’re going to be at their office, and we’re going to be doing interviews with their team, getting the brand video done. And then day two, we’re actually doing a portfolio company shoot at their newly acquired company in Chicago. Within five business days, we turn the brand video to them, which usually takes 10 to 15 days with others. And then with that brand video, it just gives us so much content that we can use to fill out their LinkedIn calendar for three months ahead. 

    And so depending on the client’s needs, what we’ll usually do is we will do the content strategy that you could use across email, LinkedIn, however you want. And then we will do the content planning on LinkedIn. We will do the content drafting, we will do the content execution, and then the actual tracking. And then all of that includes the video services, which is, you know, really complimentary to LinkedIn, because it’s getting really high engagement right now. So, you know, a typical project will be anywhere between one to three months, and then we kind of decide, you know, is this working? Do we need to readjust? 

    So for example, one of our industrial, private equity clients that are, you know, thank you for making us number one on LinkedIn. Now, we just acquired a couple more companies and we’d like for you to just focus on doing video for that. You gave us the tools that we need and we can execute on LinkedIn. Perfect. Another client Live Oak Bank, they have a 25 person marketing team. All they wanted was our LinkedIn playbook and for us to do a workshop for them. 

    And actually on their first deal, they got five, on their first post, they got five new inbound. So it’s, you know, a typical engagement is one to three months, it really depends on where they’re at. It can be anywhere between, you know, five and $25,000 a month. It all depends on the scope of the services. But, you know, there are a couple of basic packages. And it’s really tailored to what they need. I wish I could give, you know, here are the three standard options but it’s just there’s so many different variables that go in and what they’re where they’re at. 

    Patrick: I think it’s, as something as specialized this is tailored specifically to whatever the particular needs are for each respective client. And that highlights their strengths or needs ideally. And nobody wants a one size fits all off the shelf canned product so that’s great niche. 

    Jordan: Yeah, it has been simultaneously good but also a pain because you’re figuring out how do I approach this? 

    Patrick: Understood. Well, and if you’re making a 10x to 25x return, price becomes no object. 

    Jordan: That’s, I didn’t actually understand that until some of our clients said, Yeah, why would we not? This costs us, you know, 10k to do a brand video and it brings in one deal, guess how much we’re going to make off that? 

    Patrick: How can our audience, because I’m sure they’re chomping at the bit right now, how can they get ahold of you? 

    Jordan: Easiest way is go to LinkedIn and type in Jordan Selleck, SELLECK, or you can hit me up on email at That’s 5149. Labs. com. Don’t go to our website. We don’t have one. We don’t really have a need of one. No, we really haven’t. So hit us up on LinkedIn, or an email and we respond quickly.

    Patrick: Great. Jordan. Thank you very much. And on top of all this, I have a feeling you and I are going to be working together in the very near future. So thank you again for being a guest today.

    Jordan: Looking forward to it. Thank you


  • Bud Moore | Why Community Matters in M&A
    POSTED 3.10.20 M&A Masters Podcast

    In today’s episode, we sit down with Bud Moore, who is the founding partner of Valesco Industries– a lower-middle market private equity firm in Dallas, Texas. We love everything Valesco is doing, especially because there is a large need for their expertise, guidance, and capital in the lower-middle market.

    “Our ideas are muscle, and so we put that behind companies to help them grow and become a bigger and better version of what they were,” says Bud on the topic of how Valesco came to be. 

    We’ll chat about Valesco’s primary markets, value-added distributions, and…

    • Moral and ethical commitments
    • Banishing preconceived notions
    • M&A trends
    • Rep & Warranty

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Bud Moore, founding partner of Valesco Industries, which is a lower-middle market private equity firm based in Dallas, Texas. Bud, thanks for joining the podcast today.

    Bud Moore: Hi. Patrick. I appreciate you including me.

    Patrick: The reason why we reached out to you is that there is a growing ocean of opportunities in the lower-middle market. There are more and more opportunities. We are seeing not only in here in Silicon Valley with technology, but throughout the country for a variety of reasons. 

    And as I speak with experts in m&a I’m struck by this growing chasm between the middle market and upper market companies and the amount of services and resources available to them. And then you get to the lower-middle market and there is just this crying need for not only capital, but expertise, guidance, and so forth. And it’s, there’s just this wanting audience out there that’s really looking for help. 

    And I think firms like Valesco Industries are ideal to come in and provide just the types of help that they need to move on. I didn’t want to steal your thunder, but if you translate or define the term Valesco, that means to grow strong, which is a very, very helpful name. And that’s where a lot of the lower-middle market companies are trying to be. They’re trying to do that before they ultimately go to an exit. So I appreciate you making yourself available. Before we get into all things. Valesco, let’s talk about you. How did you get to this point in your career?

    How Bud Got To Where He is Today

    Bud: So mine was a bit of a circuitous route. I started out actually in investment banking on the sell-side. And did that for a number of years in a market downturn, decided I would switch to the buy-side and did that for about four or five years until I found myself in a place that I was so full service for my clients that I felt like I was a private equity guy and not getting paid for it. So I thought I’d fix that problem and actually get into the private equity side of the industry. 

    And did that in 1994 as in what today is referred to as an independent sponsor. So our ideas are muscle and putting that behind companies to help them grow and become a bigger version and a better version of what they were when we made our investment. So did independent sponsor work really until the great recession of late 2007, early 2008 timeframe. 

    And during that period of time, we had exited almost all of our investments, I’d like to say because we were brilliant and saw a recession coming, but really more so people found value in what we had. And in that particular market, we’re paying quite well for what we build. So we sold what we had, and then a private moment, sat back and thought about what we hadn’t done that we should do next and thought raising a private equity fund might be a great idea. And so we set off to do that and raised our first formal fund in 2011. 

    I guess the lesson that I learned from that is, if you’d like a lesson in humility, you should ask everyone you know for money in the midst of the worst recession they’ve ever seen. But fortunately for us, it was successful. And that’s led into a successive fund and we’ve had great success and putting that to work and what for us is our lower-middle market companies and we kind of define that as 25 to $75 million in revenue.

    Patrick: Okay, and then the industries that you target being based in Dallas, people are going to assume it’s either, and now, this is a Californianian speaking, but if you’re based in Dallas it’s either you’re doing something in the energy or the cattle industry. Tell us what are your specialty areas.

    Bud: It’s a great assumption. We’re actually kind of embarrassed being here in Texas. We’ve never actually done an oil and gas transaction. And we really regretted that several years ago and went out and spent quite a bit of time doing a white paper on whether or not we should invest in the energy industry. And what we discovered was we just weren’t smart enough to do that. That’s a very complicated industry. So for better or worse for us, we’ve really focused on manufacturing, value-added distribution and business services. 

    And that’s been our focal point for a long time. And if you take a look at industries, there are some industries where we’ve had better luck in and others. The food industry has been good for us, heavy equipment, things of that nature. But I would tell you, we’re looking really more for a unique profile than a particular industry. And in doing that, we find really great niche market companies that we’ve had good succession growing and building. 

    Patrick: When you say unique profile either operationally, a need they’re fitting, location, what do you mean by that? 

    Bud: So and we kind of boil this down to three basic financial characteristics that define a broader list of operational characteristics. For us, we take a look at the EBITDA margin, you know, our principles say it needs to be 10% or greater. I would tell you most of our investments are far greater than 10%. We look at working capital efficiency being defined as inventory and accounts receivable as a ratio to sales being 30% or less. And we look at six asset utilization compared to sales for turns or greater. What that tells us is we’ve got a company that is in a niche market in its industry, it’s able to produce, it doesn’t burn working capital. 

    It generates working capital and doesn’t have to invest every dollar of earnings into its next dollar of growth. Let’s just roughly speaking kind of the principles that we’ve operated under. And as we apply that against industries that we’ve looked at and invested in, you’ll find really a broad variety of things all the way from aerospace to heavy equipment to food manufacturing. We even currently own one of the largest producers of drug testing for professional and amateur sports in the world. 

    So it’s a wide variety of things that we’ve invested in, but what we like a lot and we think this is true across numerous industries, and even in an industry that people would consider to be unattractive, they’re always one or two players that have figured out how to do it extraordinarily well. And what we’re looking to do is invest in those companies, work with that team to be able to continue to professionalize and build that business and really grow it into something of true significance.

    Patrick: One of the things you mentioned earlier was value-added distribution is value-added. Explain that for me.

    Why Value-Added Distribution?

    Bud: Sure. Value-added distribution is we take a look at distribution. Commodity-oriented products really aren’t of much interest to us. We would define that as products that generally carry kind of a 20 or 25% gross margin, resulting in maybe a 5% 6% net margin at the end of the day. Unfortunately, if you want to grow in a distribution business like that, you’re investing this year’s earnings and next year’s growth. 

    And you really don’t really generate any free cash flow for your investors. You just invest in the business with, you know, with your end being when you decided to stop doing that. So for us, we look at businesses that are taking products and doing something tangible to them. 

    A great example, we invested in a business a few years ago that was producing high school promotional and high school fundraising items. So think of it as your local sports team for your high school but instead of buying cookie dough or pretzels or things that you probably really don’t want to support the team, you go to our online portal and you buy the team’s sweatshirt or t-shirt or ball cap and you support the team that way. We were mining substrates that are already manufactured, t-shirts, or anything that we were making. 

    But we would put on them the school’s insignia and then sell them out to their fan base. And to us, that was value-added distribution. And, you know, that’s the type of thing that we think really has, you know, great consumer desire in the marketplace. And we really like businesses like that, that have figured out a creative way to address a customer or consumer want or need.

    Patrick: As I was researching your organization and looking through your website, it’s unmistakable that you see this undercurrent, talking about not only the financial component of what you’re doing and adding value to your investments and so forth, but there’s a real moral and ethical commitment that seems to drive your operations. Can you talk about that, please?

    Ethical and Inclusive Operations

    Bud: Sure. We, when we look at the investing in lower-middle market businesses, we really can’t make the claim that our money is greener than anyone else’s money. There are a lot of investors that try to invest into that space. What we focus on is how do we do the right thing for the business, the right thing for the employees, the right thing for the community. It’s something that’s extremely important to us. 

    And the way we look at it is, you know, every day the companies that we’re invested in are providing hundreds of jobs for people in the community that allow them to have mortgages, allow them to have, you know, pay for their family’s expenses and overhead and really creates the future for them in their community. And so, that’s extremely important to us. So rather than just putting money into a business, we really like being able to come in and make a difference in the business to make it a bigger and better company. 

    So that people have a career and not just a job and, you know, you’ll see that throughout our companies in the way we’ve invested in teams and in areas. Not all of our companies are in a lower-income community. But many of the people that work for our businesses may go home tonight to a lower-income community. And so we’re respectful of that. And you’ll find that better than 60% of our employees are minorities and the businesses that we’ve invested in, you’ll find that we have promoted women and minorities into positions of leadership within the companies. 

    And so we really, we believe strongly in people that want to work hard and apply their abilities, that we should be giving them the opportunity to succeed. And that’s been a driving principle for us. In addition to that, we try and spend a lot of time working with the companies themselves, to help people with a vision of how they get better in terms of their business. And I think that’s something that not everyone in private equity, actively does. And we’ve prided ourselves on doing that for a long time.

    Patrick: I think as I got into working in mergers and acquisitions, you have a preconceived notion on how the players work and the relationships and so forth. And then when you get deeper into it, as you see, particularly if you’re a target company out there and you’ve got more than one option for prospective buyer or partner, financial partner. It’s not always the top-line number this out there that leads to a successful close or successful exit. 

    I always look at this as, you know, this isn’t company A buying company B. It’s people working together. Mergers and acquisitions as people. And one of the great value adds that I think private equity, your entire industry can deliver. Particularly for owners and founders is they can only grow so large on their own. And to take that next step, they need partners to get them there otherwise they may take a misstep or, you know, not get to where they want to get. 

    And, you know, the concept with private equity where I’m sure you guys do this, too is you know, making a partial investment or maybe rolling, they roll over some equity. It is amazing how an owner or founder may sell 60 70% of the equity in their firm to a private equity company. And then five years later, their remaining 30 or 40%, is worth significantly more than the original batch of equity they had sold over. 

    And I think that’s just that second bite of the apple is something I did not know about with private equity until I got into the business. And boy, that’s a real great thing, particularly for the people that are responsible for coming up with these companies and these services that in most cases didn’t exist until the owners and founders created them. And I think that’s a great thing you do. As you look you know, you’ve been involved with this for a while, are you seeing any trends in m&a that you can comment on?

    Recent M&A Trends

    Bud: I think the ones that everyone sees out there right now there’s just a lot of capital seeking return. And the public markets have been pretty good over the last year or two. But just in general, if you look over a more extended period, you know, those types of returns are not projected to continue. 

    And so people are looking for return. And as they look for returns, alternative investments, of which private equity is one, tend to drive a lot of interest. And I think it’s different in the lower-middle market. Looking at putting your money to work there is different than putting it to work and KKR or Blackstone or someone like that. This is money that’s going to work for which you’re going to have to put elbow grease behind it to really make it pay off in the right way. So as money comes into the marketplace, I think it has the hazard of increasing prices. It’s not great for us, it’s great for sellers. 

    But as it increases prices, you really gotta have a plan for what you’re going to do with the business because you can’t just put money in and step away and hope that that works out. So we think that the real trend that’s going on right now is, we can’t change pricing. So what we need to do is change how we look at the value proposition. And I think if you’re going to step up and pay a larger price for a company, in this market, you have to be convinced of how you’re going to grow that business going forward. 

    It won’t be for a flat company, it’ll be for a growth company. So I think right now, lots of capital in the marketplace, I think people looking for ways to grow that business and grow that enterprise are really the big things that we’re seeing going on. And then what I hope I’ll continue to see as more and more people focusing on the operations side of the business, to help make that plan for growth really come true. Because it’s all great on day one when you see the hockey stick projection of what we’re going to do over the next five years, but you’ve actually got to execute on that to be able to make it real. 

    Patrick: I think also that there are if you get a target at the right price, that capital tends to be a little more patient than other capital. And so I think it all, it goes in with that where you really do have to have not just this idea of an investment, but Okay, now how do we make it work five years down the road from now? And I think there’s a lot more focus on that delivery than just we have to get this target right now at whatever price.

    Bud: No, I think your statement is right, as far as, you know, look, how you look at the investment, how you want to optimize it. but the thing that we try and keep in mind, it’s really more than just the day of the investment and it’s more than financial economics. If you want the economics to turn out in your favor, you’ve really got to get the team behind you. The people that you’re investing in, they have a business and yes, we’re buying in some cases, patents and we’re certainly buying brick and mortar and we’re buying machinery and equipment but what we’re really investing in is people. 

    And we’ve got to work with those people to help them be better at what they’re doing. We’ve got to create a relationship that makes them want to grow and build their business. We have to give them an understanding of how they win in this process. And I think doing all those things together really makes for the right investment. In our experience, if you’re selling a business, this is the most one of the most precious assets in your life. It’s really, it’s more of your family, in some cases, than your family itself. 

    You see people more that you work with, you’re there five days a week, if not longer, you’re there for long hours. And when you’re ready to exit, you have a lot of personal connection to those people and when you sell, you want to make sure that you’re selling or taking on an investor that’s got the same passion for helping and working with those people and growing them that you had. And I think that’s part of what makes an exit meaningful for people that are really looking and do it the right way.

    Patrick: Bud, quick question. We didn’t cover this when we spoke earlier but just off the top my head, have you guys on any of your acquisitions or your transactions, have you guys use rep and warranty? I’m just curious if you have, what kind of experience you had with it.

    Why Rep and Warranty?

    Bud: You know, we’ve used rep and warranty on numerous of our transactions and really made that almost a universal standard practice probably three years ago. We’ve found it to be, it’s not covered that we have very often had any type of claims on. But I can tell you, it makes our closing process much easier. Dealing with the representations and warranties inside of a purchase and sale agreement is one of the scariest things that I think sellers deal with. 

    They don’t want to have their big payday and then turn around and write checks back to the company. They really don’t want to deal with big escrows that everyone’s going to argue about later, whether or not there should be a claim or not. And so what we found by using rep and warrant insurance, it’s really eliminated many of the discussions about what the reps and warranty should look like it comes down industry standard set of reps and warranties. 

    There’s a very minimal exposure on the sellers part. And from an insurance standpoint to the extent that you have a bad circumstance, that’s why you have the insurance protection there to be able to cover that eventuality. And we found that to be a really seller-friendly process. And so we’ve adopted that over the last few years as our standard.

    Patrick: I could not have said any better than that. So I won’t. Thanks very much for that. Bud, how can our audience reach you? How can they find you?

    Bud: Probably the easiest way is through our website That’s On there, we have all of our bios, our history, many of the videos on the management teams that we’ve worked with, as well as our contact information for easy access. 

    Patrick: And I would say it’s a story that is worth reading and worth following. Bud Moore, thank you very much for joining us today.

    Bud: Patrick, thanks. I appreciate you having me on.

  • The Rise of Smaller M&A Deals in 2020
    POSTED 3.3.20 M&A

    We’re not yet to the end of the first quarter, and we already have a solid idea of where M&A activity is headed in 2020.

    Deloitte put out a report, The State of the Deal: M&A Trends 2020, based on a survey of 1,000 corporate executives and PE firms that looks back at what happened in 2019 and their views and plans for 2020. And the outlook is good for M&A, although there will be some key changes to keep in mind.

    As noted in the report, M&A activity will continue to be very solid this year. Only 4% of those surveyed anticipate a decline in the number of deals. Sixty-three percent forecast an increase in transaction activity. That’s down from 79% last year.

    There will probably not be as big an increase compared to the last seven years, a boom time that has seen more than $10 trillion in domestic deals alone since 2013. But that’s to be expected as this level of growth in transactions is hard to sustain.

    As Russell Thomson, national managing partner of M&A services for Deloitte & Touche LLP put it in the report:

    “We’re fairly long into this M&A boom cycle, so it’s not surprising to see a drop in expectations for larger deals. What we’re seeing in the marketplace is more interest in deals in the sweet spot between $100 million and $500 million. Deals aren’t going away; companies are just being a little more careful about those larger deals.”

    So the boom is tapering off a bit, but it’s still a rising trend due to several factors, including…

    • Ample cash reserves in both corporations and PE firms.
    • The strong stock market that closed 2019 at record highs (which helps equity-funded transactions).
    • A belief that tariffs/trade wars aren’t too much of an issue.
    • A conviction that current interest rates will not have an impact on deals (and, in fact, 45% feel the interest rate environment will actually accelerate deals).

    But this is the biggest change we can expect in 2020:

    Fewer “Megadeals,” More Deals Under $500M

    The number of deals over $500M in transaction value will likely come down and be replaced by deals in the $100M – $500M range… and as low as $20M. This is for a variety of reasons.

    1. More corporate divestitures. Companies are looking to offload assets in this lower range. According to Deloitte, 75% of corporate execs expect to have divestitures this year, due to financing needs, change in strategy, and the need to offload technology that doesn’t fit a new business model.
    2. Returns for larger M&A deals have not been as valuable as expected. Firms just aren’t getting enough bang for their buck. According to the survey, 46% of respondents said that less than half of their transactions in the last two years gave them the ROI they were looking for. So look for them to reduce their risk and pursue smaller acquisitions that offer more impressive returns. Smaller targets, acquired at lower prices, are just a lot more efficient, cash-wise. To hedge and improve ROI, companies are looking for smaller targets. This isn’t at the expense of profitability. In fact, you can have a higher return on a $100M acquisition – 40% to 50% – than on a $1B deal.
    3. Strategic Buyers are also increasingly pursuing smaller deals because they have a greater need to acquire new technology as today’s tech is already obsolete. They need technology that is a better fit going forward to stay competitive. 
    4. Buyers can take advantage of more favorable terms when they go after smaller targets, especially those under $100M. 
    5. PE firms like smaller targets because they are increasingly looking for new acquisitions that they can “bolt on” to existing portfolio companies instead of hoping those portfolio companies grow organically.

    When they add on new acquisitions, the firms can expect to sell those portfolio companies at a much higher multiple than before. This is why they are getting better returns with smaller targets.

    What This Means Moving Forward

    Based on this Deloitte survey, it’s clear that M&A activity has slowed a bit but is still going strong, continuing a trend of an unprecedented level of deal-making that started back in 2013.

    Also, on the rise: the use of Representations and Warranty (R&W) insurance to transfer indemnity risk away from the Seller to a third party – the insurer. With this coverage now available to sub-$20M deals, look for this insurance to be a part of an increasing number of deals in 2020.

