Launch Series Ep.3: Diligence and Closing with Ryan Turk and Keith Gross – Ep.178

Ravix Group — Ravix Group is the leading outsourced accounting, fractional CFO, advisory & orderly wind down, and HR consulting firm in Silicon Valley. Whether you are a startup, a mid-sized business, are ready to go public, or are a nonprofit, when it comes to finance, accounting and HR, Ravix will prepare you for the journey ahead. To learn more, please visit their website at https://ravixgroup.com/

Hood & Strong, LLP — Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected]. 

Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.

If you are under LOI, please reach out to August to learn more about how Oberle can help with insurance due diligence at oberle-risk.com. Or reach out to August directly at [email protected].

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Live Oak Bank — Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle-market companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.

(00:02:45) The objective of doing diligence

(00:06:15) Deciding where to focus diligence

(00:14:05) Having flexibility in your areas of focus

(00:15:42) Pipeline management while in diligence or doing a deal

(00:22:27) Managing investor communications & Board construction

(00:41:42) Managing external parties

(00:44:00) Confirmatory diligence

(00:46:51) Keeping legal advisors focused

(00:50:24) Managing seller relationships

Alex Bridgeman:  Thank you both for joining the podcast for an episode on organizing diligence and closing and all the different steps in between. I think a good place to start would be talking about at a high level, what is the objective and goal for diligence? What does that look like? What are the different components, areas of focus? What is the high-level goal for diligence? And Keith, perhaps we’ll kick off with you.

Keith Gross: Yeah, sounds good. I think diligence at a high level is an exercise in underwriting. It’s an exercise in understanding why a business will grow to be the scale needed to hit your base case returns. So, in other words, like from today, how much more do you need to grow revenue and at what level of profitability to generate a specific return given the price you’re paying for a business? The question is, how many customers do you need to win? Where will you win them from? What does that mean relative to the market opportunity? And that’s what diligence is seeking to accomplish, to underwrite the future of that business. And I would say this is, it’s distinctly different from what I would call business analysis, which sometimes people confuse with underwriting. Business analysis sort of takes a snapshot of the company today and sees if there are any red flags. It’s a moment in time view of churn. Churn is 95%. Okay, that’s a number, but without a double click, that might hide certain facets of how new customers are behaving relative to old customers, which could have implications for your market opportunity or the value proposition. And so business analysis is sort of, hey, what does the company look like today? Is there customer concentration? Is there churn? How many new customers did they win over the last three years? Diligence is the flip of that; it’s the future. How much of this do we believe tells the story of what will happen under our ownership rather than just what has happened in the past?

Alex Bridgeman:  Ryan, I really liked your thinking around north stars, which kind of kicks off of Keith’s point around focus and outlining the key questions to ask during diligence. I would love to hear some more depth on your thoughts for north star for diligence.

Ryan Turk: Yeah, definitely. I mean, I agree with everything that Keith said. I think from a searcher or CEO’s perspective, another goal of diligence is that you are managing an investor group who oftentimes has similar questions, but there can also be a wide range. And so, part of the goal of diligence is answering those questions effectively so that you can bring the group along in the investment opportunity. And marrying what Keith said with what I just said, my experience from diligence is that it can oftentimes feel overwhelming because there’s so much. If you asked your ten investors, and each of them has ten questions, that’s 100 things that you could go after. And so, I think you need a few focus areas to kind of ground you on how you’re going to organize and execute. And I can lay out some of the things that worked for me. One of them was I’m a big fan of this adage that search fund investors individually are often wrong but collectively are not often wrong. And so, for me, asking questions of the investors was an opportunity to extract themes. So, what were the top themes that I heard across those ten folks and then grounding myself, those are the top three key issues to diligence. They won’t be the only ones, but those are the priorities.

Alex Bridgeman:  I like the framing of past versus future questions and how many of each, or where do you direct focus on either side? How do you kind of get to the point- How do you decide where you’re going to focus your diligence efforts on both sides, that business analysis and diligence? How do you kind of figure out and suss out what are the kind of core two to three things or maybe more that are actually truly important and really matter in this across conversations with your investors versus your own work?

Keith Gross: I think you nailed it there, Alex, that there are going to be only a handful of things that matter. And so what you’re trying to do is validate a set of assumptions that you believe to be true. That’s not having a perfect model or a crystal ball. That’s really trying to figure out the two, three, four things that will really move the needle and have high confidence that those things will be true. And so as Ryan mentioned, when you get a series of questions from your investors upfront, those could probably be broken into key themes. And I think a lot of times, investors are asking those questions based on their experience and based on heuristics, which are pretty good. They have a lot of experience doing a lot of deals. But it’s important to remember that for each individual opportunity, those questions might be different. That’s one of the dangers of checklist diligence. If you have a checklist that’s based on some other company or some other industry, you could miss something very critical for this specific opportunity. A checklist that was very helpful for a software business serving the sales enablement market is not going to be super helpful for Ryan diligencing a dosimetry provider. So you have to remember you’re just trying to key in on those two to three or four things that matter. And the investor questions that you’re asked can help guide you there. But you need to remain flexible. Because as you learn the answers to some of those questions, the two or three or four things that matter might shift. You might learn something that’s, oh, this matters more than I thought it did or this question matters less than I thought it did. So that flexibility is really important as you sort of work your way through the diligence process.