    Whether Buyer or Seller, R&W insurance coverage can offer many benefits including smoother negotiations, more cash at closing, and less risk. But it is important to have a broker with extensive experience with R&W insurance and how it can impact a M&A deal. If you’d like to discuss coverage for your next deal, please contact me, Patrick Stroth, at

  • Vania Schlogel | Why Your Ideal Client Profile Matters
    POSTED 2.25.20 M&A Masters Podcast

    In today’s episode, we’re joined by Vania Schlogel– the founder and CEO of Atwater Capital, who focuses exclusively on the media and entertainment sectors.

    In our chat, Vania shares with us the fine line between being able to have the formal, polished side of the business in conjunction with the creative and operational side.

    Vania also chats about the areas she specializes in, and…

    • Streaming services
    • The emergence of technology in the media and entertainment world
    • Her ideal client profile (and why it matters), and
    • Building relationships with managers and founders

    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. Very excited today, as I’m joined by Vania Schlogel, who is the founder and CEO of Atwater Capital. Atwater capital focuses exclusively on the media and entertainment sectors, two areas that are unique throughout business in America and it’s a topic that a lot of people want to go and lean forward in. And so Vania, thank you very much for joining me today.

    Vania Schlogel: Thank you, Patrick. Thanks for having me.

    Patrick: Before we get in talking about Atwater Capital and the media and entertainment industries, tell us about yourself. How did you get to this point in your career?

    How Vania Got to Where She is Today

    Vania: Well, I started life in a vastly different format. So I grew up in Idaho, in Boise and also Nampa. And really decided, you know, to apply to a school system where I didn’t have to make too many applications, which ended up being the UC system, because you could apply once and I think cover five colleges or so through the application.

    Patrick: It’s its own team now.

    Vania: is that right? Okay. So, this ended up taking me to UCLA, which quite frankly, probably also facilitated in moving into media and entertainment. And I decided, well to be completely frank, I knew I liked business. My father was always a small business owner. But I didn’t grow up with a lot and to be completely frank, googled in my junior year, what are lucrative careers upon graduation?

    I can’t remember exactly what the Google search was, but it really, and two things came back, engineering and finance and I mentioned this little anecdote to perhaps dispel the myth that one must grow up obsessed with M&A or knowing exactly that that’s what one wants to do in life. Because, for me, I sort of kind of fell into it, and that precipitated internship, and then full-time position at Goldman Sachs for a few years in the Los Angeles office, and then London. And then I spent six years at KKR, which is a large private equity firm, investing in media and entertainment.

    So that’s really where I cut my teeth, in terms of sector specialization. And from there, you know, it’s funny how networking is so important and a lot of the opportunities that are presented in life are really just sort of who you know, not necessarily what you know, because I got a call one day while I was at KKR, and it was from the folks at Roc Nation and that precipitated in me going to be Jay Z Chief Investment Officer at Roc Nation.

    And it was an interesting experience because I got to see firsthand how working in tandem with creative folks and creative communities could create a lot of equity value. And I also saw that this wasn’t a natural, it’s a relationship set that was happening between investors in Wall Street and a lot of creative communities. And so that’s why I founded Atwater Capital in 2017. We have offices in Los Angeles and Seoul, South Korea. We manage about 160 million dollars of assets under management. And as you mentioned, we focus on the media and entertainment sectors.

    Patrick: Well, I’d like to ask you a little bit about more is that that balance between the financial discipline and the investment, operational discipline and the creative side of a project or a venture. And the only parallel I have or analogy is the story I heard about the folks at Pixar. We’ve got little kids back at the time, but they would have their creative meeting where they’d sit down and talk about their next few movies that they wanted to do. And you’d have one about talking cars and I just would sit there as a, they want how much money for that kind of thing? And, you know, being able to evaluate what creative idea is actually gonna have value or not, and how do you keep them from going off the rails? Discuss how that works of what you’ve seen.

    Vania: I would say that for that balance between sort of the financial or commercial side of things with the creative and then the operational execution, the way to keep that fine balance in check, and quite frankly, moving to the best outcomes is a mutual respect and understanding amongst those different parties. What I, when I’ve seen it go badly, it’s typically because, you know, for example, the investors and the finance guys just give zero credence or respect to the creative aspect of things because it’s not the same language, quite frankly, or vice versa.

    And that’s when things go badly because things must be creative, but they also must be commercially rooted with the return on investment. And when there’s a fine balance between all of those different elements, it works out really well. And the way that we deal with it at Atwater Capital is we seek to be very respectful partners who respect the opinion and domain expertise of our partners.

    So we set up very deep partnerships with operators and creative folks and companies and essentially say to them, Look, we’re going to be supportive partners. We’re going to have a different kind of discussion with you than we think has been historically presented in your interactions with Wall Street. And that means that what you do does need to be commercially viable, but we’re not going to mess with your creatives. And typically, that works out really well.

    And the other thing that we do is you mentioned discipline, which is exactly the right word because at the end of the day, we have a strong fiduciary duty towards our LPs who give us capital. And so we make sure that we do or I should say, we contribute what we’re good at in terms of evaluating the financing of creative companies or projects. And that’s things like financial judgment, portfolio, curation and diversification, legal structuring, collateral perspective, things like that.

    And where we stay out of is the creative. We’re actually, this is going to perhaps disappoint lots of people, but we also have policies in place like none of us are allowed to attend red carpet premieres, for example, if we invest in a movie. We just need to make sure that as investors, we let the creatives and the operating folks do what they’re really good at. We stick to what we’re good at and make sure that our views are not somehow wrongly influenced by the things that we shouldn’t be focusing on as investors and financiers.

    Patrick: So you keep that arm’s length to avoid conflict.

    Vania: That’s right. Yep.

    Patrick: With entertainment in media is like software. There are many different elements of that. Are there particular areas of media and entertainment that you specialize in? Or is it pretty much everything in that channel?

    Vania: What we try and do is be investors who see where trends are going and get ahead of those trends. So the short answer is we’ll be quite generalist in the sector, but we will drill down into our view of sub-sectors and where things are going and try and place capital ahead of those trends.

    Patrick: Which leads me to this question because this was an opportunity we had and, you know, as with a lot of things in entertainment just kind of died on the cutting room floor. But give me your idea with the new streaming services that are out there as we go from bundle entertainment packages two is rapidly unbundling, but it looks like that unbundling is going to result in, a different type of re-bundling is people have to buy more things all a cart. What are you seeing out there in that field?

    The Evolution of Entertainment Delivery

    Vania: It’s interesting because I think specifically, you’re speaking to filmed entertainment. And if you look at what’s happened in the music industry, this process really unfolded in a much earlier fashion than it has been filmed entertainment. So we used to buy a bundled hard good in the form of, you know, vinyl or CD. Things, essentially that bundled good disaggregated and digitized into a digital download that was an owned digital goods. And now, things are re-bundled into a streaming which is access, not ownership subscription bundle.

    So I think we’re just finally seeing filmed entertainment come around to that. So it’s quite funny because initially, so many folks were excited, or at least I did a lot of equity. Research analysts were super excited about the golden age of streaming when it came to filmed entertainment because the bundle was breaking. And that’s right. The bundle was breaking on the traditional media side, but it’s absolutely re-bundling.

    And we’re in a period where it’s great for the consumer because competition creates innovation. It creates choice. And so right now we’re in a golden age for the consumer because we’ve got tons of different platforms, whether they are relatively, I’d say technology-centered players or tied to a traditional media player, who are all investing GADS as money to compete for our competition. Sorry to compete for our attention.

    And at the back end of this, we will see various players emerge. I think we are going to, what’s happening is probably not long-term sustainable in order to actually get a proper return on investment for all the capital that’s going into tier one content. We are going to see have to see some big winners emerge at the back end of this. And there will be a re-bundling and a massive wave of content.

    Patrick: So there’s going to be a consolidation and so forth. Can you talk to me, I know we didn’t cover this when you and I spoke, but tell me your impressions on the emergence of technology, within media and entertainment.

    Vania: Overall been, just as from a consumer standpoint, fantastic. Think about the experience, the consumer experience of let’s go back to music, paying $26 for a CD. By the way, inflation, if we adjusted for inflation would be much more expensive in today’s terms, but paying that much for a CD, potentially losing it or scratching it and even.

    You know, trying to play a playlist and verses now where I can walk into my home, voice command any song for $9.99 a month and get that song played over the speakers. From a consumer perspective, technology, or let’s say tech entrance to various sub-sectors within the space has done wonders for the overall consumer experience when it comes to consumption of content.

    Patrick: I just think also just the impact on the economy, the impact on business, not only in America but worldwide, is profound. And how we’re big Nativists here up in Silicon Valley, and we’re the hub of all things tech, if anybody were to venture down to Southern California, you’ve got a mini, I guess they call Silicon Beach. But technology has really transitioned down there very nicely and it’s everywhere.

    Vania: That’s right. And I’d be remiss to not talk about the flip side of it, though, which I think we always have to be aware of which is, there’s already rumblings where, is a consolidation amongst the tech powers that now distribute the content that we are consuming on a daily basis, is that consolidated power going to be good for the consumer in the long run. And so for a period there, I think you saw, for example, platforms like Netflix or Amazon Studios, quite frankly, creating content that was not seen and would not ever get greenlit by some of these major studios and players.

    And so there was really a creative Renaissance that came up from that. And I think one of the things that from a societal standpoint that we just have to keep an eye on, is that as we talked about, just now, on the back end, there will be a bundling, there will be an emergence I think of various large failed And who wins this war. And I think we just need to make sure that in that whole equation, that when it comes to what consumers, their experience and the diversity of their choice and whatnot, that there’s always going to be that natural tension between consolidation of power on one side, and what’s good for consumers on the other.

    Patrick: With Atwater Capital, give me a profile of your ideal client, because there’s the nostalgic idea of a producer or somebody running around trying to raise money for a project and so forth. But tell us what the profile of your ideal client.

    Atwater Capital’s Ideal Client Profile

    Vania: Sure, so I’ll contextualize client in our case as a company or project, for example, that we would invest in. And so the investments that we have made that have been successful, and I would say the common thread between those is a great management team, rather than for example, a very special strong CEO. We don’t like cult of personality. Quite frankly, we like to see great leaders. And great leaders have strong people and a very strong supporting cast around them.

    And so the best companies that we’ve ever invested in have strong management teams that, you know, go down into second, third layers and there’s still a strong core competency there. You have folks who can have healthy debates and discussions around strategy around operation and can be, you know, because as a shareholder, we don’t want to go in and run that company. That’s actually a disastrous outcome for a shareholder. The mantra is we invest in people, not assets. And so you want those folks running the company.

    And you really, as a shareholder want to be the supporting cast where you can just kind of optimize around the edges, whether it’s making introductions, kind of helping to think about strategy. And so management teams are very important to us and core to the thesis. The other thing about it is does this company solve an issue or meet a need?

    A very discernible need? And do they meet it in a particularly efficient or effective way? And I know this all sounds very basic, but quite frankly, investing is down to the fundamentals and basics most of the time. Yes, there’s a level of domain expertise that one must built up of one’s career, but it really comes down to the basics. And so I would say those are the common threads that we’ve experienced in our successful investments.

    Patrick: And you’re looking at investments all over the place.

    Vania: All over the place, yes. We have portfolio companies currently in the US and Europe. We’re looking at, we’re actively evaluating investments right now in Asia, in East Asia specifically. The only reason why right now I’d say we have not focused on certain geographies like South America or Africa is in my belief investing is a local activity and a very human-intensive activity.

    It’s one where you should have a local team who understands local trends who can build relationships with local founders and management teams. And so we have not grown to the size to focus on those geographies. So we focus sort of where we do have incumbent relationships and expertise.

    Patrick: That’s what I was told not too long ago was the reason why so many venture capitalists only investing in the bay area up here in Northern California. They only invested quite a few of them in just the Silicon Valley, the Bay Area companies and ventures, because they wanted to be within a couple hour car ride of their investment in case they had to make quick changes. And if you’re investing in something, you know, two or three time zones away, that gets a little problematic. So that’s not a surprise.

    Vania: Just in general, obviously complexity and communication grows the more timezones you have in between you and your portfolio company. But I, and that’s once you’ve already made the investment. So just from a portfolio monitoring and sort of operational involvement perspective, but I also think, so for Atwater Capital, 100% of our capital is invested in proprietary deal flow.

    And we really pride ourselves on that. And that is also another reason why I think investing locally is important and having local teams is important is the deal sourcing aspect of it. Do you have folks on the ground who are plugged in and who can build those human relationships with management teams and founders?

    Patrick: Vania, how can our audience find you?

    Vania: Probably your website is the best way. So we’re at and we have a submission tool there where they could write a message, give us their contact details. And we’re reachable that way.

    Patrick: Excellent. Well, Vania, thank you very much for joining us today and we look forward to speaking again.

    Vania: My pleasure. Thank you for having me.


  • How R&W Insurance Has Changed the M&A Landscape Part 2 
    POSTED 2.18.20 M&A

    In the last few years, there’s been a game-changer slowly but surely transforming the M&A world.

    The use of Representations and Warranty insurance is increasing across the board as Buyers and Sellers, PE firms, VC funds, and strategic buyers all recognize that this coverage makes negotiations less contentious and more cost-effective. Because the indemnity risk is transferred to a third-party, this insurance also gives a sense of security.

    R&W insurance is changing how deals are structured.

    We covered why – and some of the foundational details in the first part of this article, which you should read here first.

    Now, we’re to going to get into the weeds, so to speak. Taking a look at some of the specific ways deal terms are being rethought when R&W coverage is part of the deal.

    Materiality Scrape

    If there is a breach of a Representation or Warranty in a Purchase and Sale Agreement, Sellers seeking to limit their exposure, prefer wording in the agreement that requires breaches to be “material” in order for the Buyer to be able to claim the breach for indemnification purposes. Depending on the deal size, “material” generally being more than $100,000 to $250,000.

    Naturally, a Buyer will want to remove this qualifier by applying a Materiality Scrape (i.e. to literally scrape “material” as a determinant for breaches), giving them the ability to determine a breach and thus reduce their risk.

    If R&W insurance is in place, most Sellers will agree to Materiality Scrapes because the policy coverage will mirror the Materiality Scrapes in the agreement, eliminating risk on both sides of the table. According to SRS Acquiom, 2/3 of deals with R&W include even Double Materiality Scrapes (where Buyers determine both the breach and the calculation of resulting damages).

    Pro-Sandbagging Provisions

    Buyers like having pro-sandbagging language in Purchase and Sale Agreements.

    Say a Buyer is performing their diligence and they find a problem. They see that a Seller’s representation has been breached… but the Seller hasn’t recognized the issue.

    Without R&W coverage, what happens next is…

    The Buyer is under no obligation to tell the Seller what they found. They can go through the deal and then bring up the breach post-closing. That blindsides the Seller, who is left wondering why the Buyer didn’t inform them sooner to avoid having to pay damages. Making a claim against the Seller like this is referred to as “sandbagging.”

    An R&W policy will have a warranty statement – a pro-sandbagging provision – that says the Buyer certifies they have no knowledge of any breaches. If it turns out they do have knowledge and don’t inform the Seller before the deal closes, that breach will be excluded.

    As you can imagine, this is great motivation for the Buyer to be forthcoming if any issues show up in their due diligence efforts. They will tell the Seller as soon as possible because otherwise they won’t get the benefit of the insurance later.

    This also enables the parties to address “known” issues before closing rather than the having a future “surprise” sprung on an unsuspecting Seller.

    Disappearing Escrows

    Before R&W Insurance emerged, the prevailing belief of Buyers was that large escrow accounts provided both security and a more “honest” Seller. As R&W began replacing escrows, Buyers and their advisors argued that having cash on hand was safer than hoping an insurance company would pay claims.

    After a successful period where R&W policies have incurred and promptly paid claims, confidence in R&W has only increased, while escrow amounts have decreased. So much so, that according to SRS Acquiom, the average escrow amount has fallen from 10% of transaction value on uninsured deals to 1% of transaction value on insured deals.

    Catch-All Reps

    There are certain Buyer-friendly “catch-all” reps out there, officially known as 10b-5 representations, or full-disclosure representations. Among all the other specific representations in a Purchase and Sale Agreement, this catch-all states that the Seller doesn’t know of any potential breaches or other issues. Therefore, any future unexpected event could potentially trigger these reps, greatly exposing Sellers.

    These open-ended reps can’t be underwritten, so they are routinely excluded by R&W policies.

    In response to the insurers’ position, Buyers and Sellers have agreed to remove these 10b-5 reps entirely so the corresponding exclusion is eliminated. SRS Acquiom reports that some 90% of deals with R&W no longer contain 10b-5 reps as compared with 62% in uninsured deals.

    Non-Reliance Provisions

    In a recent report on M&A trends from SRS Acquiom, the company noted that they are seeing more non-reliance provisions, which are very Seller-favorable, in Purchase and Sale Agreements.

    With this provision, the Seller is telling the Buyer that the Buyer cannot rely on information provided by the Seller, like a tax report or financial statements. The Buyer must perform their own diligence and use those findings to make any determinations.

    This protects the Seller if the Buyer claims that they were provided inaccurate financial statements or similar diligence reports. This shifts risk in the direction of the Buyer. But if R&W insurance is in place, the Buyer is not worried because the coverage would cover and pay the claim for any breach.


    In the event of loss, there are deductibles due before a claim is paid. In the past, there was a tipping basket. For example, if there was a deductible of $500,000, the Buyer had to eat the first $250,000. However, the minute it goes over $500,000, the Seller is responsible for the entire deductible.

    With R&W coverage in place, the two sides are now agreeing to split the deductible 50/50, simplifying the deductible issue.

    On a side note, it’s amazing how many claims of breaches are reported at least one year post-closing. Most policies have a deductible dropdown. If after one year there have been no claims, the deductible goes from 1% of transaction value to ½%.

    Next Steps

    It’s clear that Representations and Warranty insurance is taking the M&A world by storm. I see it becoming standard in the next few years. You can get ahead of the curve by learning about this specialized type of insurance and how it could change the terms of your next M&A deal – whether Buyer or Seller. Just contact me, Patrick Stroth, at for all the details.

  • Bart Vossen | M&A in the Energy Industry
    POSTED 2.11.20 M&A Masters Podcast

    The energy industry is going strong so far in 2020… and the outlook for the future is good as the industry responds to sustainability initiatives and reacts to market pressures.

    Bart Vossen of Houston-based SGR Energy shares how upcoming regulations are impacting the industry, as well as why the company looks beyond U.S. borders for most of its customers.

    We also chat about mergers and acquisitions in the industry, talking about some prime targets SGR considers and how they conduct acquisitions, as well as where the company is headed in 10 years – they have some big goals, for sure.

    Tune in to find out…

    • The biggest obstacle to growth they’re working on this year
    • The product mix that sets them apart from the competition
    • The difference between upstream, midstream, and downstream
    • Energy trends in the Caribbean and Central America
    • And more

    Listen now…

     Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Bart Vossen of SGR Energy. Bart and I had the pleasure of meeting each other during an event in Houston last October. 

    And as what I had been thinking about with M&A is it’s literally everywhere. And one of the areas that us Californians don’t think about for where M&A is, is in the area of energy. And the Silicon Valley of energy is Houston. And that’s where Bart and I met. So, Bart, thank you very much for joining me. Welcome to the podcast.

    Bart Vossen: Thank you, Patrick. Thanks for the invitation.

    Patrick: Now before we get into you and all things SGR Energy, tell me what led you to this point in your career? 

    What Led Bart to the Business of Energy?

    Bart: Well, I was living up in Bloomington, Indiana. And I was working for a real estate school there and got offered a job down here in Houston to work with the US Department of Treasury and I sold all their ceased property in the Houston area. That contract ended. I went into pressure vessels and structural steel. And I saw an ad, I believe, on Indeed that said timid salespeople have skinny kids. My kids aren’t skinny, I applied for the job. Here I am. So yeah, I came and interviewed and met the guys that interviewed me and then I got to meet the CEO. And soon as I met him, I said I got to work for this guy. 

    Patrick: So tell us about SGR energy. what does it do? How is it in the energy space, and go through the specifics. Keep in mind, our audience probably does not know the difference between midstream and downstream. So if you could just share with us some of the lingo with the energy, that’d be great.

    Bart: Okay, so there’s three basic areas in oil and gas. There’s upstream, which is the exploration and drilling for oil, there’s midstream, which is the transportation and storage of oil, and then downstream is where they do all the processing and refineries and then they ship it out from there. And SGR, we blend fuel for power plants. So technically we are downstream. But actually, if you go past downstream a couple miles turn right, we’re going to be somewhere over to the side over there. So after everything goes to the refinery, what’s left is the six oil, the heavy oil, the residual fuel, they’re all known as the same thing. 

    We take that fuel, we mix it with some diesels and middle distillates, which are actually things that come out of the process higher up in the process. We mix it with some proprietary stuff that we know about and then we sell that the power plants in the Caribbean and Central and South America at the moment. And they burn that and they make electricity. Perfect example is if you go to Sandals or Couples, they have to get their electricity from someplace, Jamaica. 

    The power plants that do that, their ship goes in, drops off fuel, they burn it and they make electricity. Our fuel is probably the cleanest in our area. In addition to power generation, we can also make bunker fuel. We blend bunker fuel, which is also known as the gasoline of the oceans. And I’m sure that your people don’t know anything about the new IMO 2020 rule. The International Maritime Organization is part of the UN. 

    And they designated, I believe, about seven years ago that fuel on ships at sea will go from 3.5%, which it was up until December 31 to 0.5%. So on January 1st, ships had to decrease the sulfur in their fuel by over 85%. Our fuels, and therefore the sulfur will, you know, there’ll be less sulfur, which is a whole lot less polluting. And we can blend to that specification today also.

    Patrick: See, everybody’s thinking about all the plastics in the ocean. And here you are, you’re going to be single-handedly reducing the sulfur in the ocean.

    Sulfur Reduction and Advancements in Energy

    Bart: We’re trying, we’re trying. And a lot of people are going to use more diesel in their fuel. So people at the gas stations when they drive past they’re going to see diesel prices are going to be higher. We don’t use as much so our alternative blendstocks are cheaper and a lot of them are cleaner than the diesel on distillate. So our fuel is burns better and burns cleaner and it’s kind of most of what we use as a byproduct of something else. So we’re also recycling. 

    Patrick: So with this, is the fuel so going toward manufacturing plants, things like that? Because those be domestically used or domestic, US domestic is going just all pure nat gas.

    Bart: In power plants, most of the power plants are doing nat gas. There are some like paper mills, industrial burners such as that, that can use our fuel. We’re in negotiations with a few of those, with a few paper companies in the area in the country, but most of our fuel goes to, goes out of the US because natural gas came in in the 90s. And it’s, they say it burns better and burns cleaner and so everybody switched to that. 

    But you can’t run a pipeline of natural gas from Jamaica to the Dominican Republic. And there’s no pipelines in the Caribbean. So our fuel is made, shipped and then it goes and we’ll put it into a large storage container and as those people need to make electricity they either ship via truck or rail to their facility. They’ll burn it and make electricity. 

    Patrick: Is your market largely, okay is your market largely now Latin America region or the island regions?

    Bart: Currently, we got a lot of customers in the Caribbean. We also have Central America. We’re in the process of closing on a facility in Colombia that will allow us to, it’s a terminal in facility that allows us to store a little bit more and take that good crude that we can use out of Colombia. And we, so the clients in Central America. And once we start those contracts and get all that started and taken care of, we also have clients in Asia that are wanting our fuel. 

    Patrick: Well, that’ll be a big, that’ll be another very large market for you. 

    Bart: That’ll be another huge market. So we’re probably going to double our revenues this year. And once we start those deliveries, they’re going to go crazy. 

    Patrick: These firms right on the cusp of, you know, great than spectacular. Now, with this growth coming up I’m just wondering in there and because you and I were, met at an M&A function. Tell me about SGR’s position with M&A. I mean, are they a buyer or are they a seller? What generally can you tell me?

    SGR and M&A

    Bart: SGR can do both. There are a lot of smaller companies that we could merge with or acquire. And those companies, we could go and, there’s a lot of wells up in East Texas, for instance, that Exxon Mobil drilled and once they got below hundred barrels a day or whatever they can’t use anymore. They’re called stripper wells. So they’ll sell them to somebody and those guys are millionaires just doing that. So we can go and get those guys, take them over, use that fuel. And so we can acquire some of those guys. 

    As for us being acquired, our CEO, Tommy, his goal is to be the largest blender of our fuel in the world in the next 10 to 12, 15 years. And he wants to do that as a tribute to his mentor. His mentor in the late 80s, they supplied all the heavy fuels to like Houston Power, and Light, Florida Power and Light. Large electric companies in the US before the natural gas came in. So his goal is to be the biggest and the best.

    If somebody came in and wanted to buy us, it would have to be a very good offer because the people that have supported us, our shareholders, he wants to be able to make sure that they’re very well taken care of. So, right now, our goal is to go public. But again, if somebody came in and said, Hey, we want to buy you. Here’s the price and he could agree with that and the shareholders agreed with him then we could look at doing something on that side.

    Patrick: Yeah, have you guys had some smaller add on acquisitions in the last maybe 18 to 24 months?

    Bart: Not, well, we’ve had one with the one in Barranquilla, where we just kind of took that over. The company sold it. The company that built it originally was an infrastructure hedge fund in Australia that, they’re not an oil and gas business though. They knew we were looking for something, they contacted us, and we took it over, ran it, made it profitable. And so now we’re going to go ahead and finish the acquisition of it. I don’t know, that’s, I don’t know what’s going on there yet. But that’s really the only thing we’ve acquired so far in the group. And more may come but I don’t know what’s on the schedule at the moment, if you will.

    Patrick: I don’t know if you could tell us this. So I apologize If we’re pressing too hard, but what are the methods by which you guys are vetting opportunities for acquisition? Are you actively, do you have a banker out there helping you look or are you just because of the network and the people that you work with every day, you already have your ear to the ground?

    Bart: Our CFO spotted a few. We’ve already set our eye on a few places. CFO came in I believe July and he’s found a few more. So there’s a few more places that we’re looking at now. Each has their pluses, each has their minuses. Facilities to expand our storage capacity, which we greatly need to do right now. So he’s keeping an eye on those. There’s talks going on with those.

    Patrick: So that’s not very different from Tech. I hate to interrupt but what everybody’s looking for is storage. Tech’s looking for more and more storage. I would tell you in our personal lives, we’re looking for more and more storage. And so now we have this. So that’s encouraging to see is that even with a very mature business like energy that is transitioning out, like, you know, with the, with natural gas, you know, domestically but there are other areas for the needs that are there for the powerplants outside of this area. In addition to that, you’ve got the storage, which I don’t think that’ll go away anytime soon. 

    Bart: No, no. We’re always going to be needing that. And we could, if we had a magic wand and can wave the magic wand right now get one of the storage facilities, we could increase storage capacity because we have the letters of intent for, we could do a 10 multiple on our deliveries right now. 

    Patrick: Oh my goodness. 

    Bart: It could happen that fast with the people that want our product, with the IMO that’s come about. The brain fuels that we can blend. The 10 multiple could double. So we’re in a, it’s a very exciting time. We thought this was going to be a couple years from now but when people call you, you stop and you talk to them. People come and say hey look we’ll give you money to do this and this and this and like okay. We’ll talk.

    Patrick: Okay, Bart, I gotta tell you it’s very similar to, you know, and I’m giving away a lot of our family, you know, insight here but it’s almost like ask me whether I want to invest in Disney right before Avengers Endgame comes out. And that was kind of a no brainer kind of idea there. We didn’t know how all the streaming services would do, but we knew Avengers Endgame was going to be here and it was going to be, yeah, and that sounds to me your situation looks really great. What else is there that you want us to share? What can you share about SGR Energy with the audience that you want them to take away?

    Big Future for SGR Energy

    Bart: Like I said, we’ve got letters of intent for, we could do a 10 multiple on or deliveries right now. We’re looking for investors. Anybody wants to do a shameless plug, we currently pay a 12% dividend to our investors. I got in about three years ago, I’m making about 30. I make over 30% because the shares gone up six times since I bought it. 

    This year is going to be crazy. So anybody that is interested in, we can’t say we’re sure thing but I mean I don’t, I can’t think of anything else that’s better than us at the moment. Anybody’s looking for a great investment, wants to make some money and then plan as you go public. If all goes well, the next two to three, four years, there could be a 10 multiple on that investment. So on investment today so. 

    Patrick: Well, and we’ll be right by along the way as you pick up any additional subsidies or acquisition targets to help build up your infrastructure. Bart, how can our audience get ahold of you? 

    Bart: My number at the office is 832-241-2189. And my email address is B as in boy, AR T as and Tom at SGR So that’s Anybody wants to hook up on LinkedIn, I’ll be happy to connect with them there. But anybody has questions, shoot an email, give me a call. And I’d be happy to tell them how we can benefit them and what we can do to make them hopefully richer in the future. 

    Patrick: Excellent. Well, Bart, I really appreciate this. And while the normal display disclosure out here is this isn’t an advertisement or solicitation to buy or information on investment, it is something that if you’re interested in energy, M&A opportunities or energy investment options, you want to look at something that maybe isn’t on the beaten path, this is definitely ay SGR Energy. Bart, thank you again for joining us and we’re going to talk again.

    Bart: Thank you, Patrick, for your time. I appreciate the invitation.

  • How R&W Insurance Has Changed the M&A Landscape Part 1 
    POSTED 2.4.20 M&A

    Representations and Warranty (R&W) insurance is not just here to stay, but growing – not to mention changing the way deals are structured.

    More than a dozen insurance companies now offer this specialized product that transfers the indemnity risk away from the deal parties over to a third party – the insurer. And while only the big deals were eligible before, Underwriters will now take on deal sizes as low as $15M, which opens up a new world for Buyers and Sellers in those mid- to small-market companies. Plus, policies are cheaper than ever before.

    Strategic buyers, VCs, and PE funds are all talking R&W coverage. Sellers are insisting on it because it reduces their escrow obligations and indemnity risk, and Buyers find having this insurance in place makes it easy to move forward.

    All Signs Point to More R&W in Deals

    This widespread adoption of R&W insurance has had a tremendous influence in the M&A world, not just smoothing out negotiations and getting deals done faster but also altering very specific and often contentious deal terms when it comes to the Purchase and Sale Agreement.

    All this provides a critical mass that will bring R&W insurance to the forefront, with wider awareness and adoption in the coming year almost a given, even as it changes deeply ingrained accepted practices.

    First, a little context and background.

    You know there is a sea change going on when even the most resistant “old guard” companies change the way they do business.

    For years, SRS Acquiom was the go-to provider in M&A deals for holding escrows and other financial guarantees. It’s no wonder that for a long time they actively discouraged Buyers and Sellers from using R&W insurance. They maintained that having cash in escrow was safe and more advantageous than spending money on insurance.

    But they weren’t able to hold back the R&W tide, and now they’ve set up a brokerage within the company to sell… R&W coverage. So, they’re finally catching on. It’s a can’t beat ‘em, so let’s join ‘em type of thing.

    The major change resulting from the wider spread introduction of R&W insurance is how it’s disrupted the balance of “power” in the M&A world.

    The Buyer Power Ratio

    SRS Acquiom has a metric – the Buyer Power Ratio (BPR) – that they use to gauge the negotiating strength of Buyer and Seller. It’s a simple calculation: Buyer Market Cap / Target Purchase Price = Buyer Power Ratio. For example, if a Buyer’s Market Cap is 25 times the value of the target company, then the Buyer would have a BPR of 25. The higher the BPR, the greater the leverage for the Buyer in terms of size.

    Basically, the larger the Buyer is compared to the Seller, the more power and leverage they have to get favorable deal terms. For example, companies such as Apple, being a thousand times larger than any potential acquisition target (thus a BRP in excess of 1,000), will always have the complete upper hand. In deals where Buyer and Seller are similarly sized… the less leverage and the more negotiation will take place.

    R&W insurance has introduced a wrinkle here. When the Buyer Power Ratio is low, Buyers are now increasingly using R&W as a way to make themselves more attractive to Sellers while decreasing their risk.

    For example, it’s harder for the Buyer to exercise their walk rights once the Letter of Intent is signed and the target company is off the market. At this point, the two sides are joined at the hip.

    If the Buyer tries to walk away, the target feels like they’re damaged goods and will have a hard time attracting another potential acquirer. If the Buyer wants to abandon the deal at this stage, they face a severe financial penalty. It’s like canceling a wedding at the last minute and not getting your deposit from the caterer or hotel ballroom back.

    However, this puts Buyers in a tough spot if they spot something during due diligence in the run up to closing the deal. They want to walk away but is the issue worth the penalty? That’s where R&W insurance comes in.

    The Buyer can shift this risk to the insurer. By hedging the risk, they can feel comfortable moving forward with the deal.

    Overall, the mindset of Buyer and Seller going into deals when they have an R&W policy in place is:

    What steps can we take to shift risk to the insurance company? And, how can we make sure the insurance company will accept risk?

    Now, we see two parties angling to have terms that they consider a risk to be covered by insurance.

    In part 2 of this article, we’ll drill down into some of the specific deal terms that are changing with the introduction of R&W insurance and how it will impact a M&A deal going forward, including elements like the double materiality scrape, non-reliance clauses, and more.

    For now, if you have any questions about Representations and Warranty insurance and how it could change the dynamics of your next M&A deal – whether Buyer or Seller – you can contact me, Patrick Stroth at or (415) 806-2356.

  • This Could Change Everything in M&A
    POSTED 1.21.20 M&A

    There is a potential game changer in the M&A world, especially for Strategic Acquirers, and Representations and Warranty (R&W) insurance is an integral part. And with this coverage available for transaction sizes of $20M (or even lower) the impact will be widespread.

    Tech powerhouse Atlassian, which offers software solutions for workplace collaboration, coding, and more, does a lot of acquisitions. It’s a multi-billion-dollar company, and it buys dozens of smaller companies to expand its services into new areas.

    So far, pretty standard.

    Most large companies use that leverage to “bully” the smaller business into accepting whatever terms of the deal they put on the table.

    But Atlassian has shaken things up… to put it mildly. 

    As Tom Kennedy, the company’s chief legal officer, and Chris Hecht, head of corporate development, put it in a statement announcing this bold move:

    “The M&A process is broken. It’s outdated, inefficient, and combative. Which is why we’re publishing the Atlassian Term Sheet to fix it.”

    Why the New Atlassian Term Sheet Is a Game-Changer

    The traditional way to go about M&A deals is to conduct negotiations in which one side wins and the other loses. The larger company will always win.

    Commandant #1 in the traditional M&A world is, “Those with leverage tend to use it.”


    You win the deal at the sake of losing trust from the those on the Seller’s side. It makes everybody uncomfortable. And it’s counterproductive.

    When bringing in a target company, you want them to be your next rock stars that will help you capitalize fully on your new investment. If you’ve beaten them into submission and they have to show up at the office on Monday, it can be quite difficult to really put your heart into your work.

    One of the biggest points of contention (and cause for resentment): Why is it standard to have escrows that are 20% to 30% of transaction value? Breaches are typically tiny. Big escrows are unnecessary. Atlassian is saying they will give their targets a choice: either provide a 5% escrow for 15 months or pay for a Buy-Side representations and warranties policy and provide a 1% escrow (this insurance would cover the other 4%). That represents a seismic shift from what well-leveraged Buyers usually do.

    After going through plenty of deals where that happened, Atlassian decided to make a radical change and be transparent during the whole M&A process, from the beginning.

    With the Atlassian Term Sheet, they’ve shown potential Sellers exactly where they stand on:

    • Closing Date
    • Due Diligence
    • Deal Documents
    • Holdback
    • Proposed Purchase Price
    • Outstanding Equity Awards and Other Equity Rights
    • Employment Offer Letters and Non-Competes
    • Employee Retention Pool
    • Indemnification
    • Escrow
    • Insurance
    • Transaction Expenses

    These terms are non-negotiable. A Seller can take it or leave it. And, in many cases, they should take it because if you read through the term sheet, you’ll see that Atlassian – the Buyer – actually assumes a lot more risk according to this term sheet than in a similar, standard M&A deal.

    This Seller-friendly stance horrifies M&A attorneys. But Atlassian is fine with it because they know there is not much risk in these deals. There are actually very few breaches in deals post-closing, especially with IP. And if there is a breach, it’s small in the vast majority of cases.

    Atlassian is not rolling over. Everything is still contingent on extensive, rigorous diligence.

    How R&W Coverage Fits In

    R&W Insurance is an instrumental part of this document. The glue that holds it together, in a way. And, the term sheet outlines that the Seller will pay for R&W insurance and D&O Tail insurance.

    For R&W coverage, the term sheet states that the Seller will pay for it, including any fees, premiums, taxes, or commissions, for a policy limit of 4% of the Purchase Price. It’s quite affordable, costing less than ½ of 1% of the transaction value.

    One of the reasons Atlassian can feel comfortable offering these terms is that if there is a breach, the R&W insurance kicks in. It transfers all the indemnity risk to the insurer. If there are any breaches post-closing, they file a claim and get damages – no need to go after the Seller.

    Ever since I first saw R&W insurance back in 2014, I’ve had the opinion that as M&A progresses, this specialized type of coverage will become as standard as title insurance for buying a home. Because of the speed and frequency of M&A deals – which is only increasing – things have to become standardized.

    And things are heading that way. PE firms and VCs, as well as Strategic Buyers, are being drawn to this insurance more than ever. There are about 20 insurers offering this coverage today, up significantly from a handful just a few years ago. And there are policies even available for deals under $20M, which is a development in just the last year or so.

    There is no good reason not to get this coverage, in most cases.

    How Will This Term Sheet Impact M&A in 2020 and Beyond?

    I think this is going to soon expand beyond Atlassian.

    This could be a potential signal for other Strategic Buyers out there. They know they had better streamline the process. Why are they reinventing the wheel for every deal and grinding the Seller into submission? That attitude is as productive as old school football coaches who wouldn’t let you drink water to toughen you up.

    Think of it this way. Forty-niners coach Bill Walsh established a policy of no-contact practice mid-season on. There wasn’t any need. And unlike other teams, his players weren’t beat up for pivotal games late in the year.

    The NFL is a copycat league, and other teams soon followed Walsh’s tactic. Corporate America is full of copycats, too. So I think you’ll see them follow suit when they see that the term sheet has made Atlassian very attractive in potential Sellers’ eyes.

    With everything, there is a hard way… and a smart way. The Atlassian Term Sheet is the smart way. This is a more efficient and cheaper way to get deals done.

    They have an eye on the end result: integrating the acquired company. This company wants peace, love, and happiness in their M&A deals going forward, and they’re not having to take on very much risk to get it.

    Be sure to check out the Atlassian Term Sheet in-depth. Then I’d invite you to speak with me, Patrick Stroth, about how Representations and Warranty insurance is a key part of this new way of thinking… and how it can protect you in your next deal. You can reach me at or (415) 806-2356.

  • Pejman Makhfi | Easier Acquisitions for Mid-Market Companies
    POSTED 1.14.20 M&A Masters Podcast

    There comes a stage in every company’s life where organic growth is no longer enough. A strategic acquisition is the only way forward.  

    But for middle-market companies, this is a tricky proposition. The management team is running the business… they don’t have time to research potential targets, negotiate price and terms, and all the rest that goes with an M&A deal.

    Pejman Makhfi, the founder of Silicon Valley-based Synrgix, which provides a process management system to support growth through acquisition for middle-market companies, has a solution. And it’s vital that it’s implemented now because data shows that mid-market companies that aren’t acquisitive are likely to fail.

    Tune in to find out…

    • One thing any CEO or CFO must know to manage M&A deals
    • How to manage ongoing M&A activity with minimum impact on resources
    • A strategy to balance organic growth and growth through acquisition
    • Why lack of resources doesn’t have to mean stalled growth
    • 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 PJ Makhfi. PJ is the founder of Synrgix, a Silicon Valley-based startup company with tools and services to support the execution of the processes in the mergers and acquisitions domain.

    Middle market companies hit a stage in their journey where they face pressure to sustain growth, pressure from the board and shareholders in one direction, and market agility and competition out there from the other direction. Both of these make ma critical to a strategy for middle-market companies if they want to grow. I noticed the immense importance of this effort based on recent discussions I’ve had with PJ and his team, which is why I asked him to join us to talk about synergetics and how they can solve the problems for the middle market.

    PJ. Thanks for joining us today. Welcome to the podcast.

    PJ Makhfi: Thank you, Patrick. Pleasure to be here and thanks for the opportunity.

    Patrick: Tell us before we get Synrgix to tell us what brought you to this point in your career.