Ryan Turk: If I were to tie some of those things specifically to my deal, Radiation Detection Company, there were sort of three North stars in diligence that helped me organize what mattered. The first I touched on, which was what were the top three themes coming out of investor questions, and those ended up being key bets. And for RDC, one of them was there was some technology disruption happening in our industry related to a transition from a legacy technology to a digital one. Every single investor I spoke with had concerns and questions about that. And so that really crystallized as a key thing that I needed to diligence. And it turns into a key bet in the sense that you turn it into a statement of, we need to believe that RDC will be able to secure a technology partnership to participate in the digital transition happening within the industry. And so, once I was able to answer that, that became a key bet. Another framework that was really helpful is what I know Keith refers to as what do you need to believe? So, you start with your return profile in mind, whether that’s a 30- typically a 35% IRR, and you work backwards to say what do I need to believe I can do with this business over a given period of time to achieve that outcome. And at RDC, that was a combination of continuing to grow at historical rates, being able to execute some pricing optimization, and then a handful of small acquisitions. And when you lay all that out on a piece of paper, you can look at it and say, okay, I’m going to go diligence these three things. Do I think we can continue to grow at 7% a year? Do I think we can achieve this pricing increase? What’s my level of confidence that we can get these three deals done? And then the third was Pacific Lakes four plus one framework, which is an industry framework that identifies the key drivers of an industry. And I think that’s where you can identify, okay, I got a lot of confidence around what is the market size, I’ve got a lot of confidence around the criticality. There’s a big gaping hole when it comes to the business model or something like that. Rather than go into too much detail, that was another helpful framework for me on how to organize diligence. So, if you combine all those things, that lead you, that results in maybe six to seven priority lines of effort within the diligence process.

Keith Gross: I think Ryan made a really good point there when he was sort of laying out the frameworks he used and giving his own personal example, those key bets are very specific. I need to believe that I can grow 7% a year, I need to believe that I can get X percent price increase, I need to close Y number of acquisitions. And that sort of is painting a picture of the levers that in your base case you will pull to hit that that goal return, so to speak. What is not that helpful in diligence is sometimes you see folks approach it with, I believe the market will grow, I believe the company will retain customers, and I believe we will continue to beat our competitors on RFPs. All those things do need to be true. But as you go through the diligence process, it’s really hard to say okay, I now have the level of confidence to say this is enough market growth to help me hit my base case return, this is enough value proposition that should persist throughout the whole period, etc. So I thought that was a really good framing the way Ryan had it. The only other thing I would add there, and it sort of gets lost in the course of diligence, but there are a lot of paths to your base case outcome. So Ryan ultimately underwrote, I’m making up the numbers, Ryan, 7% annual growth of new customers with two and a half percent price increase, and six acquisitions. But he also might have been able to get to the answer with 5% growth, but 6% price increases and 10 acquisitions. And so, as you go through the diligence process, you’re also figuring out how sensitive the model is, the case is, the business is to these various levers, and you’re building different levels of conviction for each one to build the mosaic that is your base case.

Ryan Turk: And something, Keith, you taught me when I was doing my deal on running diligence was that really great what you need to believe statements are the combination of a few “and” statements, meaning these one, two, or three “and” things need to happen, plus the addition of a handful of “or” statements. So if we do these three things, plus one of these six things, we’re going to hit our outcome.

Keith Gross: The “and or” framework is sort of a great check as you’re approaching the end to say let me just put in plain English how I’m going to get to my base case. And if you can keep saying this and this, and this, and this, and this, and this, your degrees of freedom are pretty low. And you’re sort of trying to hit the bullseye, so to speak, versus if it’s this and this, or this, or this, or this, you have a lot more degrees of freedom when you’re actually operating in the business.

Alex Bridgeman:  Yeah, a friend of mine has a similar concept but called it multiple ways to win with ideally more being better. How many ways can this deal win through growth, debt pay down, some acquisition or M&A process, new product, how many ways are there for me to win in this deal, which sounds very similar and rhymes with the concept you’re outlining. I think, Keith, one thing you said earlier was that those key questions, those key bets and areas of focus may change over time. And it’s important to have some flexibility as you learn more to be able to ask questions about those areas of focus. And maybe they have to shift here and there. Are those dynamics at odds in any way, where you want to focus on certain areas, but you’re constantly trying to- you want to check and make sure those are the right- Are those efforts at odds at all? Or do you feel like they are symbiotic in some ways?

Keith Gross: I think they’re symbiotic in some ways. I think Ryan made the point earlier, there’s a lot of stuff you could dig into, a lot of stuff you can diligence. And so, you have to have a hypothesis about what are the things that matter most to the outcome of this company and start pressure testing those. And that could be on new customer acquisition, that can be on churn, that can be on pricing levers, that could be general operational scalability, industry tailing, a lot of different things you can pressure test, but you’ll have a hypothesis as to what the two, three, four are that matter the most. And as you dig into those, you should almost think about that as having strong opinions loosely held. And as information comes back that either something else is more important or whatever you were looking at is not important, being able to have the mental flexibility to promote and demote certain pieces that you were otherwise doing, or if you get a bad answer on one of them and yet it’s still an important lever, saying this is not the deal for me to do.

Alex Bridgeman:  That makes a lot of sense. Ryan, one thing you’ve talked about, kind of switching gears to pipeline management during diligence, one thing you’ve talked about was, when you found RDC, you focused a lot of your effort on working on the deal for RDC and less effort on pipeline management. And I’ve heard of both ways in terms of focus on the deal at hand versus manage your pipeline. I would love to hear from your experience and then, Keith with kind of your breadth of experience across multiple deals, what are some best practices around pipeline management while in diligence with a particular deal?

Ryan Turk: Yeah, I’ll leave it up to Keith to kind of offer a best practice. But I can tell you my experience. When I found Radiation Detection Company, I stopped all pipeline activity. I got lucky because RDC closed, but if it had not, I would have been three to four months sort of behind the ball. That flywheel that I had been spinning would have stopped. So, I think I got lucky from that perspective. So, I do reflect back, and my advice to searchers is that you need to be thoughtful one way or the other. Don’t do what I did, which was just sort of forget that you’re still searching and focus on the deal. I imagine there are cases to be made on both sides. But I think the point is be aware that that can happen and just be thoughtful about your trade off about whether you do devote continued time to a pipeline or whether you, for some reason, decide to suspend pipeline activity and really focus on the deal. Keith, what are your thoughts about best practices on that?

Keith Gross: Yeah, we’ve sort of come down on the side of things that it’s best practice to keep your pipeline running from LOI until almost close. And the reason for that is as a searcher you spend all this time building a pipeline, building that momentum, building that flywheel. And to Ryan’s point, if you put it on pause, even just for a month, two months, to get that that pipeline going again takes another two, three, four months to get back to sort of full velocity. And given that time is your most valuable resource as a searcher, losing that time can be very painful if the deal doesn’t close. If you think about the data, the frequency with which people close on an LOI, depending on who you ask, you’ll hear one in three, the average searcher will have three LOIs, the average searcher will have four or five LOIs, that means somewhere between a 20 and 33% chance that this is the deal for you. But the flip side means there’s somewhere between 66 and 80% chance that it’s not. And so the majority of the time, you’re going to be re entering the world of searching and reactivating your pipeline, so keeping it going in the background can maximize your probability of success over the course of the search, even though at the moment when you first sign that LOI and it feels like it’s the one, that’s a really hard thing to do both mentally because of your excitement for the deal, the LOI you just signed, and because practically, you now have to keep your pipeline going while also doing diligence.

Ryan Turk: I’ll add that there’s an emotional element to this. And there’s also a practical benefit to what you just said, Keith, and that is that if you get so far into a deal, and you don’t have a pipeline going, there’s not a lot of optionality or it feels like there’s not a lot of optionality for you at that point. But imagine a world where you’re continuing to see interesting companies and talk to business owners. I was not in this experience, so I’m speculating, but I know, what I do know is that there were points in my deal where I thought, oh boy, if this thing doesn’t happen, I really shot myself in the foot. And I don’t have anybody else to talk to, any other pipeline right now. Whereas I can imagine the flip side is, if you do have a pipeline, not only emotionally do you feel a little more secure, but also, I think it would help you preserve objectivity, which is difficult as a searcher.

Keith Gross: That’s a great point, Ryan. I fully agree. Preserving objectivity is much easier when you have other options. But it also provides a basis for comparison. You can look at the deal you have in front of you relative to the other options on the table. So, it’s not just the emotional, well, my search isn’t dead if this doesn’t happen, it’s also the practical well, I’m digging into an industry. And I know, Alex, you talked to Aaron and Kevin recently about industry, and you’re deep in that industry, if other companies within the industry are popping, you can compare that to the one that you’re currently looking at and know am I doing a deal that’s good.