    PJ: As you may know, my background is in software with many years of experience in BPM. For those not familiar with BPM, it is business process management. BPM help optimizes and automate business processes, and let you put tools in place for continuous improvement. In the past, I’ve been a part of several acquisitions both on the buy and the sell-side of the deal. What I noticed was that while the deal rationales made sense, and clear synergies, where there, acquisitions didn’t fully deliver on the promises, so I decided to take on the challenge, dig deeper and see if I can make the M&A process more controllable and rewarding. I talked with many executives and practitioners and studied past successful and failed acquisitions. These gave me the insight and a chance to solve the problems that directly impact M&A success rate, lined up a strong team of like-minded members and advisors, and built a solution to help our executives take up M&A without hesitation.

    Patrick: I didn’t know that happen. That’s fascinating. What markets when we talk about middle-market now, what markets are you targeting? And specifically, what are the challenges that they’re facing? How do they know, not succeed in these M&A deals?

    Middle-Market Challenges

    PJ: We’re focused on helping mid-market companies. I would say our sweet spot is from 50 million to 500 million revenue. Our typical clients are companies that strive for rapid growth but have reached a stage where organic means are no longer sufficient. They would like to reignite and accelerate their growth. Just think about what it takes to take a new product from conception to market and scale or taking your existing product to different markets, domain expertise, engineering, marketing, sales, partnership, etc. The organic means are often too slow and uncertain in an age where disruptions are happening every day and everywhere.

    Patrick: I didn’t think about that. Well, when you consider you’ve got a choice for growth is either you get Do It Yourself organically or you grow through acquisition. There are merits to both sides of the equation. And I would just think, anecdotally about Coke and Pepsi where it’s cheaper and faster for them to acquire another flavor than to develop their own sports drink. I think it’s easier for them to just go buy Gatorade, but there’s still that tug between organic and an M&A. Why do you think M&A is the solution over organic for growth?

    PJ: There are some numbers that can share with you, Patrick that support this. Over the past decade, 73% of mid-market companies have disappeared. Of those who survived 70% were acquisitive. historical data shows that M&A helps companies grow three times faster and give a 75% higher chance of success, even an economic downturn. Surveys also show that 60% of mid-market companies considered M&A, but only 22% building into their strategy is M&A gets quick access to revenue and reduces costs. You would ask why don’t all adopt this?

    Patrick: Well, those numbers are compelling. Why is that? Why are more companies not going for acquisitions if it’s such a no-brainer?

    PJ: Good question, this goes back to lack of experience and resources in a very complex and delicate process. On average, our CEOs have point nine acquisitions in their lifetime. There is uncertainty, complexity, risks and high expected costs. Plus there is still the existing business that they need to run, leaving them with little time and resources to commit to the m&a initiative. There are also concerns about using third parties. Today, the M&A ecosystem is suffering from misaligned incentives for service providers. And the corporation’s several players in the M&A process work in silos and are compensated regardless of their returns.

    Patrick: Yeah, that would pretty much make me pause. I always look at this as if you’re running a medical corporation and you want to acquire another medical corporation. You’ve got to go out and almost get finance and a law degree. Just understand what’s happening, and fortunately can’t do all that at one time when you’re running a company. So what does Synrgix do to offer these companies so that they’re stepping out into the unknown, and they can do so confidently?

    PJ: So we started exactly what the mission to address the challenges that I just talked about. We created a software platform to guide the execution of the M&A process. The platform allows CEOs and CFOs to track and manage the entire M&A process successfully. From strategy planning all the way through integration, and synergy realization, we offer on-demand services to augment the in house team, our need basis. And we aligned our compensation with our client’s success metrics to create a truly trusted relationship.

    Patrick: So you can make the process as simple or as hard as it needs to be. The client has full control There is less of a chance of a conflict of interest because of compensation structures different. That’s fantastic. I’m sure there’s a lot more in it when people dig deeper with the platform and so forth, you can’t be the only one out there. So with other players out there that are providing services to M&A parties, how does Synrgix differentiate itself in the space?

    Why Synrgix is Different

    PJ: The first and foremost difference is that Synrgix uses a process-based approach with end to end transparency. In other words, it gets rid of silos, there is so much at stake in a transaction our CEOs and CFOs want visibility throughout the entire process. Second, objectivity, experience, and control are in the fabric of our solution. We target its identification, due diligence, valuation or integration. We provide visibility and decision support to execute a successful deal. And finally, the curated on-demand services give our clients and the extended deal team they can tap into when needed. That allows them to manage m&a initiatives with minimum resource impact and risk to their in house projects and day to day business. So you’re providing transparency, objectivity, and the ability to pick and choose the services as you need is need fit so that you’re controlling costs. I think that’s fantastic with everything you’re offering there. Is there anything else you’d like to share with the listeners when it comes to this platform? Yes, I like to encourage our CEOs and CFOs to think more about how long and what it takes to prepare for M&A.

    We have learned that M&A transactions take a lot of upfront work before you have a solid plan and a green pilot pipeline of targets. My advice to you or executives is to be proactive in order to stay on top of your game. And ahead of the competition. You can start big or small, build a strong strategy, and in house capabilities and have the processes and tools in place ahead of the time. Be the one-off acquisition or scaling through several acquisitions, make sure you have a repeatable process that builds on top of and learns from the past deals.

    Patrick: I think was really important to keep in mind just something that we forget from time to time is there’s always the focus on a potential target company, thinking that they’ve got a plan ahead and get organized and think about all the things they have to do to get organized to be acquired. And we don’t really think about the other side of the equation we’re all the pre-work has to be done. Done. If you’re thinking about an acquisition, and you shouldn’t wait until you have a clear target in mind, you’ve got to start doing a lot of this pre-work ahead of time and kind of get yourself staged up for that. And it’s helpful to have someone out there that can guide you and do that pre-work without this big, long, cumbersome commitment. Why don’t you run us through a scenario on how you work with a client? Let’s say you’ve got a company that has a concept they do want to grow, and they want to get started, but they don’t know exactly where they’re going. What would it look like for them if they commenced engagement with you?

    PJ: It’s very simple. Patrick. On sign up. What we do is we work with our clients to understand their situation and needs. Our success manager helps them capture their acquisition and growth strategies, selection criteria, and process templates to follow best practice execution. Clients can kick the tires and go at that point, they can use our sourcing services to get a pipeline of pre-scored targets, or do their own target sourcing. It’s as easy as that.

    Patrick: So they can sit down with you get some guidance on a profile and not only get their processes for acquisition and bringing somebody on board, but they can also talk to you and get guidance on where they could find targets with your sourcing services. So that really is a big value add out there. Tell us about the pricing for this out. How is it based?

    PJ: Our pricing is very competitive. It’s a very reasonable monthly subscription fee with no upfront cost or yearly commitment. Our clients get a success manager to help them onboard and run a smooth process. On top of that are on-demand sourcing and other supporting services are there for those clients who like to tap into with a pay as you go, payment model?

    Patrick: Well, I think one of the things we can overlook on this is what you’re doing if you’re an acquirer, what’s the difference between an acquirer and a serial acquirer? A serial acquirer has done more than one acquisition. And I imagine with Synrgix if you can get the templates set up for processes here, and you may come up with more than one target, but you may go for one target at a time. I think it was great as this sets up an individual platform for each and every company. So you’re not only equipped and ready to go ahead and process assessable transition and acquisition for one target. But you can set the template for this being used again and again and again. And I think that’s very valuable that this is not just a one-off tool. This is something that can be deployed and after successful deployment, it can be used as an Again and again and again. And so I think that leads to more acquisitions, which we’re happy about because the smoother acquisitions become, the more there will be and we love more, not fewer acquisitions.

    PJ how can our clients reach you?

    PJ: Your audience, you can reach us by visiting our website or email us at We can offer a free readiness assessment or a demo as our client requests.

    Patrick: Well, that’s outstanding and to our listeners out there, I would strongly encourage you, you have absolutely nothing to lose in these processes to learn something that is a potential tool that can be an absolute game-changer for you, if not for making something easier, at least giving you peace of mind to know that There’s something out there that you can use as a reference point. PJ, thank you for joining us and we look forward to talking to you again!

    PJ: Thank you for the opportunity and I look forward to working with you.


  • The Lowdown on “Naked Tail” D&O Insurance
    POSTED 1.7.20 Insurance

    In insurance parlance, if you insure a particular exposure, you’re covered. If not, you’re bare. If you’re looking for a policy that covers something that’s never been covered before, you’re… naked.

    That’s the situation many privately held, small and middle market companies find themselves in when they seek to sell their business.

    The Buyer asks them to secure Directors and Officers Liability insurance (D&O), specifically a “tail” policy to make sure there’s a source of insurance coverage in case the Seller is held liable for any wrongful acts against an employee or others – things like human resources issues or fraud – committed before the closing date.

    Essentially, the Buyer doesn’t want to find out six months after the closing date that there is some sexual harassment lawsuit or anti-trust complaint against the former owners.

    As the new owner, the Buyer doesn’t want to be on the hook for incidents that happened before they purchased the target, so they require Tail coverage that extends the target’s D&O Liability, Employment Practices Liability, and Fiduciary Liability coverage for up to six years from closing.

    Tail policies provide virtually the same protection as a traditional D&O policy that has a Tail Endorsement. On the acquisition date, the Tail kicks in and covers lawsuits brought against the directors and officers of the target company. This covers any allegations that they committed a wrongful act prior to the acquisition, all the way back to the incorporation date.

    This sort of coverage is standard in the M&A world. I’ve been working in this space for years. As I mentioned in a previous article, when Representations and Warranty insurance is not a fit for a deal, Naked Tail coverage is one of three alternatives.

    (To put it in to perspective, the cost of D&O Tail coverage is about $20K to $50K. That’s a fraction of the cost of a R&W policy. And the deductible on a Tail policy is $25K to $50K, which is also a fraction of what it is for R&W.)

    There are literally thousands of privately held companies in the $30M to $50M range that have never held D&O insurance and now need it to satisfy the terms of their acquisition. Today, this can be done quickly, easily, and broadly.

    For example, a small business, run by husband and wife for 20 years. They never felt the need for D&O coverage and had gone the whole 20 years without any sort of legal claim against them. But, when they were ready to sell and enjoy a well-deserved retirement, they were forced to scramble and find coverage because the Buyer required a D&O Tail. Since the couple had never carried D&O previously, their options for finding suitable coverage were limited. That is until now.

    Insurance companies didn’t look at these Naked Tails favorably in the past. Generally, they wanted to see three to four years of successful coverage under a regular D&O policy (and wanted three to four years of premiums).

    What happened to people who didn’t previously have a policy and are about to sell or merge? The insurers would provide scaled down policies with multiple exclusions at rates that were substantially surcharged.

    Things have changed. Now, insurers understand that the risk of anything that the Seller didn’t know about blowing up post-closing is very small. And they are willing to offer these Naked Tail policies for even small transaction size deals.

    Today, Underwriters need only a statement from the Seller warranting that, as of the closing date, they know of no fact, event or circumstance that would give rise to a claim. Such warrants are hardly problematic because the Seller is already making these warrants to the Buyer on a much broader scale.  Therefore, the Naked Tail is a relatively low risk for Underwriters.

    Three Reasons You Need a Naked Tail Policy

    There are a couple of reasons you need a D&O Tail policy when you’re going through any M&A deal, besides the fact that it is contractually required. (For those who’ve never had D&O insurance and don’t see why you need it now, pay close attention.)

    1. If you are getting purchased, this is major liquidity event. You become a deep-pocketed individual overnight. There’s nothing like some press release touting the $20M sale of your company to bring people out of the woodwork who are motivated to take some legal action. Could be past competitors (like a company hoping to be purchased but you were selected instead). Also, former employees who quit before the transaction happened and who now feel they want part of the payday. You need to be protected against such situations.
    2. D&O insurance will cover your costs. The cost of litigation is only going in one direction as time passes – up, especially as states, California foremost among them, pass court costs on to litigants. You’ll also have to pay defense costs and settlement costs. If you have a Tail policy, the insurer covers those costs. The more limits, the more protection, the more dry powder you have. You want to preserve your nest egg.
    3. If you don’t have R&W coverage, you have no protection from Buyers alleging you committed fraud or misrepresentation when you affirmed you knew of no potential breaches of the Reps in the Purchase and Sale Agreement. In these cases, they usually want to keep your escrow, and even clawback more funds to pay for the financial damages – up to 100% of the purchase price. That’s not good.

    D&O Tail coverage doesn’t cover fraudulent behavior, but it will give you money to defend yourself against allegations of fraud. An allegation is not proof. But if you want to keep your escrow, you must defend yourself in court, no matter how frivolous the claims. Without D&O coverage, you’ll pay your own legal costs.

    D&O Tail coverage doesn’t cover fraudulent behavior, but it will give you money to defend yourself against allegations of fraud. An allegation is not proof. But if you want to keep your escrow, you must defend yourself in court, no matter how frivolous the claims. Without D&O coverage, you’ll pay your own legal costs.

    How to Get Your D&O Tail Policy

    As I mentioned, if you’re looking to sell your business, you’ll most likely be contractually obligated to take out a D&O Tail policy. There’s no getting out of it, so to speak. And with the legal and financial protection it offers, why wouldn’t you want a policy anyway.

    I would recommend not going to your regular commercial insurance broker, even one with experience in standard D&O insurance. A Naked Tail policy is a whole other animal.

    You need a broker experienced in insuring M&A transactions and Naked Tails in particular. It’s a slightly different skillset. And because this issue usually comes up close to closing, you want a pro who can get the paperwork processed in a day or two.

    I’ve worked in this world for years and would love to answer any of your questions about setting up a D&O Tail policy to your deal. It’s low cost and easy to do. 

    You can contact me, Patrick Stroth, at

  • Middle Market Privately Held Firms Fearful of M&A
    POSTED 1.1.20 M&A

    Every business must have some plan for growth. That’s obvious. But how they achieve that growth is another story.

    There are basically two methods:

    1. Organic growth
    2. A merger or acquisition

    Companies usually use a blend of both. But those that try to rely solely on organic growth, which takes a significant amount of time, even with the best businesses, will be left behind in the marketplace.

    M&A is a much more effective choice to add to their product offering, boost their capabilities, reach new groups of consumers, or expand their geographic presence.

    But there is an issue, at least among middle market, privately held firms. They might understand that organic growth is too time-consuming, yet they won’t move forward with promising M&A deals that seem like a good fit.

    In fact, a study from Synrgix, a business application development and consulting company, found that one out of 5 of the 25,000 middle market companies surveyed that are looking to execute an acquisition, actually do so.

    Why is this the case?

    There are several factors at play.

    Mainly it’s fear, due to lack of expertise… lack of time… lack of resources.

    These are relatively small, privately held companies. They don’t have an internal corporate development department. Besides, they don’t have the experience or knowledge base in how to conduct M&A deals, so they decide not to do it.

    It takes time to search for targets – and it always helps if you know what makes for a good acquisition. It’s usually a CEO or CFO that is placed in charge of an acquisition, but they have a full-time job already and often don’t even know where to begin. So, deals fall by the wayside… and growth stalls.

    The Consequences of Delaying an Acquisition

    Only when pushed to the brink in desperation do these middle market companies go through the whole acquisition process – or at least attempt to. They might eye a potential target only to find out a competitor grabbed them first, while they struggled to get their ducks in a row.

    If that potential target had a capability they were looking to add, it gets even worse. They might lose the target and lose an existing client that expected the company to serve them with that capability.

    Another consequence: the company was contemplating entering a new market and a competitor makes the acquisition and enters that market instead. Bad for business.

    There is a solution. Synrgix offers a software platform that streamlines acquisitions by helping organize the process and schedule milestone events until the deal is done.

    With a platform like this, companies eager to engage in M&A don’t have to hire an outside corporate development firm. They can do the work internally and spur deals that will allow them to add new capabilities, clients, geographic market, and more – all elements critical to growth. You can see the Synrgix platform yourself at:

    Another element that can help spur successful acquisitions is Representations and Warranty (R&W) insurance. With this coverage:

    • Negotiations are generally much quicker and less contentious.
    • Any risk from breaches of reps in the Purchase and Sale Agreement are transferred to a third party (the insurer).
    • Insurance companies do pay claims.
    • Less money is held in escrow and there is no chance of clawback.
    • Both Buyer and Seller feel peace of mind as a result.

    There is potential risk in every deal, but R&W insurance mitigates it. And in the last couple of years, costs for this coverage have been coming down because more insurers are getting into the game.

    Not to mention, deal sizes as low as $15 million are being covered by multiple insurers – that’s perfect for middle market companies looking to grow through M&A.

    If you have a middle market company but haven’t been able to pull the trigger on a much-needed acquisition, I’d be happy to speak with you further about how you can avoid obstacles that are in your way.

    You can contact me, Patrick Stroth, at

  • How R&W Insurance Makes M&A Deals Smoother, Easier, and Faster
    POSTED 12.17.19 M&A

    You know what it’s like when you drive to a new place – say you’ve just changed jobs and you’re heading to the office. Have you ever noticed how the very first time, the trip seems longer somehow? Of course, you’re using GPS for directions, so you don’t get lost and make yourself late.

    But… every subsequent trip seems shorter and shorter. And soon enough, you can ditch the GPS because you know exactly where you’re going. You don’t even have to think about the drive. Your morning commute becomes easy and intuitive.

    That’s kind of what it’s like when using Representations and Warranty (R&W) insurance for the first time to cover an M&A deal.

    The first time it’s a bit intimidating because you’re not familiar with the process. You don’t know how it works.

    But just like your commute, the more you do it, the easier it gets. And it’s well worth getting through the initial tough times and making R&W coverage a regular part of your standard operating procedure for M&A deals moving forward, whether you are a Buyer or Seller, strategic, VC fund, or PE firm.


    Simply put, R&W insurance enables the parties on both sides of the table to save time and money and simplify the deal terms. Not to mention it smooths out, and speeds up, negotiations.

    It also gives both sides priceless peace of mind if there are any breaches to the Reps in the Purchase and Sale Agreement.

    All that – and much more, as you’ll see in a moment – and you don’t really have to do any more work than you’re already doing as part of the deal to secure this coverage because, for the most part, the Underwriters will base your policy on due diligence work already being done.

    What Happens When R&W Is Covering the Deal

    One of the biggest time drains on any M&A deal is negotiating the Letter of Intent and then later, the Purchase and Sale Agreement.

    What Reps are included…

    How broad or narrow are those Reps worded….

    Size of the Indemnity cap….

    How much of the Seller’s money will be held in escrow to cover potential breaches…AND how long will the fund be held…

    Those deal terms can result in a lot of back and forth, which doesn’t just take time, but also costs you big time in legal fees as each new iteration of the contract is reviewed by the attorneys.

    However, when R&W insurance is covering the deal, you don’t have to negotiate these points anymore. With this specialized coverage, if there are any breaches, the insurance company will pay the damages. And those claims do get paid in a timely manner. With that backup in place there’s no need to grind away to get marginally better terms. No need to go after the Seller for compensation.

    With R&W coverage in place, many Sellers will still accept Buyer-friendly Purchase and Sale Agreements because they want to limit their risk. They are doing so by transferring the risk to the insurance company.

    Why Sellers Love It

    For Sellers, one of the biggest benefits of R&W insurance – and a reason many will pay for the coverage, even a Buyer’s side policy – is that the money held in escrow for years past closing day is a fraction of what it would be without this coverage.

    In fact, because of the increasing use of R&W insurance, the average amount of money held in escrow for M&A deals has decreased across the board. Common escrow amounts used to be in the range of 10% of transaction value. Now the average is 1%.

    If you’re a Seller, you know you – and your partners and investors – will appreciate that cash in hand on closing day. And Buyers appreciate not having to go after Sellers, who could be new partners or a key part of the management team.

    This was a key reason why a partner in HR software company RedCAT Systems insisted on R&W coverage when they were acquired a few months back by PE firm Broadtree Partners. You can check out how this insurance changed the dynamics of the deal and why both sides are now big fans of R&W, in a pair of case studies examining the acquisition from both the Buyer’s and Seller’s sides.

    At one point, financial management companies that held money in escrow were pretty down on R&W insurance. They had a financial interest in large amounts being held in escrow, after all. They said that cash held in escrow by a third party was much safer than any insurance policy. Many of these management companies are now offering R&W coverage themselves. They’ve seen the light.

    Another benefit to Sellers is that when R&W insurance is in place, they can demand that 10b-5/full disclosure Reps will be taken out of the agreement. In fact, 90% of deals with Buyer’s side coverage don’t have these Reps, which are catchalls that could potentially result in the Seller being financially liable for issues they didn’t know about it. When that type of Rep is taken out, there is much less exposure for the Seller.

    Take the Leap

    The truth is that after you’ve done it once, you’ll become the biggest cheerleader and advocate for R&W insurance due to all the advantages it offers. It’s no wonder that more and more PE firms are embracing this coverage. And as the costs of R&W policies go down and deal sizes under $20 million are able to be covered, its use will just continue to grow in just about every sort of industry.

    If you’re a R&W insurance “first timer” – whether you are a Buyer or Seller – you no doubt have questions about how this coverage will work in your situation. I’m happy to answer your specific questions. I’ve specialized in helping companies secure this coverage for many years before its current moment in the sun. It’s great to see it gaining such widespread acceptance.

    Please contact me, Patrick Stroth, at

  • We’re Not Going Into a Recession – Here’s Why
    POSTED 12.3.19 M&A

    As the song goes… it’s the most wonderful time of the year. The holidays are upon us. Aside from time with family and friends, my favorite part of the season is the Wall Street Journal’s Economic Forecasting Survey, specifically – the Recession Expectations forecast question: “When do you expect the next recession to start?”, which comes out every September or October.

    It’s a survey of several dozen economists, who chime in on the current health of the economy and when they think the next recession will hit.

    It’s one of many coming-year prediction articles, presentations, commentaries, etc. that come out every year around this time from various financial publications, investment banks, and others. As 2019 draws to a close, it’s worth taking a closer look.

    I wish you could place bets on this sort of thing because I knew exactly what the Wall Street Journal piece was going to say even before I read it.

    How is that possible? Because it’s pretty much the same every single year – and the predictions for 2020 were no exception.

    What to Expect in 2020… or Not

    As is usual in the Journal’s survey, economists are very pessimistic about the economy in the coming year. In fact, they are certain a recession will happen in the next 12 to 18 months. Before you sound the alarm, let’s go back to this time in 2018… 2017… 2016…

    These economists said the same thing: recession in the next year or so. But I don’t remember being in a recession the last few years. Do you?

    I don’t think we’ll be facing a recession in 2020. And, as far as M&A activity goes, there will certainly be no or negligible impact from economic conditions next year. That’s not just for lower middle market, but for M&A at all levels.

    For a different point of view than the usual dour economic forecast, I like to turn to Christopher Thornburg, PhD, a founding partner of Beacon Economics.

    He maintains mainstream economists think that a recession is inevitable every seven to eight years and that because things have been so good – too good – for so long, we’re well due. Not so, says Thornburg.

    Looking at the leading economic indicators, he says we’re in good shape.

    The ongoing “trade wars” are no issue. The GDP is solid. Consumer spending is stable, if not going up. Consumer savings is up. Debt ratios are lower than they have been in years.

    There is one constraint and caution: There are more job openings in the country than people eligible to work. That will slow down businesses because they have so many jobs to fill.

    But overall, we’re in a good economy, so businesses are expanding. And that means more M&A activity.

    What M&A Activity Will Look Like in 2020

    There are other factors that will encourage M&A activity in the coming year:

    • Interest rates remain stable – so the cost of borrowing is not going up, which is one less hurdle to getting deals done.
    • There remains a lot of dry powder held by PE funds – it’s still in the trillions. So there is a lot of cash on the sidelines waiting to be used.
    • There are more emerging, startup PE funds being created now than a year ago, which means more prospective financial Buyers on the playing field.

    And because M&A deals are easier to get done and costs are coming down, we’re seeing other side impacts as well:

    • Smaller PE firms can be successful as deals flow down to them. It’s not just the big institutions that are taking all the action.
    • Because there are more M&A deals being done, the top 100 law firms that used to handle the bulk of the transactions – and charge more money – just can’t keep up. That means smaller firms, especially regional firms, are getting more billable M&A legal work.

    In general, this “spreading of the wealth” is a good thing. As more revenue associated with M&A is going to more players, services will improve. That’s especially true with Representations and Warranty (R&W) insurance.

    The Outlook for M&A Insurance

    We’ve seen that there are already more R&W insurance placements because there are more insurers offering this coverage. Even deal sizes under $20 million can be covered. With this increased supply, costs are coming down. And the process for setting up R&W insurance to cover a deal is easier than even a year ago.

    So not only will 2020 be a banner year for M&A activity, but I expect a corresponding increase in R&W insurance policies written as Buyers and Sellers recognize not only the above factors, but also the many other advantages of this type of coverage:

    • It removes the need for cash to be held in escrow.
    • It removes the need for extensive negotiations on the indemnification clause in the Purchase and Sale Agreement, as the indemnity obligation is transferred from Seller to insurance company.
    • If there are any breaches in the reps, the Buyer can file a claim with a third party (the insurer) and get paid promptly to cover damages.
    • In short, all the risk goes to the insurer, which makes Buyers and Sellers happy.

    R&W coverage also makes negotiations between Buyers and Sellers much smoother. In some cases, it’s the make or break for a deal.

    As you look ahead to 2020 and consider your acquisition strategy (or plan to sell your company), it’s worth taking a close look at how Representations and Warranty insurance coverage could give you the edge.

    If you’d like to get all the details on how, please contact me, Patrick Stroth, at Let’s chat before we all get so busy during the holidays.

  • Case Study: Small Software Company Funded by PE Firm and R&W Insurance Got the Deal Done
    POSTED 11.19.19 Insurance

    Steven Epstein, founder of RedCAT Systems, and his partners and management team had slowly but surely built their company in a highly specialized niche serving top clients, including those in the Fortune 500. They were ready to sell to take the company to the next level.

    But this small, Colorado-based software company involved in HR and compensation solutions for clients like LinkedIn, Uber, NYSE, and many more wasn’t interested in being acquired by just anybody.

    They were looking for a partner who wouldn’t accelerate growth too fast or take on too many new clients too quickly because they wanted to ensure a slow growth strategy that would keep current clients happy and give the new ones the same high level of customized service they’re known for. In their specialization of executive compensation, which has a lot of moving parts, this counts for a lot.

    After a time, they found their match – a company that understood their business culture – and were recently funded by PE firm Broadtree Partners.

    “We wanted to make sure that our clients were treated well. It’s a very high-level service. There’s really nothing that we would be asked that we weren’t able to fulfill on time, on budget, and pretty much the experience was exceptional. That’s why we were able to get the type of work that we do. And we wanted someone who would share that philosophy and maintain that while at the same time doing measured growth,” says Steven, of RedCAT.

    As with any M&A transaction, there were some hiccups along the way… as well as one major obstacle that could’ve derailed the whole deal, and probably would have, if this transaction was being negotiated prior to 2019.

    This is an in-depth examination of this real-world M&A transaction. We first got the story from the Buyer’s perspective – you can check out that article here. Now, we’re hearing from the Seller as we explore how the deal went down so that both sides were happy. Additionally, Steven was featured on my podcast, M&A Masters. You can listen to his episode here.

    The Anatomy of a Deal

    Once Broadtree and RedCAT had a signed a Letter of Intent, it took roughly nine months to close the deal.

    One of the things that stalled the deal moving forward was due diligence. Broadtree was more used to dealing with larger companies that had more in-depth and detailed financial records that could be combed through. It took a while for RedCAT management to get all the required information together.

    “As a company, if that was your plan [to be acquired], I would just keep much more meticulous track of every single document,” says Steven. “Every little bit of every single dollar that was ever spent took a lot of effort to come up with… and then thousands of pages of contracts we had already signed. Looking at and reviewing every single thing took quite a while.”

    Tech due diligence – which involved making sure no code or other IP could be claimed by another party – also took some time to get through.

    But what was the major sticking point?

    One of RedCAT’s partners, who had been burned in business deals in the past, wanted some protection. Specifically, he wanted to use Representations and Warranty insurance so that less money (including his) would be held in escrow and there wouldn’t be any threat of clawback.

    With R&W insurance, if there are any breaches in the Seller’s reps, it’s the insurance company – not the Seller – who reimburses the Buyer and pays the financial damages. Those claims do get paid, and this coverage is reasonably priced.

    Often the Seller pays for the insurance because of these benefits. But there are plenty of reasons for a Buyer to get on board, too. For one, in case of a breach, they don’t have to go after their new team members (the Sellers) who’ve joined the company after the acquisition for damages – that’s very awkward. Also, there is no need for costly or time-consuming legal action. The claim gets paid, and everybody goes about their business.

    “[R&W insurance] allayed our partner’s fears, basically of the deal and the liability,” says Steven. “If something did come up, I think it would be tremendously beneficial to have it. Let’s say we didn’t have R&W, and we put in $1.5, $2 million in escrow. And then some kind of obscure thing comes out, and we disagreed with it. That would cause a serious breach. Not only of, say it’s a million or two dollars, but then we probably wouldn’t want to stay on. And the effect is most likely the failure of the new business.”

    The Status of R&W Coverage Today

    Just a short time ago, this wouldn’t have been possible because insurers were only offering R&W coverage for larger deals. But recently, we’ve seen an increase in Underwriters crafting policies for transaction sizes under $20M, which opens up this insurance to a whole other section of the M&A world, including lower middle market companies like RedCAT.

    For Steven, the R&W coverage offered more than financial protection.

    “The peace of mind can be priceless. Just the feeling that I don’t have to worry about this. We’re covered. It’s not a thing that will A) damage the relationship and B) just consume life energy where you’re fighting about something that is likely frivolous.”

    That’s a ringing endorsement for Representations and Warranty coverage. If this case study has interested you in this specialized type of insurance, tailor-made for M&A transactions, and now available for deal sizes under $20M, contact me, Patrick Stroth, at

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

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

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

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

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

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

    Listen now…

    Mentioned in this episode:


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

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

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

    Who Is Rob Joyce, and What Is Broadtree?

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

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

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

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

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

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

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

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

    Why RedCAT?

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

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

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

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

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

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

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

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

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

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

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

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

    Experience With Rep & Warranty

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

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

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

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

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

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

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

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

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

    Rob: Thank you very much.

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

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

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

    Rob, how can our listeners find you?

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

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

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

  • Case Study: Rep and Warranty Insurance Helps Smooth M&A Deal in the Tech Sector
    POSTED 11.5.19 M&A

    When lower middle market PE fund Broadtree Partners expressed an interest in acquiring the small HR software solutions provider RedCAT Systems (which works with Uber, LinkedIn, and NYSE, among many other major firms), it looked like everything was going smoothly.

    RedCAT’s management team and founders felt that Broadtree’s post-closing plans for the company meshed well with their core values of not growing too quickly in order to best serve existing customers, which have complex needs, especially with benefits for well-compensated workforces.

    Broadtree was enthusiastic about RedCAT’s impressive customer base and how they had filled a hole in the marketplace with a unique and vital service. They felt, with their management resources and capital and the RedCAT team’s contacts and experience, that they could take the company to the next level – with smart growth.

    The sticking point: one of RedCAT’s partners felt that Representations and Warranty (R&W) insurance should be part of the deal.

    This specialized type of coverage, created especially for M&A deals, transfers all the risk, including the indemnity obligation, to a third party – the insurer.

    It eliminates the need for money to held back in escrow and for an indemnification clause – which makes the Seller happy. This is why the partner wanted the coverage: to make sure his proceeds from the sale were safe and not held back. They had previous experience with lawsuits from a corporate perspective and saw this as a potential area of risk.

    But there are benefits for the Buyer, too. If there are any breaches to the Seller’s reps, the Buyer can file a claim and is quickly compensated with no hassle by the insurer.

    Deals with a transaction value as low as $15M will be considered by insurance company Underwriters for R&W policies. With a transaction value under $25M, the deal with RedCAT certainly qualified. But this is a development within the last year or so, which is one of the reasons why the Buyer was somewhat reluctant, at least at first, to make this accommodation to the Seller.

    Another new development is that deals under $20M can be insured by R&W coverage for up to 75% to 100% of the transaction value. In the case of RedCAT, the parties were seeking a policy covering up to 75% of the transaction value. For larger deals, unlike this new lower middle market segment, Underwriters are only comfortable going up to 30%.

    How R&W Insurance Changed the Deal for the Better

    For Broadtree Director and Portfolio Company CEO Rob Joyce, this was the first time he had taken R&W insurance all the way to the finish line. So they were familiar with, but weren’t aware of, all the potential advantages for both parties.

    “[Rep and Warranty] on my end was really used primarily as a tool to help one of the Sellers become comfortable with the transaction, and that was based on their prior experience,” says Rob. “This person was very, very concerned about this, and Rep and Warranty insurance pretty much mitigated the issue. This was something that could have been really, really time intensive had we not used the solution, and it could have derailed the deal.”

    This is the perfect example of one of R&W insurance’s biggest benefits: it smooths negotiations, removing the contentious elements of escrow and holdback, which also speeds up the journey to a final Purchase and Sales Agreement and eventual closing.

    For the Buyer, it gives reassurance that they will be paid promptly if there is a breach in one of the Seller’s reps, without the need to go after money held in escrow that would normally go to the acquired company’s management team… that could now be, as is the case with RedCAT, part of the Buyer’s organization.

    Overcoming Other Complications That Delayed the Deal

    As negotiations progressed and the due diligence process began, other issues began to emerge. And what happened should provide helpful tips for other lower middle market companies contemplating a sale by showing them what they can be doing now to prepare.

    The issue was the financials. As a smaller company, RedCAT didn’t have the amount of financial data required, and it wasn’t in a format Broadtree was familiar with.

    This often happens due to lack of resources. For example, in RedCAT’s case they didn’t have an investment banker or adviser actively pushing the deal. The founders were working on the deal, which takes significant time, as they continued to run the business.

    The financials themselves were good, but the quality of the data reflecting that was different than you see in larger companies. The other issue was the technical diligence, which is vital with a software company. But soon enough, Broadtree understood the software development process, code base, and related items. Having R&W backing them up was an unexpected, but welcome benefit.

    What’s Next for Broadtree

    Broadtree Partners, after this positive experience with R&W insurance, now consider this coverage to be part of their strategy for acquisitions going forward.

    Instead of being reactionary to a Seller’s requirements (for example, a banker who needs it on the deal) as they have in the past, this PE fund plans to introduce it early in the deal process because of the benefits it offers both Buyer and Seller.

    “This is an immediate part of my toolkit, one that can allow some risk mitigation on my side if I feel the need, and, two, I think it’s also a great tool to help overcome some Buyer discomfort if they’re worried about the sort of risks to the deal that Rep and Warranty insurance can cover,” says Rob. “I would not hesitate to use it again.”

    At this point, RedCAT Systems is well on its way to growing to the next level. They’ve acquired new customers and are gearing up for a big hire to push further growth. And it might not have happened, had Representations and Warranty insurance not entered the picture.

    Note: This is Part 1 of a two-part series examining the Broadtree Partners acquisition of RedCAT Systems, focusing on the use of R&W insurance. Here we covered the deal from the Buyer’s perspective. Coming up next time, we’ll check out how the Seller saw things develop.

    If this case study has interested you in Representations and Warranty insurance, contact me, Patrick Stroth, at

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

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

    They were recently funded by PE firm Broadtree Partners. 

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

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

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

    Listen now…

    Mentioned in this episode:


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

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

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

    Origins of RedCAT Systems

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

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

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

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

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

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

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

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

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

    Why Steven Chose to Sell

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

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

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

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

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

    Patrick: So how did you settle on Broadtree?

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

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

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

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

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

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

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

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

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

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

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

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

    What Led Steven to Seek Out Rep and Warranty Insurance?

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

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

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

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

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

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

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

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

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

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

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

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

    Steven’s Involvement in the Rest of the Process

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Steven: Yep. On RedCAT Systems. 

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

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

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

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

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

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


  • The “Marriage Proposal” of M&A
    POSTED 10.22.19 M&A

    The Letter of Intent (LOI) – sometimes called a term sheet – is a vital first step in many M&A transactions. With an LOI, Buyers show that they’re serious about acquiring a business. And it allows the Buyer and Seller to have conversations to discover whether the vision each has for the deal lines up with the other… before they spend time and money on negotiations and due diligence.

    It’s like the marriage proposal before the wedding, which is when the deal closes and the purchase sale agreement – which often contains very similar terms to the LOI – is signed.

    An LOI is non-binding. But it shows commitment, outlines the basic structure of the deal, lays out a path forward, and contains an agreement to not talk to any other potential Buyers.

    What Should Be in a Letter of Intent

    LOIs typically vary in length from about two to 10 pages, depending on a number of factors. Some argue a shorter LOI can help speed up the negotiating process as it centers the conversation around the most important elements of the deal. If there’s not agreement there, the logic goes, there’s no need to discuss other factors.

    But in general, it pays – literally – to be very detailed in your LOI, especially for Sellers. What’s dangerous about a simple, two-page LOI is if there are any questions or disputes about terms, the Buyer has all the advantage and leverage. So you want to have as much spelled out as early as possible. This makes terms much easier to agree to later – and you can always pull out a term. But it’s a lot harder to add language to the LOI after it’s signed.

    During the LOI stage, Buyer and Seller should talk indemnity. This, of course, is when the Seller is liable to the Buyer financially if the Seller’s reps and warranties weren’t accurate and not uncovered in the due diligence process. There’s a remedy that makes this discussion virtually non-confrontational.

    It’s at this point that the Seller should build in an option for Representations and Warranty (R&W) insurance. Any escrows or withholds (which will be substantially reduced) will be based on the amount of R&W insurance in place. And if there is a breach, a third party – the insurer – will pay the damage, so the Buyer is protected, and the Seller is off the hook.

    At the LOI stage, you don’t need to determine how much coverage is needed, or the cost. As a Seller, you just want that option there. But you should reach out to a broker. With the proposed purchase price, details on how much indemnity the Buyer is expecting- say 10% or 20% of purchase price, and what, if any escrow or withhold the Buyer is seeking, the broker can come back with a quote and a proposed policy. Having knowledge of the R&W cost in advance provides leverage when negotiating who pays (equal shares is very common).

    With that info, the Seller can say, “We agree to the escrow and indemnity cap if we can have R&W insurance to cover it”. That puts some power back in their hands. This usually also accelerates the Seller’s acceptance of the LOI, shows good faith, and removes fear on the Seller’s part.

    The other components of an effective LOI include:

    • Purchase price
    • Deal structure

    Is the transaction a stock or asset purchase? What are the forms of payment? This can include cash, stock, seller notes, earn-outs, rollover equity and contingent pricing.

    • Exclusivity period

    When the parties agree not to shop around. The Seller can’t talk to any other potential Buyers. This is typically a binding clause requested by the Buyer, who wants to ensure that Sellers are negotiating in good faith. It’s typical for Buyers to request an exclusivity period from 30 to 120 days, while Sellers will typically want as short a period as possible.

    Because the Seller has taken themselves off market, if the Buyer drags their feet, the target can go back out to market. It happens often enough. On this note, Sellers have to be very careful when Buyers offer big topline numbers subject to lots of terms that are left nebulous.

    • Confidentiality agreement

    Sensitive information shared during talks will not be shared. The Buyer can’t share the secret sauce recipe. Both parties have likely already signed an NDA earlier in the process, but this clause further ensures that all discussions regarding the proposed transaction remain confidential.

    • Closing date

    An agreement for the signing and closing to be at a specific target date. It’s always subject to change. But if the Seller sets this deadline, it incentivizes the Buyer to take action.

    • Closing conditions

    What are the tasks, approvals, and consents that need to be obtained before or on the closing date? For example, the amount of cash that should be in the business at closing, what happens to employees – what percentage remain, and debts or obligations that must be resolved/paid. The company must also be operating at the same level as it did as negotiations began.

    NOTE: Closing conditions are viewed by courts as literal. If the condition was for $400K in operating costs to be left in the business, and at closing you only have $375K, it’s a serious violation of the terms. The Buyer will deduct the shortfall from the purchase price, or the Buyer can literally walk away from the deal with no liability.

    In short, Buyers don’t want to acquire a company to find they defaulted on lease payments or loans or has other issues.

    • Breakup fee

    Compensation if either party stalls or delays. This clause is also typically binding, though breakup fees are less common in the lower middle market. In larger deals (>$500MM), breakup fees of approximately 3% are typical.

    • Management compensation

    Which members of the senior management will stay on? Who will be provided equity plans? This aspect of the deal may be vague at the LOI stage before due diligence has been conducted.

    • Indemnity
    • Approvals

    Does the Buyer or Seller need any approvals (e.g., from a board of directors, regulatory agencies, customers) to complete the transaction?

    • Due diligence

    How will due diligence will be conducted? This includes the nature of information (financial, technical, etc.) that will be disclosed and the manner in which it will be disclosed. A sample term would be the need to speak with three of the Seller’s largest clients. Or a requirement to interview certain people in management.

    • Indemnity Provision

    Includes size of escrow or holdback. This is the IDEAL place to include wording referring to Indemnity to be paid by R&W insurance. This will not appear fully until the purchase agreement, but sometimes the Buyer will include summary terms of their expected escrow terms for holding back some percentage of the purchase price to cover future payments for past liabilities, and this is where the Seller can counter (reduce) the Buyer’s amounts using R&W.

    • Representations and Warranties

    This also may not be finalized until the purchase agreement, but if there are contentious or non-standard terms, the Buyer may include them in the LOI.

    Where to Go from Here

    The Letter of Intent (LOI) is an important step in most M&A transactions. It serves in some ways as a preview or summary of the deal terms that would be expected to appear in the purchase agreement down the line. 

    It’s not unheard of for Buyer and Seller to skip over the LOI and go straight to the purchase agreement. However, an LOI can be useful for a number of reasons.

    It helps ensure that Buyer and Seller have similar (or at least similar enough) expectations around deal structure, scheduling, and other big concerns. It also means that any potential deal-breakers come up earlier in the process, so that the parties can either a) stop the transaction process before significant resources are spent on due diligence and drafting deal documents or b) figure out a resolution sooner.

    The LOI is also a nice way to ensure that Seller and Buyer are on the same page about how due diligence will be conducted. In addition, the LOI’s terms serve as important protection for all parties in a deal (e.g., exclusivity periods protect Buyers, while breakup fees protect Sellers).

    Representations and Warranty insurance can be a key part of your next M&A deal, and timing is critical. It’s vital that this coverage and its impact on the indemnity cap and amount of withhold be included in the LOI.

    As a broker, I’d be happy to discuss this specialized coverage with you at your convenience. Please contact me, Patrick Stroth, to set up a call at

  • Alternatives When Representations and Warranty Insurance Isn’t a Fit 
    POSTED 10.8.19 Insurance

    In the world of M&A, many companies, on both the buy-side and sell-side, have realized the tremendous benefits provided by Representations and Warranty insurance.

    The Buyer is able to recover any losses from a breach of the Seller reps without doing so at the expense of the Seller. The Buyer simply makes a claim with the insurer. Plus, the policy cost is either discounted significantly or is free because the Seller will gladly cover the premium.

    Sellers love it because they take home more at closing and the indemnification risk is transferred to a third party – the insurance company. A clean exit, and they have zero fear of future potential clawback if there is a breach.

    That being said, not everyone is willing to entertain using this insurance.

    This is especially true in the case of a corporate, strategic Buyer, in which one company buys another because of synergy of products… to expand to a new customer base or geographic region… or to acquire products they want.

    The thing is that strategic Buyers are often much larger than the acquisition target – often hundreds of times larger. In these cases, there is no incentive for the Buyer to get R&W insurance; the protection it provides them is negligible. This is the case even if the Seller is willing to cover the cost. The other issue: the Seller has no leverage here.

    So what’s a Seller to do?

    As a small Seller, you don’t have to enter into an M&A deal with no protection. There are alternatives if your Buyer isn’t interested in full R&W insurance.

    Rep and Warranty Lite

    For tech companies, the most sensitive reps are those dealing with technology, of course. If those reps are breached, it could be very expensive as they are critical to the value of the company.

    The target tech company could be confident that their IP is not infringing on anybody, but the Buyer no doubt still has a bit of worry.

    If the Buyer is not willing to consider full R&W insurance, a Seller could get a limited policy that just covers IP reps. These types of policies do rely on the Buyer’s due diligence. So the Underwriters still have to engage the Buyer to get their diligence on IP. But it’s not the full report, so it’s a relatively easy ask. And the cost is still on the low end, with a premium cost at 2% – 2.5% of policy limit (subject to $100K minimum premium), with 1% transaction value retention.

    The same sort of arrangement could be made for tax reps, as well.

    Seller’s R&W Insurance

    Although the vast, vast majority of R&W insurance is on the buy-side, it is possible for Sellers to get their own policy. This could be handy if the Buyer refuses to disclose any of their due diligence and the Seller is nervous about not having any protection from risk.

    To be frank, sell-side policies can be more challenging than those of the Buyer’s side. It essentially protects the Seller in the case of a third-party (which includes the Buyer) bringing action against them for a breach of their reps.

    For example, McDonald’s recently bought a small AI company – the technology will be used to speed up the drive-through ordering process. A huge company buying a small one.

    Hypothetically, let’s say the AI company had unknowingly breached another company’s IP. That other company will sue McDonald’s and the AI company. McDonald’s is fine – they have their own protection and legal team. But the founders of the AI company need protection because they no longer have insurance after the acquisition. A sell-side R&W policy can be a perfect option.

    Directors and Officers Liability Insurance

    Owners and founders can also rely on a Directors and Officers liability policy to protect them in case of allegations of misrepresentation, unfair dealing, or fraud. At the very least, the D&O policy can pay lawyer costs to protect the policyholder.

    In the vast majority of purchase and sale agreements there is a requirement that the target company have a D&O policy in place. Privately owned companies with a small number of shareholders/owners might think they don’t need this coverage because they don’t have outside shareholders. But this protection is key.

    Once the Buyer acquires a company, the board is their responsibility. They don’t want to take a risk on things done before they acquired the company. It’s best to have some other source of recovery like this on their end as well.

    A D&O liability policy will run you a tiny fraction of what R&W costs.

    D&O Tail Insurance

    For those companies that never carried D&O insurance in the past, there’s a solution.  Companies can purchase a D&O Tail policy that will provide virtually the same protection as a traditional D&O policy that has a Tail Endorsement.

    In the event there is a claim against any of the directors and officers, they will be protected from legal action for up to six years post-closing if there is a D&O “tail” policy.

    Even if they didn’t have insurance previously, on the acquisition date the tail kicks in and covers any lawsuits brought against the directors and officers at the target company. This covers any allegations they committed a wrongful act prior to the acquisition, all the way back to the incorporation date.

    Step by Step, Down the Line

    Let me wrap things up with a quick case study of a company that wanted R&W coverage in place… and a Buyer who wasn’t willing to deal… and what they did next.

    A small AI company was bought by one of its clients – one 1,000 times its size, roughly, and worth $20B. The total transaction value was $17M.

    The Buyer had no interest in R&W insurance, even when we offered a policy that covered the full $17M.

    The Seller was really concerned because the IP reps went from general reps to fundamental reps with a longer survival period. That’s a lot of risk out there for them for years down the road if another company claims IP infringement.

    We offered to insure just those IP reps, with a premium from $100K to $300K, which the Seller was ready to pay.

    All that was needed to write the policy was the Buyer’s due diligence report. But they didn’t want to disclose any confidential information.

    The last alternative we were able to offer the Seller was a D&O Liability Insurance policy. We got the thumbs up and did a $5M limit D&O policy for $50K.

    The company was acquired on July 1, 2019. Until July 1, 2025, any lawsuit filed against the company’s board of directors for allegations prior to the acquisition date will be covered.

    Of course, R&W insurance would have been preferable for the Seller. But this was the best option and does offer substantial protection.

    If you’re interested in exploring your options for protecting yourself post-closing with Representations and Warranty insurance or some other type of coverage, get in touch with me, Patrick Stroth, at

  • Let’s Talk Indemnification 
    POSTED 9.24.19 M&A

    After an M&A deal closes – and there are breaches of any of the Representations and Warranties from the Seller – the Indemnification provision protects the Buyer from the resulting damages. In most cases, a portion (10% of the transaction value) is held back from the Seller to pay for these financial losses.

    Indemnification provisions, which are enshrined in the Purchase and Sale Agreement, are an ideal way for a Buyer to mitigate risk. But at the same time, Sellers aren’t too pleased with having a significant amount of cash they expected from the sale of their business held in escrow in case of a breach.

    In short, Buyers want very “broad” Indemnification provisions, covering any potential loss, while Sellers strive to narrow the scope of what breaches are covered, the amount to be potentially paid out in case of a breach, and how long Indemnification provisions can be enforced – the survival period.

    As you might expect, Indemnification – and all the elements that go into it – is one of the most hotly contested deal points when an M&A deal is being negotiated.

    As an advisor in an M&A deal or an owner/founder who is selling their company, it’s important to understand just how important Indemnification is – it’s definitely not an afterthought but rather a critical part of negotiations with the Buyer. It could have a tremendous impact on the amount of money you take home after a deal closes and have ramifications for years down the road if any liabilities pop up that the Buyer blames you for.

    Here’s a quick analogy to break this down into simple terms:

    You want to buy a Tesla. You ordered it, gave the dealer your specs, and put down a down payment. You don’t want to show up at the dealership and be given a Nissan Leaf. If that happens, you want your money back. That’s the mindset of the Buyer.

    But, from the Seller’s point of view… they sold you a car. Once you drive off the lot (the deal closes), it’s not their problem anymore. They want no liability for what happens after. They expect the Buyer, after having done their due diligence, to assume all the risk.

    Indemnification Provisions and Survival Period

    Reps can be divided into fundamental and non-fundamental, with fundamental being core reps covering the basic operations of the business, like stock ownership, authority to sell the company, or tax issues. Of course, this isn’t set in stone. Buyers want to move as many reps into the fundamental category as possible (such as intellectual property), with Sellers resisting that effort. For good reason…

    In general, survival periods can run from six months to two years on non-fundamental reps. However, when considering so-called fundamental reps, the survival period is longer.

    Of course, that’s where negotiation comes into play again. Buyers and Sellers will often disagree on what constitutes a fundamental rep. For example, environmental liabilities can be very expensive and time consuming to clean up… and often these issues don’t come up until long after closing. Buyers would prefer these to be fundamental reps.

    Some items are subject to survival periods negotiated separately. For example, say the target company is the subject of a government investigation – that may or may not go to the courts. Buyers will advocate for a survival period for “special” Indemnification provisions for any related reps and warranties that is indefinite – because the legal process could be very slow.

    Indemnity Cap

    Not only do Sellers want to limit the time Indemnification provisions are in force and which types of claims can be brought, they also want to “cap” how much they might have to pay out in case of a post-closing breach.

    The indemnity cap is typically a percentage of purchase price. A portion of that cap is held in escrow for at least a year or until the survival period ends. That’s money that the Seller doesn’t get to take home or distribute to shareholders at closing. The feeling is that the money might never come home because Buyers will find any reason to retain it.

    A Better Alternative

    Indemnification is such a contentious topic that it can slow down or even shut down deals entirely. There is a way to sidestep all of this.

    Representations and Warranty (R&W) insurance is a specialized coverage that transfers all the indemnity risk to a third-party – the insurer. If there are any breaches of reps and warranties post-closing, the Buyer simply files a claim and the insurer covers the Buyer’s damages. And unlike other types of insurance, this coverage is affordable (costing less than ½ of 1% of the transaction value) and more widespread than ever, with about 20 insurers now offering this coverage, even for deals under $20 million.

    Savvy PE and VC firms, as well as corporate strategic buyers, are recognizing its benefits to smooth out deals and mitigate risk and increasingly making it a must-have in their M&A deals.

    With IP becoming a standard fundamental rep, R&W insurance is ideal for small technology companies, at $20M or less, being sought after by larger firms. And if the Buyer is not interested in R&W coverage, which can often be the case for big companies, it is possible to insure only the IP reps in the deal. The premiums are just $125,000, with $30,000 in underwriting fees. A small price to pay for the Seller’s peace of mind.

    If Indemnification has your M&A deal hung up, or if you’re a Seller concerned about this issue because you’re about to put your business on the market, I’d invite you to speak with me about Representations and Warranty and other types of M&A focused insurance that could protect you.

    You can reach me, Patrick Stroth, at or (415) 806-2356.

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

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

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

    And that’s just one benefit.

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

    Tune in to find out…

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

    Listen now…

    Mentioned in this episode:


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

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

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

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

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

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

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


    What Is Trade Credit Insurance?

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

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

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

    Austin: That’s exactly right.

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

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

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

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

    The other thing that we find is the financial benefit.

    How Does Trade Credit Work?

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

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

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

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

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

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

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

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

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

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

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

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

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

    Benefits of Trade Credit Insurance

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

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

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

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

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

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

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

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

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

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


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

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

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

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

    Patrick: How long does the process take?

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

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


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

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

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

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

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

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


  • The First $1 Billion R&W Insurance Policy Issued – and What It Means for the Industry
    POSTED 9.10.19 M&A

    It’s a landmark moment in the world of M&A. Marsh JLT, the world’s largest insurance brokerage, has announced they successfully placed the first Transactional Liability policy at a $1 Billion Dollar Limit, the largest such policy ever written. As impressive as this may seem, it’s only a matter of time before a larger policy Limit is placed on an even bigger transaction. This is just one of the many data points outlined in the Marsh JLT 2019 M&A Trends report.

    The biggest takeaway is that if you have a billion-dollar deal – you need look no further than Marsh JLT. They have the resources and experience to handle these very opportunities. I’ve always believed the world needs the Mega Brokers like Marsh JLT because “someone” has to insure Disneyland! 

    This is just one indication of how the benefits of transactional insurance, especially R&W insurance, is being recognized by Buyers and Sellers and made an essential part of a growing number of transactions, even for transactions going as low as under $20M.

    According to Marsh JLT’s June 2019 Transactional Risk Insurance Report, which looked back at trends in this space in 2018, there are 25 firms offering this specialized type of insurance. That’s a sizeable increase from the handful offering this coverage just a few years ago.

    More policies are being written as well, with Marsh JLT alone experiencing a 40% increase in policy count, from 359 in 2017 to 504 in 2018. The median transaction value for those insured deals was $135M. The size of the average R&W policy placed is about 10% of the transaction value.

    Industry-wide, the number of M&A insurance policies rose for the fifth straight year, according to the Marsh JLT report, driven by strategic acquirers who are gaining confidence with this product. The number of R&W transactions conducted in this sector increased by 21% from 2017 to 2018. PE and other financial acquirers are already comfortable with this insurance, with PE being the majority users.

    Of the policies written, 99%, were Buy-Side R&W, leaving only 1% as Sell-Side R&W. Buy-Side policies continue to represent the vast majority because they provide broader protection (i.e. covering Seller fraud) and because they best facilitate a “clean exit” for Sellers, with no indemnity obligation and less, if any, money held in escrow.

    This allows the Seller to have most of the sales price in hand when the deal closes so they can move on to new investments or distribute funds to shareholders and investors. That’s the reason why Sellers, in many cases, are more than happy to pay for this coverage.

    Looking at trends and what the future holds, it’s clear that the increase in usage of R&W is the direct result of three factors that aren’t changing anytime soon:

    • On-going price reductions from the growing number of insurers entering the M&A space. The favorable pricing environment is expected to continue into 2020. Deductibles for R&W policies are just 1% of enterprise value for most transactions. It’s just 0.75% for deals over $500M.
    • R&W insurance is increasingly being used on larger transactions as past experience has strengthened consumer confidence in the product.
    • More strategic buyers are using the product for both competitive reasons and as an accommodation to target companies. Again, both sides of the table are coming to recognize the value of this coverage.

    It’s also important to note that Underwriters have more experience than ever in writing R&W and other transactional risk policies. This allows this component, including due diligence, to become a seamless part of an M&A deal.

    All this is taking place with a very healthy M&A environment as the background. The Marsh report notes that global M&A activity jumped 11.5% from 2017 to 2018 to $3.5T, even as the total number of deals actually fell. That’s the fifth year in a row that deal values have topped $3T. PE firm buyout activity, meanwhile, was valued at $557B, which is the highest level in 10 years.

    Expect to see increased use of R&W and other transactional risk insurance in the rest of 2019 and beyond.

    The great news for specialty firms, such as Rubicon M&A, is that Marsh’s growth into the billion-dollar deal level opens a wider gap of underserved deals as there are far more sub-$135M deals out there with the exact same needs for protection and service. We’re thrilled to have Marsh JLT out there to serve the mega-deals. We’ll handle the rest!

    To discuss how Representations and Warranty insurance can impact your next M&A deal, contact me, Patrick Stroth, at or 415-806-2356.

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

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

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

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

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

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

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

    Listen now…

    Mentioned in this episode:


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: And then we have IT consulting?

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


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

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

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

    Strategic Buyers vs. Private Equity Firms

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

    Colin: Thank you, Patrick.

  • The Key Differences in Mindset Between Buyers and Sellers in M&A
    POSTED 8.27.19 M&A

    Going into an M&A deal there is always a “courtship” period where the Buyer is wining and dining the target company. If things go well, this leads to a Letter of Intent, which essentially states that the Buyer wants to buy the company, and the Seller agrees.

    This is where things get more complicated. The courtship – and romance – is over.

    Considering that a typical M&A deal is about as hard to complete as a Hollywood blockbuster, it’s a miracle these deals ever go through. There are so many elements that could derail them at any stage until the purchase and sale agreement is signed and the closing takes place.

    So what happens?

    If you’re a target company, you need to be aware of the mindset the Buyer takes on when approaching a deal.

    It helps you manage expectations when you sit across the table. As the target, you must realize that as desirable as you may be, you might not have as much leverage after the Letter of Intent.

    The Buyer’s attitude is that if they’re paying full price, then the target company has to perform to expectations or better once they assume control, even if there are unknown factors that come into play through no fault of the Seller. The Buyer believes the shareholders of the target company should take on all risks of the unknown, despite the due diligence they have done.

    That’s why in these types of deals, a significant portion of the sales price (8% to 10%, generally) is held in escrow for a period of a year or more, with the Buyer basically free to take funds if there have been any breaches with the representations and warranties in the sales contract to pay for the financial losses. They can even clawback more money beyond that amount.

    Understandably, Sellers aren’t eager to take that risk… or take home significantly less funds at closing… money which owners and shareholders are eager to use to retire or invest in new projects.

    A Unique Insurance Product

    But, as we’ll see in a moment, there is a remedy that allows Sellers to protect themselves and not be required to leave any funds in escrow. In fact, they no longer have an indemnity obligation at all.

    On the other side, the Seller maintains they can only give assurances for issues they know about and outline in the representations and warranties in the contract. The target thinks the Buyer should take on all the risk after those issues are outlined.

    Clearly, the two sides are at odds. And this can make for difficult negotiations.

    But there is an insurance product that can make both sides happy, remove the need for money to be held back in escrow and fulfil any indemnity obligations in the event of a breach of the Seller reps. Deals as low as $15 million will be considered by insurance company Underwriters.

    Representations and Warranty insurance does this by transferring the indemnity obligation from the target to a third party – an insurance company.

    For example, say a chain of restaurants is purchased. But post-closing, the Buyer discovers that there are $1M of gift cards out there yet to be redeemed. Without R&W insurance, the Buyer would have to go after the Seller to cover their financial losses. But with this coverage, they simply file a claim with the insurer.

    Another big bonus: with this coverage in place, a deal is EIGHT TIMES more likely to close. Because the indemnity obligation has been removed from the Seller’s shoulders, that’s one less thing to negotiate. The process becomes that much smoother.

    The Nuts and Bolts of R&W

    The vast majority of policies are “Buyer side,” where the Buyer is the Insured Party, although often the Seller is the one to pay for it, and happy to do so, considering all the benefits.

    Securing this coverage is easy, and its cost is low. To secure a policy takes a couple of weeks at most, as the Underwriters review the due diligence performed by the Buyer. The rate is 2%-3% of the Policy Limit, including Underwriting fees and taxes. The price of R&W insurance has dropped considerably in the last several years, while the number of insurers offering this coverage has increased.

    Timing is critical. If you want R&W insurance to cover your next M&A deal, there should be a provision made at the Letter of Intent stage. If it’s put in place at that time, it can always be removed.

    If you’re interested in making Representations and Warranty insurance part of your next deal, contact me, Patrick Stroth, at

  • You Can Now Cover Full Transaction Value With R&W Insurance 
    POSTED 8.13.19 Insurance

    In recent years, as more insurers have entered the Representations and Warranty insurance market (according to a study from Harvard Law School, there are now more than 20 insurance companies writing these policies), there have been more opportunities for ever smaller M&A transactions to secure coverage, with deals as low as $15M deemed eligible.

    The insurers that offer these policies understand that given the smaller transaction size, they will be asked to cover most, if not all, of the transaction value (TV) of the deal.

    Insurance companies are providing flexibility for Buyers and Sellers by offering policies that provide coverage up to the purchase price, while also insuring the Non-Fundamental reps to a specified Limit – more on this below.

    Sellers of small TV targets have less leverage than their counterparts, so having the ability to transfer ALL the indemnity risk can provide a productive tool for both sides.

    Naturally, Underwriters in this space require the same levels of Buyer diligence as the larger deals, so eligibility for R&W should be checked before proceeding.

    Here’s why this matters: most R&W policies don’t cover the entire cost of the transaction. They only have to provide Limits up to the Indemnity Cap (Cap) as outlined in the Purchase Agreement. 

    A Seller’s maximum exposure is equal to that Cap and no more. Therefore, there’s no need to provide more protection above that Cap. In many cases, the Cap runs 20% to 30% of the TV.

    Typical R&W insurers that cover $100M+ M&A deals are reluctant to insure more than 30% of the TV. So, the maximum an insurer would be willing to cover on that $100M deal is $30M, even though that same insurer has the capacity to provide a $50M or $75M Limit. The reasoning is that Underwriters are not comfortable insuring a majority of the TV. 

    This position is not the case with deals in the lower middle market (sub-$30M TV space). Unlike the larger deals, it’s easier for Caps to exceed that 30% threshold. Consider a $5M Cap is 33% on a $15M deal. Buyers have significantly more leverage over targets in this sub-$30 TV space, and therefore routinely require higher Caps, particularly with regard to Fundamental reps. 

    How It Breaks Down

    Within the Purchase and Sale Agreement, there are specific categories of reps: Fundamental and Non-Fundamental. 

    Fundamental reps often include:  

    • Organization and Standing
    • Capital Structure
    • Power and Authority
    • Title to Securities (stock sale)/Title to Assets (asset sale)
    • Taxes

    Any rep not identified as Fundamental is considered a Non-Fundamental rep.

    Buyers scrutinize the Fundamental reps more closely than any of the other Seller reps, as breaches of Fundamental reps lead to larger, more serious financial damages. 

    Breaches of Fundamental reps are rare because they have been so closely watched, but according to the recent AIG claims report, they do happen.

    R&W insurance is priced based on the amount of Policy Limits provided. Since smaller transactions traditionally don’t need higher Limits, Underwriters haven’t been able to set a price for small deals that justifies the risk. 

    For that reason, Underwriters developed the approach of offering to insure the entire transaction by covering the Fundamental reps at a maximum Limit, while including coverage for the smaller, Non-Fundamental reps Cap. 

    The per Limit rate for these purchase price policies is discounted due to the lower risk of the Fundamental reps, while enabling Underwriters to collect sufficient premium to insure the smaller deals.

    Take the case of a PE firm seeking to purchase a chain of car washes for $22M. 

    Within the Agreement, the Buyer seeks a $4.4M (20%) Cap on Non-Fundamental reps, but no Cap on Fundamental reps.  

    Prior to the entry of the new R&W policies, the maximum limit of coverage for Fundamental and Non-Fundamental reps would be $6M to $7M and the parties would have to bear any risk above that Limit. 

    Today, policies are readily available to offer a package that provides $22M in Limits for Fundamental reps, with a Sub-Limit of $5M for Non-Fundamental reps.  

    Consider the pricing benefit as well. 

    A $22M Limit R&W policy runs $400K to $600K. However, a policy with a $22M Limit on Fundamentals and a $5M Sub-Limit for Non-Fundamentals can be as low as $220K. 

    It’s clear that the use of R&W insurance will continue to grow as more Buyers and Sellers come to understand its benefits and insurers are willing to cover a wider range M&A deals.

    If you are considering a M&A deal on the small side but didn’t realize you could secure R&W insurance to protect yourself, let’s talk about this recent trend of insurers covering full transaction value.

    You can reach me, Patrick Stroth, at or 415-806-2356.

  • ERPs
    POSTED 7.30.19 M&A

    The Software You Need to Scale Up Your Business

    As a company is scaling up, especially a startup, it wants to stay nimble and always moving forward to maintain momentum. At the same time, the systems they used in their startup phase – like QuickBooks – just might not be robust enough to manage their new incarnation.

    There are too many financial reports, people, and processes to keep track of with simple accounting software or spreadsheets. Not evolving and finding an efficient way to keep track of it all, and meet the needs of your growing company, will cause growth to stall.

    There is an ideal solution to help you put the systems you need in place to properly scale up your business. It’s a comprehensive software solution that can boost productivity and efficiency while decreasing costs by integrating:

    • Accounting
    • Human resources
    • Sales
    • Operations
    • Service
    • Your CRM
    • And more…

    … in one system. It gives you a 360-degree view of your business, 24/7, from anywhere in the world.

    An Enterprise Resource Planning (ERP) software solution can improve productivity, increase efficiencies, decrease costs, and streamline processes, and much, much more by automating front and back office processes like…

    • Financial management
    • Revenue management
    • Fixed assets
    • Order management
    • Billing
    • Inventory management
    • And more…

    What Makes an ERP So Powerful

    For any startup ready to take their business to the next level and grow, as well as make itself an attractive acquisition target, a solution like this is necessary.

    Cloud-based software NetSuite is the ERP system of choice. Forty thousand organizations across 160 countries use NetSuite to run their businesses. Seventy percent of all startups are transitioning from other legacy systems to NetSuite ERP.

    An ERP can be used by low level staff, as well as top managers, because the level of access can be customized to each user. NetSuite is ideal for companies scaling 1 to 10 to 100 people and expanding to multiple locations and is perfect for a workforce that is spread across multiple locations, has a large percentage of employees who work from home, or has a team that is regularly on the road or in the field, like salespeople.

    Because it’s cloud-based, it can be accessed by any computer around the world. And it also features an API that is easy to integrate with other systems.

    NetSuite features different “modules” that are added on to its core suite, including modules like financial management, payroll, order management, fixed assets, ecommerce, and more. It can be fully customized to meet a company’s needs.

    You can add or switch out modules as you need them – perfect for a rapidly growing business that needs to adapt quickly to the needs of the market.

    NetSuite grows as you grow, allowing you to add features and functionality as your business grows.

    All the Data You Need to Make Decisions in One Place

    This ERP gives real time visibility through dashboards and reporting throughout your organization. It’s a single platform that handles multiple services for your organization.

    Dashboards allow you to analyze and track system data on a variety of levels, including tracking KPIs like account balances and outstanding bills. But they can also organize deadlines, meetings, calls, and more.

    The order and billing management module integrates sales, finance, and fulfillment operations to be more efficient, improve quote accuracy, and reduce billing mistakes. It also automates your approval, invoicing, and payment management responsibilities.

    Fulfillment errors can be reduced with a module that centralizes customer, order, invoice, and shipping information, while integrating with shippers like UPS and FedEx.

    You can monitor your supply chain from end to end, procurement to payment. And it improves collaboration and communication between vendors and customers.

    But NetSuite doesn’t only tell what happened in the past or what’s currently happening in your business.

    Importantly, with NetSuite dashboards, you can conduct the financial planning that helps you achieve your company’s goals. You can conduct “what-if” financial modeling to help budgeting and forecasting, which allows you to plan your next move more effectively.

    The impact on your business is felt in several other ways.

    Employees can be more productive because you can reduce spreadsheet-based processes by up to 70%. With NetSuite, you’ll have one backoffice system that handles financials, fulfillment, inventory, and sales. Using real-time dashboards, scorecards, and KPIs you can constantly and accurately monitor the daily cash balance.

    You also enjoy reduced IT costs; it’s estimated that companies can save up to 93% in IT costs because they don’t have to maintain, integrate, and upgrade different applications that NetSuite does in one place.

    Next Steps

    If you’re ready to move out of the startup phase, it’s clear you need an ERP to help manage your business. But it’s not a matter of a simple download.

    In order to truly optimize this powerful tool, it’s best to engage an Authorized NetSuite Provider (ANSP) who can walk you through the process from concept to integration (including training) to ongoing servicing.

    An ANSP will ensure that companies realize their full “NetSuite potential.” Particularly, for companies that currently use NetSuite, engagement with an ANSP can be of tremendous value.

    Looking for an ANSP? Drop me an e-mail at, and I’ll send you the contact details for the leading ANSP in Silicon Valley.

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

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

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

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

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

    Listen now…

    Mentioned in This Episode: and

    Episode Transcript:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick Stroth: Idaho-

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

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

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

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

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

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

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

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

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

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

    Jacob Whitish: Yeah. Exactly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • Sub-$20 Million Dollar Deals Can Now Be Covered By R&W Insurance
    POSTED 7.16.19 Insurance, M&A

    As more players in the world of M&A come to realize its tremendous value, there have been several big changes in the use of Representations and Warranty (R&W) insurance to protect Buyers and Sellers post-transaction. (Any financial loss resulting from a breach of the Seller’s representations in the purchase-sale agreement are paid by the insurer because they take on the indemnity obligation from the Seller.)

    I’ve mentioned previously that the number of insurance companies offering this specialized type of coverage is more than 20 today, compared to just four in 2014.

    There are also more policies being written than ever before. A part of that is the fact that just a few years ago insurers only felt comfortable insuring deals of $100M or more, and then only with audited financials.

    Now, they are offering coverage for deals under $20M… in fact, they’ll now go as low as $15M… without requiring a strict financial audit during the due diligence process.

    The reason? The R&W market has matured, so to speak. Insurance companies are more comfortable with it as they’ve had successful experiences with larger deals. Underwriters are familiar with the product and the claims process. (Only about 20% of deals result in claims.)

    Now, insurers are looking to increase their bandwidth and increase the number of clients they cover. And that means they have to look at smaller clients.

    The risks are smaller and can’t be mitigated as much as with larger clients. But by bringing down the rates enough, they can cover the small deals. And because the amounts involved are so low, there isn’t much financial risk.

    Still, sub-$20M deals are different in a few key ways:

    • Fewer insurance companies are willing to cover the small deals.
    • There are few Brokers who truly understand R&W insurance and have the right experience.
    • Of the Brokers who do understand it, there is an even shallower pool of those who are willing – or able – to do work on smaller deals. (Many Brokers prefer the larger risks – and the higher commissions – that come with the big transactions.)
    • Brokers working these small deals need to know which insurance companies will take on these deals and the Underwriters with the right experience on these policies.
    • In smaller deals, you have less experienced parties on the buy side and sell side. For most, it’ll be the first time they’ve encountered R&W insurance, and the Buyer is not inclined to learn about it, so it’s critical that an experienced broker is engaged to guide the parties through the process.
    • The Seller really drives demand on this product, often not being willing to move forward on a deal without it. And for good reason, as they can’t afford to have millions of dollars of exposure out there. They’re not serial entrepreneurs who can survive that loss. They’re ready to collect more cash at closing so they can pay out investors and move on with their lives.
    • Despite the smaller deal size, pricing is still in the $200,000 to $300,000 range, including all fees, premium, and taxes, which is similar to what policyholders pay for much larger deals. Insurers aren’t willing to take any less to make it worth their while.
    • Buyers must do third-party due diligence on the acquisition target’s tax situation, IP, financials, operations, HR, and more as those are the biggest exposures out there.

    There are many more M&A deals on the smaller side that don’t get the press of the big-name transactions. And I think the use of R&W insurance to cover transactions at any level can only go up as it becomes more well-known, especially among PE firms and VC funds.

    I’m an optimist by nature. But if there is a slowdown in the economy, you will see a lot of owners and founders running to the door to close out business – that’ll cause a spike in sub-$100M transactions.

    And in order to capitalize on their return and secure more cash at closing in uncertain economic times, they’ll want an R&W policy covering the deal.

    If you’re involved in an M&A deal under $20M and are interested in the protection that comes with Representations and Warranty insurance, I’d invite you call me, Patrick Stroth, at 415-806-2356 or send an email to I’m experienced in deals of all sizes and I have the contacts at the insurers to secure the coverage you need.

  • Craig Lilly | 3 Reasons Foreign Companies Are Looking at U.S. Acquisitions
    POSTED 7.9.19 M&A

    When we usually see cross-border deals, it’s a U.S. company acquiring a foreign business. But increasingly the reverse is happening, says Craig Lilly, corporate partner at the Palo Alto office of Baker McKenzie, and there are three primary drivers for that trend.

    But cross-border deals with foreign buyers aren’t without their pitfalls, especially with newly enacted regulatory and anti-trust and merger controls – at that’s just the start. Just look at what is happening with Chinese telecom giant Huawei.

    Cross-border M&A is far from a done deal. Foreign companies are still acquiring U.S. companies, says Craig, but just engaging experts like his company to shepherd the transaction.

    We talk about where cross-border M&A is headed in 2019 and beyond, as well as…

    • The two biggest concerns in cross-border deals
    • How changes at CFIUS have vastly changed the playing field
    • When a cross border deal isn’t really a cross border deal – and why
    • How American companies are taking advantage of Asian company’s hesitancy
    • And more

    Listen now…

    Mentioned in This Episode: and Winning Strategies in Cross Border Deals Tips for Success Presentation

    Episode Transcript:

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak to 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 Craig Lilly, M&A and corporate partner at the law firm Baker McKenzie in their Palo Alto office. Craig’s practice focuses on acquisitions, divestitures, joint ventures, and strategic investments.

    But it’s in complex cross border deals where he’s really developed great expertise and he’s now thought of as an industry leader. Craig’s been a regular contributor on Bloomberg, the Wall Street Journal, and other M&A specific publications. Craig, welcome to the program and thanks for joining me today.

    Craig Lilly: Thank you, Patrick. I’m glad to be on the program.

    Patrick Stroth: Well, Craig, now that we’re getting past the first quarter here in 2019 rather than just focusing on cross border deals which we’re going to get into in depth. Tell me what your perspective is as an expert on what the state of M&A is here in 2019.

    Craig Lilly: Well, I think MNA is very strong and still in 2019, the values is increasing even though the volume may be slightly lower. 79% of executives say that the M&A will increase in or remain the same in 2019. We’re seeing record amounts of a private equity raise as well as venture raise which is really good for the ecosystem in mergers and acquisitions. In the last 12 months alone, we’ve seen over 3.6 trillion in deal value over 19,000 deals in US and Europe. So that’s a very strong technology M&A is up 20%.

    Also, we’re seeing M&A more institutionalized. 20% of all targets, Pat, are backed by either private equity venture firms or professional investors. Also, there’s record levels of what we’d call dry powder or money to make acquisitions. The PE dry powder is estimated to be over 1.7 trillion and also, the top five tech companies alone have over 340 billion in dry powder. And that includes Apple, Google, Microsoft, Facebook, and Amazon. So the key M&A drivers that we’re seeing are really for strategics are customer expansion and diversification. And so those are all I think big drivers for M&A and which will continue in 2019.

    Patrick Stroth: Well, we’ve got just a confluence of changes that have been happening over the world where you’ve got either the world getting flatter or a lot of capital looking for places to be put and maybe people aren’t looking at their backyards anymore. They’re looking overseas. They’re looking cross border. And which is why I wanted to come speak with you about this. But before we get into the technical issues on cross border and the ins and outs of it. Give us a little bit of context for you. What brought you into becoming an M&A attorney first and then to specialize in cross border acquisitions?

    Craig Lilly: Well, I had a background in financing and accounting so I was always interested in M&A and investments which really drew me into it. I originally worked in private equity back in the cottage days of private equity when it was a very early industry. And then I started working in technology over the last 16 years or so. And one of the things to that really interests me about the technology and in M&A is that companies at earlier and earlier stages are expanding internationally which is a big driver of cross border M&A. So those are the things that really interest me is the international aspects, the complexity, and also getting to learn new industries and verticals.

    Patrick Stroth: So what makes a deal a cross border transaction? Is it as simple as we think just anything outside the US borders?

    Craig Lilly: Well, really it’s really any deal with foreign aspects. It could be the buyer or the seller or material assets or it could be a US company acquiring another US company that has material foreign assets as subsidiaries. So typically almost every kind of major US corporation has some type of foreign aspects. So all those acquisitions even though it may be a domestic acquisition really is a cross border because of the foreign aspects or subsidiaries that a US company may have.

    And we’re seeing this in an earlier stages of the companies. A lot of early companies are young companies are expanding overseas whether to develop technology, develop manufacturing or to acquire customers through diversification.

    Patrick Stroth: A lot of times we’re thinking of US going outside and looking to foreign markets for acquisition targets. But it’s also on the flip side, according to what you just told us where you’ve got foreign-owned companies coming to the US which intuitively we think that the US is too expensive a market for targets. But that’s not necessarily the case. There are things that must be driving these foreign-owned companies to come and invest in the US. What drives the demand from their side to come here?

    Craig Lilly: I think it’s three primary drivers for foreign companies to want to make acquisitions in the US. The first one obviously is technology. We’re seeing the fourth industrial revolution happen here in United States where technology is embedded in almost every different vertical or industry whether it’s automotive or manufacturing or artificial intelligence within industrial manufacturing. And so that’s spurring a lot of the investments and acquisitions by foreign acquirers here in the US.

    The second is just customer acquisition. Companies are looking to acquire customers and essentially diversify their base. And a third driver really is not only the diversification within a customer base but diversifying their own different revenue streams where they could be diversifying in a new analogous business that maybe is very synergistic with your existing line of businesses.

    Patrick Stroth: I agree. One of the things that changed my perspective when we talked about this a while ago was that the focus always on customer basis and so forth. People immediately think China or India where they’re billions of potential customers out there completely overlooking the fact that while we may not have the largest population. We probably have one of the richest. So if you can make a stand here in America with a very friendly consumer base, you’ll do very, very well. And that was one of the things that really came up when you and I were talking about the US being such a great target for them. This can’t all be that easy. What are the challenges that are germane to cross border deals versus ups or domestic deal?

    Craig Lilly: Well, there’s definitely changes or challenges in regulatory, whether they are antitrust or merger controls. Obviously, CFIUS which we’ll get into later is a major challenge for companies investing in the US and CFIUS is the Committee on Foreign Investments in the United States. And also, structure and tax issues. Furthermore, key issues when a foreign company comes here is complying with employment laws. It could be unions or the WARN Act. When you want to terminate employees. Intellectual property, data privacy, and security are a major concern as well.

    You’re seeing often more and more companies are having inadvertent data breaches. So that’s a key issue for any company in any type of transaction particularly for cross border where you could have cultural issues and other different challenges in data privacy. Also, anti-corruption is always a big challenge for companies and having internal compliance programs implemented to correctly deal with those types of issues. And obviously, in any type of transaction diligence, culture, deal execution, and also, post-closing integration is a major issue. And in post-closing integration, something doesn’t start after closing. It really starts very early in the acquisition process.

    Patrick Stroth: Can I ask you this is a little off topic but with all of those challenges that are there that’s probably a role that you and your firm will give guidance to if you can’t have absolute on the ground consulting recommendations you have resources or can provide resources to companies to address those various areas of concern?

    Craig Lilly: All right. We have great breadth in over 45 countries around the world and have over 70 offices. So we have experts in all these areas. And really that’s what you need is a specialist or cross border specialist teams because of the numerous landlines involved in foreign deals and some of the really kind of two big areas that companies are very concerned a bit right now obviously is data privacy. But also the anti-corruption issues that are involved and because of the stiff penalties can be imposed and that’s really you outbound or inbound.

    And so we see companies take a very in-depth look at that. One of the things we also look at every transaction, we try to very early on the process is sit down with a client and discuss what are the really high-risk areas, where is really the concerns for the company, where’s the value? It could be in the intellectual property and so we’re going to really take a deep dive in intellectual property to potentially a freedom operate analysis to make sure that they’re protected. And if they do buy the company that they have the freedom to use it the way that they intended to have synergies with their existing businesses.

    Patrick Stroth: Talk about CFIUS a little bit. Should every company now be aware of it, not just the ones that are the traditional chemicals and military applications number one? And then number two, CFIUS is US. Explain what happens if other countries have something similar.

    Craig Lilly: Well, the Committee on Foreign Investments in the US or CFIUS is where a foreign company proposes to acquire a target a US business that generally either produces designs, test, manufactures, fabricates or develops one or more critical technologies. And because of the recent changes in the law, even a 1% investment in a company with critical technologies could trigger a CFIUS filing. So its critical technologies has been expanded for CFIUS and includes such things as defense articles, and defense services, commodity software, and technologies on commerce control list or controlled for reasons relating to the national security, chemical or biological weapons, missile technologies or for reasons relating to regional stability or surreptitious listening.

    It also can include energy and things subject to Department of Energy regulations such as nuclear equipment, software, and technologies, and also includes emerging and foundational technologies which is not to be defined which is very broad. There’s actually currently 27 pilot program industries identified by NAICS code which will require mandatory filings. Also, CFIUS applies if the target owns, operates or manufacturers or supplies critical infrastructure or real estate.

    And critical infrastructure is broadly defined. It can include systems and assets so vital to the United States that the incapacity or destruction would have a debilitating impact on national security. For example, the purchase or lease or incession of a foreign person to a foreign person or any of real estate is located in the United States and is located within an airport or a maritime port or close in proximity to a US military installation that is sensitive for national security reasons.

    And why should an acquirer be concerned about CFIUS? Well, US Treasury which oversees this can unwind the transaction or impose very harsh equitable remedies and fine. Also, each party can pay up to the amount of the purchase price for the fine. And yes, other countries do have similar laws. The EU also has a similar law. Seven transactions last year were blocked by the EU and we had over 14 deals either blocked or abandoned during the last few years. Over 240 deals were actually formally reviewed by the US in last year. And so CFIUS has very wide overreaching kind of application.

    Previously before the recent changes, a company that was making an acquisition in the US could make an investment of 9.9% or less without being subject to CFIUS. But now it applies even to a 1% investment in critical technologies and that’s a mandatory filing. So it’s a very broad expansive type of law and it’s not just only in the US. EU also has these laws as well and a lot of people also are also concerned about China. And why is China’s such a huge presence in cross border here over the last decade? Well, in 2008, China inbound was 1 billion. However, eight years later, by 2016 inbound was 48 billion.

    So that alone has led to a lot of the concern over CFIUS. Also, there are a lot of changes in capital markets and venture capital. Previously DARPA was very heavily involved if there was some type of sensitive technology being developed. But because of the expansion in private markets and venture capital, there’s all types of new technologies that are being developed where DARPA is not involved at all anymore. It used to be decades ago, DARPA would be almost involved in any type of development of critical technologies because it was usually done by larger companies. Because of the expansive venture capital over the last 20 or more years. Now we’re seeing critical technologies being developed even with very small companies.

    Patrick Stroth: At what stage are you filing for CFIUS? Is this where you pass a letter of intent and you’re beginning to get things structured up there or is it something where it can be preemptively checked before advancing too far into an M&A transaction?

    Craig Lilly: Well, generally, we will recommend clients to do a CFIUS assessment of the risk very early on prior to the letter of intent stage. Typically, companies will be even talking with the Treasury even during this letter of intent stage. And that’s generally what we recommend so that we can basically get some initial advice from the Treasury as to whether this is a very high-risk type of assessment which would require a filing. And in most cases, it can be a mandatory filing.

    But typically, you will file this generally right around or medially before the execution of the contract. And that’s just to sign a contract where you may later do the acquisition usually in a two-step type transaction.

    Patrick Stroth: The other question for you. Its something we didn’t talk about. But you triggered my thought process here. Compared to a US deal, I know every deal is different depending in industry and size and everything but are cross border deals routinely larger? And if so, how much larger than a domestic deal for technology or pick a case study?

    Craig Lilly: Well, historically, we saw a lot of large investments but now we’re seeing even the very small investments. There has been just a rush of investments over the last decade of all types of foreign and Asian investors in the US it was particularly with technology companies and so that’s helped a big surge in venture capital investment as well. But we’re seeing across the board obviously, some of the investments by some of the Asian investors has decreased over the last year just because of some of the CFIUS concerns in the regulatory landscape. But there’s no particular size for cross border or a foreign investment we’re seeing across the board all different shapes and sizes just like you would see with a domestic acquisition.

    Patrick Stroth: And assuming that CFIUS gets taken care of. There are the other kinds of risks out there that are germane to M&A. A lot of those risks can be mitigated or controlled or completely eliminated with ensuring a deal through rep and warranty insurance and it’s been used at an increasing rate in domestic deals. How has rep and warranty impacted cross border M&A?

    Craig Lilly: Well, representation and warranty insurance actually was more expensive in the EU and in Europe before it really came to the US. And so it’s very prevalent in Europe and generally, there’s lower price premiums as well. As you know, representation and warranty insurance essentially allows sellers to walk away with more cash at closing while giving buyer’s interest protected in the form of an insurance policy against loss.

    So typically whether it’s in domestic buyers in Europe or otherwise, there’s been the landscape for representation and warranty insurance and in Europe, particularly is fairly widely accepted. And because it’s a less litigious type environment to typically the prices and premiums and risk retention’s are much lower for a Europe-type acquisition.

    Patrick Stroth: Craig, you mentioned China before and how they ramped up very extensively of going from a billion dollars in deals and then a very short term, they come up to $48 billion in transactions. What do you see aside from the slow down right now which could be temporary but what do you see going forward both in Asia and cross border M&A overall? What trends do you see there?

    Craig Lilly: Well, it definitely a cross border M&A has slowed down because of CFIUS and you’ve seen with the recent trade restrictions that were imposed on the Huawei by the US that that’s a definitely an impact on perception at least for Asian investors here in the US. I definitely think it’ll probably be very slow for a lot of the Asian investments in the US. I do think you’ll see more and more US buyers throughout the world whether it’s in Asia or in Europe. I think some of the big drivers for that though is just because there’s a lot of dry powder available for not only private equity funds but also a lot of the large institutional and strategics.

    As I mentioned before, the top five tech companies are 340 billion in dry powder. But also you’re seeing a lot of kind of old-line companies that are really trying to expand whether it’s through technology whether it’s a FinTech or an agricultural tech or some other kind of emerging tech or they’re trying to diversify their customer base or their revenue streams. And also you’re seeing obviously you see continued outsourcing whether it’s through manufacturing or assembling happen and that’s throughout Asia. And also we’re even seeing a lot more in Mexico and Latin America because of the close proximity and probably the more respect or for the cultural aspects of the United States including protection of IP.

    So I think we’ll see kind of more and more US companies do a lot more cross border. The acquisition of tech is obviously a very driving aspect but obviously, the customers diversification, aqua hires, and other things too. And I think you’re seeing this across all different types of verticals whether its artificial intelligence or robotics, FinTech. Of course, auto tech’s been a very big area servicing a lot more of different transportation companies that are trying to expand and drilling through multiple verticals here. It’s a whole… Electric car, autonomous vehicles. The communication slash smart car and also ride sharing too as well. Those are all things that are kind of driving the transportation industry and I think we’ll continue to see that.

    Patrick Stroth: So we’ll be doing a lot more US buying outside our borders as opposed to the last couple of years where we’ve had predominantly Asians coming and buying into the US. That trend looks supportive because it seems that there are more and more service providers out there and advisors such as Baker McKenzie that can make things easier for US buyers to go abroad where they probably were reluctant to do that because of a lot of the bear traps out there that they didn’t know what they didn’t know. And they’ve got resources like yours now that they can bring to bear that will help. At the same time, CFIUS is making it harder for the foreign-owned companies to come in and maybe easier for us to go out. So it may have not the same sustainability or robust outlook as you do domestic but it’s still fairly positive. Would you agree?

    Craig Lilly: No, I agree. And also we’re seeing kind of a trend that’s really developed over the last few years is that you’ll see a US slash Delaware Corporation basically as a holding company but really their operations are really abroad and even though any M&A or acquisition is of the Delaware company as a domestic acquisition, essentially the company is a foreign company. And so we’ve seen a lot more of those types of transactions and that’s obviously been spurred by the not a venture capital investment here in the United States as well. And I think we’ll see that continue.

    That’s why I’m saying M&A is also becoming more institutional-wise where 20% of all targets are backed by some type of institutional investor whether its private equity or venture capital. So I think we’ll see that continue. Obviously, we’ll see a lot of I think secondary private equity sales. And what that means is one private equity funds selling a portfolio company to another private equity fund. Now those type of exits account for somewhere close to 30% now of all private equity exits. I think that trend will continue as well.

    Patrick Stroth: Well, you’ve got a lot there for us to consider, particularly just not the cultural differences but a lot of the other regulatory and compliance traps and so forth and just how things are different outside. But that shouldn’t stop you from taking advantage of some great opportunities out there. And if there are organizations like you and Baker McKenzie that can be brought to help smooth that transition, that’s all the better for a lot of owners and founders out there. Craig, how can our audience reach you? Because I’m sure they’ve got a lot more questions than I can give you.

    Craig Lilly: Well, I’ll have a presentation which I’ll have on Rubicon’s website after this. And then also you can reach me at our website or my email address which is just Also, you can reach me through my phone number 650-251-5947 plus I’ll have a cross border presentation that I’ll post on Rubicon’s website that can be accessible and will have my information as well.

    Patrick Stroth: Well, that’s absolutely fantastic. Thank you very much. And you can check the show notes here under the insights tab at Rubicon, R-U-B-I-C-O-N-I-N-S as in Sam, Go to the insights tab there and you’ll have the show notes along with a link to Craig’s presentation and you can also reach out to Craig directly. Craig, very informative. You cracked open a lot of different avenues of thought there so I greatly appreciate it. My audience will appreciate it as well. Have a good day. Thanks so much for joining us today.

    Craig Lilly: Thank you, Patrick, very much.


  • Liquidation Insurance for VC Funds 
    POSTED 7.2.19 Insurance

    There is nothing venture capital funds like more than a clean exit in which they can take their money from sales of portfolio companies, distribute funds as necessary to investors, and then move on to new acquisitions with the money they earned from the sale.

    But sometimes there’s an issue and a VC fund can be sued by a third party well after the sale of the portfolio companies… with the fund being on the hook for millions.

    That’s not such a clean exit.

    Here’s the scenario.

    A VC fund has a portfolio of 10 tech companies. They were all promising startups. Some fared poorly. Some did okay. With such early stage companies, that’s just the cost of doing business. Nobody can tell for certain what startups will crash and burn.

    But some of the portfolio companies did very well in growing quickly and seeing revenues soar, thanks to breakthrough tech products, not to mention guidance from the fund. 

    After a few years, the fund had plenty of potential Buyers come calling. The VC fund was happy to offload several of the portfolio companies, resulting in a tidy profit overall. The fund managers are happy. The investors are happy to see a return on their seed capital.


    Unfortunately, that fund, a legal vehicle for having equity in those portfolio companies, is still liable for lawsuits from third parties. And the fund also retained an obligation to indemnify the Buyer for contingent liabilities they were unwilling to assume.

    And because a good portion of the capital from the sale of the portfolio companies is still held in reserve for contingent and/or tax liabilities that might come up, that capital is at risk and they are unable to make a final distribution.

    It’s like if you had a bank account for several vacation rental properties you owned. You’ve already sold the properties. But because you still have that bank account with the sale proceeds, you are still linked legally to the properties.

    If this lawsuit from an outside party is successful, the proceeds will come – be “clawed back” – from your reserves held in escrow against potential liabilities.

    But there is a way to speed-up the liquidation of the fund so that all the proceeds can be distributed to investors instead of being held in case of potential clawbacks.

    Fund managers can make a final distribution to the fund’s partners or interest holders without fear.

    With this “fund liquidation insurance” in place, VC funds are able to close the “liquidity gap” after the sale of their portfolio companies and get a clean exit while still meeting the reserve requirement, which is what they’re after, of course, and maximize their returns. 

    This coverage can also be expanded to cover heirs, assigns, estates, spouses, and domestic partners of fund managers. With this insurance in place, policyholders are covered for identified and unidentified contingent obligations that fund managers would otherwise prepare for with reserves or holdbacks.

    Fund liquidation insurance unlocks the millions (in some cases tens of millions) of dollars VCs are forced to keep in escrow/reserve to cover the cost of these potential liabilities.

    Some Private Equity and similar investment funds are also using fund liquidation insurance rather than holdbacks during windups to cover back-end risks and to enable the efficient distribution of a fund’s proceeds to investors.

    Divestments, which can be multi-year liabilities, can be insured, with the risk of clawback transferred completely to an insurance company. This is not Representations and Warranty Insurance (R&W), although the two types of policies can work in tandem.

    This policy will be set up during the final stages of the liquidation process.

    Potential liabilities, which can include sell indemnity caps, escrows, and excesses, are added up to form the policy limit. Premiums for this insurance are 1.3% to 3% of that limit, with an additional premium of 3% to 5% for unknown risks. It’s a low cost, considering all the benefits.

    Another benefit: this specialized type of insurance could also be a deductible expense. Consult with your tax professional.

    For more information on fund liquidation insurance, contact me, Patrick Stroth, at or 415-806-2356.

  • The R&W Insurance Market Grows and Matures
    POSTED 6.25.19 Insurance

    It’s a good time to be alive for Buyers and Sellers in the M&A world.

    The use of Representations and Warranty (R&W) insurance, is more widespread than ever, with deals as low as $15M considered insurable. That’s down from a minimal deal size of $100M just a couple of years ago.

    What makes R&W coverage so attractive?

    It protects both Buyer and Seller if there is a financial loss resulting from a breach of the Seller’s representations that were outlined in a purchase-sale agreement. 

    The insurer covers the losses in case of a breach because they take on the indemnity obligation from the Seller.

    Plus, the number of insurance companies offering this coverage has jumped from 4 in 2014 to more than 20 today.

    The news comes from the latest report from one the largest insurance companies in the R&W and broader M&A insurance space, AIG. The report, their fourth in the Claims Intelligence Series report, is called Taxing Times for M&A Insurance.

    When this report is released, those involved in the M&A industry and Private Equity pay close attention to the trends it highlights.

    The bottom line is that more R&W policies are being written than ever before as both Buyers and Sellers come to understand the benefits such a policy will bring to their deal, such as…

    • Smoother, more efficient negotiations of the purchase and sale agreement.
    • More money at closing for the Seller (escrow is eliminated, and the indemnity risk is placed with the insurance company).
    • An easy route for the Buyer to recoup financial losses in case of a breach post-closing.

    Both sides of the table have a better understanding of how R&W works, not just for their negotiations, but when the time comes for actually “using” their policy.

    That calls to mind another trend of note: more claims are being reported in this space. It’s not surprising as there are more insured deals out there. But never fear, insurance companies do pay claims in this space readily, unlike with some other forms of insurance. And, as of now, the trend of claims isn’t outpacing the premiums generated by R&W, so pricing and retentions will remain steady. 

    Plus, it’s clear that policyholders (the Buyers) are better prepared to work with the insurer to get their claims paid. The more policyholders purchase R&W, the more comfortable they’re getting as R&W impacts their negotiations as well as when a claim does happen, they are better prepared to:

    A) Report a loss at a more favorable time (after the Retention level has dropped down 12 months after closing), and

    B) When they do report a claim, they bring extensive supporting documents to help the insurer process the loss more efficiently and quickly. This comes from R&W claims representatives who work with policyholders directly on claims.

    Note that 74% of breaches are reported to R&W Insurers within the first 18 months of closing. It’s more evidence that policyholders are more sophisticated in the use of R&W, with half of those breaches reported after 12 months when the Retention drop-down provision has been triggered.

    Overall, this is a good sign that R&W insurance is steadily maturing and provides a sustainable tool for M&A.

    Here are some of the raw numbers:

    • In their report, AIG notes that there were 580 claims from the 2,900 policies the company wrote for deals from 2011 to 2017. This finding is based on claims filed (including claims where the amount sought did not exceed the retention amount), not claims paid.
    • Claims were reported on 20% of all deals, with claim frequency at 26% for deals from $500M to $1B in size. Bigger, more complex deals register claims in one of every four transactions. So larger deals are experiencing claims more frequently (1 in 4 as compared with 1 in 5 for sub-$500M deals).
    • Claims severity grew, with the most material claims (valued over $10M), increasing from 8% to 15%, at an average of $19 million. Big losses are getting bigger. On the other hand, smaller Claims (those under $1M) are mostly falling below the policy retention, resulting in no payment by the insurer. Look for insurers to continue maintaining retention levels at the 1%-2% transaction value for sub-$500M deals. 
    • Despite the larger deals experiencing big losses on a more frequent basis, competition among R&W insurers will continue to force rates and retention levels at lower levels for the immediate future.
    • Most financial breaches are discovered during diligence. Undisclosed liabilities are harder to identify which is why they are the largest source (1/3) of financial breaches.
    • Tax related breaches follow right behind financial breaches, with compliance with laws and material contracts rounding out the majority. 

    Buyers and Sellers interested in one of these R&W policies need a broker who specializes in R&W, works on these deals routinely, and is experienced in M&A.

    I’d welcome the opportunity to speak with you further about how R&W insurance could benefit your next M&A deal. You can call me, Patrick Stroth, at 415-806-2356 or send an email to, to set up a time to chat.

  • An Overview of Tax Liability Insurance
    POSTED 6.18.19 Insurance, M&A

    With any merger or acquisition, tax liability is a major concern because when you buy a company you assume its tax obligations. And you can bet the IRS is keeping close tabs on every transaction for taxable events, not to mention state tax authorities.

    Not paying attention to tax treatments that apply to acquisitions could cost a Buyer significantly, and perhaps negate any advantage they had in the deal at all. For example, say a Buyer purchases because they think it has favorable tax deals, but the taxing authority disagrees. Then they’re on the hook for the tax bill.

    But for a low premium, tax insurance, with policy terms generally set at six years, would protect against that disastrous event. Think of tax insurance as an “add-on” to Representations and Warranty insurance, kind of like you add earthquake or hurricane coverage to your homeowner’s policy.

    That might be putting it too lightly, actually. Tax insurance protects a taxpayer (in this case, the acquiring company) if there is a failure of tax position arising from an M&A transaction, as well as reorganizations, accounting treatments, or investments.

    A few examples of where tax liability insurance would be applicable (thanks to RT ProExec Transactional Risk’s recent white paper for this info and other helpful tips in this post):

    1. Historic tax positions of a target entity in an M&A transaction
    2. Investment in clean energy (e.g. solar), new market, rehabilitation, and other investor tax credits
    3. Real Estate Investment Trusts (“REIT”) and their representations as to their REIT status in an acquisition
    4. Foreign tax credits
    5. Preservation of (or availability of exceptions to any limitations to) net operating losses and other tax attributes following a transaction
    6. Transfer pricing
    7. Tax treatment of reorganizations, recapitalizations and/or spin-offs
    8. Debt v. Equity analysis
    9. Capital gain versus ordinary income treatment
    10. Deductibility of expenses (as opposed to capitalization)
    11. Excessive compensation
    12. Deferred compensation
    13. Whether withholding taxes are imposed
    14. Whether distributions constitute a “disguised sale”
    15. Valuation risks
    16. S Corporations and 338(h)(10) elections

    Checking tax status is, of course, part of any Buyer’s due diligence. An outstanding tax bill is easy to find. But certain tax treatments the Seller insists are correct and up to standard, may not be. The Buyer, relying on its tax attorney’s specialized tax expertise, can insist those issues be taken care of pre-sale because they are exposures.

    In the past, Sellers could go to the IRS and ask, “Is this an exposure?” and get a Private Letter Ruling okaying the request. But with the IRS swamped these days, they’re not really issued anymore.

    Where Tax Insurance Comes In

    When there are tax issues that come up for debate during due diligence for an M&A transaction, both sides bring in tax attorneys and each side makes the best determination in their opinion if this is a taxable transaction or not. They could take a light touch or be very conservative.

    The Buyer will likely insist that a portion of any tax liability goes to the Seller, whose expert says they don’t agree with that determination. If there is a disagreement – get tax insurance.

    Underwriters will get letters from tax attorneys from both sides outlining their arguments, along with supporting documents. It’s quite simple underwriting.

    Underwriters want to see:

    • Name and address of the insured.
    • Covered tax descriptions of detailed descriptions of the underlying transaction and the relevant tax issues.
    • Draft opinion from a tax advisor.
    • The tax backgrounds of the Buyer and Seller.
    • Limit of liability the insured would desire.
    • A potential loss calculation, including additional taxes, interest, penalties, claim expenses, and gross-up.

    It generally takes the Underwriters about three to four days to deliver a preliminary response.

    In some cases, M&A transactions can become tax-free transactions or tax-free exchanges. Of course, the IRS can always disagree and insist on back taxes and fines.

    Some things to keep in mind:

    When Underwriters aren’t confident about a specific tax position, they may set retention at where they think the tax authority would settle. When they are more confident, they will be okay with minimal retention by the insured or none at all.

    If a tax memo convinces them that the IRS agrees that it is not a taxable event – good. If not, the IRS triggers an inspection.

    The insurance will pay the legal costs to fight the IRS, as well as taxes, penalties, and fines if they lose. And, get this. If your insurance win was, let’s say, $5 million and the IRS says, “You just made $5 million in income,” the insurance will pay tax on that as well. That is known as a “gross-up.”

    Tax liability insurance is more expensive than R&W (it generally costs between 3% to 6% of the limit), but it makes sense as the stakes are higher. So it should be an important part of any M&A transaction.

    If you’d like to discuss how to protect yourself with tax liability insurance and how it coordinates with R&W coverage (because R&W does not include a Seller’s identified or disclosed tax risks), please call me, Patrick Stroth, at (415) 806-2356 or email me at, to further discuss this vital insurance protection.

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