Alex Bridgeman:  At any point along the spectrum of complete focus on the deal versus managing your pipeline to the fullest extent, anywhere in the middle, there has to be some sacrifice where tasks either on the pipeline side or the deal side get set aside for the other half of your workflow. So, within kind of that deal process, if you want to manage your pipeline, where do you find space or what tasks get set aside from the deal side in order to manage that pipeline? Where are the appropriate places to set aside in order to focus on your pipeline?

Keith Gross: I think it’ll really vary by searcher, but some places that could be useful. So well, one, on the diligence side, making sure you’re spending your time focusing on the things that matter for that deal, whether you want to call it your what you need to believe levers or your key bets, just like these are the two to four things that really matter. And I spend my time solving those first, rather than spinning your wheels doing business analysis that regardless of how the answer shakes out, it doesn’t really impact your ability or desire to do the deal or not do the deal. So, one would be just to keep your diligence very focused. On the search side of things, that’s probably a little bit tougher. I think you can continue your outreach at the same clip. You probably have to lump together calls more often than you were or maybe the travel suffers a bit. And you’re actually going to physically visit sellers during diligence. New industry ideation might take a little bit of a pause. But ideally, in a well-structured diligence process, you’re getting through business diligence in somewhere between four to six weeks. So, forget the confirmatory stuff, but actually is this a good business in a good industry that I want to push forward on. And so, you’re not talking about a multi month full pause. The hardest part of the diligence for you is that first four to six weeks, so keeping the pipeline going throughout, but particularly in that first four to six weeks is the most important.

Alex Bridgeman:  We talked earlier about managing investors, and I think this would be a good point to break into managing the internal parties throughout a diligence period with your investors perhaps being the first bucket to dive into. And within any search, you might have 8 to 12 to 15 different investors to manage. Ryan, I would love to start with your experience. How did you kind of think through the, Keith, as you put it, the thematic questions that you’re getting from your deal in diligence and working with investors on those questions and thinking through that process?

Ryan Turk: Sure, I can share my experience and my process. So I admitted an area where I didn’t do a very good job. And that was dropping my pipeline. I think investor management through the diligence and deal process is something that I did do well. So, I’ll share what I did. My first concept was that I didn’t want to try to manage all 10 to 12 investors the same, nor do I think they all expect that. So, what I did was whenever I had a deal under LOI or near LOI, I would circulate a brief memo on it and do an initial round of calls. And I would frame those as, hey, I would like to collect your questions, I would like to get your assessment on the deal and whether you think it makes sense for me to continue to spend time on this. I think that I picked up from somebody, and I don’t know who, but to expect an investor on the first call to, hey, are you investing or not? Or would you invest in this deal or not? I think is arbitrarily high bar. For me, the better question was, is this interesting enough to spend more time on? Or do you think you can kind of kill this right away? Although I didn’t ask that second part explicitly. So anyway, in those initial calls, kind of what I was saying earlier is you’re going to get ten different questions from each investor, and that can feel overwhelming. But if you take a step back, and if you were to like word cloud it, as an analogy, and extract those themes, typically, you’ve got some pretty clear themes, like, wow, every single person wants to understand revenue quality, every single person is concerned about big competitors, only one person is concerned about the color of the paint on the building, so I’m going to put that one aside. So then, with those themes in mind, what I did was I picked three investors, and I established a mutual understanding that I was going to work most closely with them. And those three for me had- I kind of wanted to fill three buckets. The first was my lead institutional investor, who was going to offer a lot of support and investment experience. The second was whoever was most enthusiastic. And really, that was nothing more than just leveraging their positivity and support. Because you need to find ways to keep your motivation up. And if there’s that one investor that just for whatever reason really loves your deal, tapping into that energy can be really powerful. And then the third investor bucket was my most skeptical investor. And that’s the person that maybe has a dissenting point of view or is particularly skeptical of the deal. And I wanted to work really closely with them because, one, I appreciated that objectivity, and I knew that they would sharpen me. And the third was, at the time where perhaps, it’s not a sales pitch, but at the point where their questions were answered and perhaps they arrived at a place where they said, well, actually, I do like this deal, that can be a really powerful story to tell amongst the other group of Alex was particularly skeptical at the beginning because of revenue quality. I worked really closely with him to answer these three questions. We answered them. The analysis is in the appendix. And now he’s feeling much more positive about the deal. So, for me, it was collecting those themes from amongst the whole group, then identifying those three buckets of investors. And when I say mutually agreed, I was very clear, I was like, hey, Keith, I want to work really closely with you specifically on this. And in a world that can be quite busy, saying things like that can kind of make it clear to somebody like okay, when Ryan calls me or when he emails me, I get it, like he’s relying on me in a special way that he may not be relying on some of his other investors for. I think that can create partnership that’s really powerful as you’re trying to navigate a deal to close.

Alex Bridgeman:  And you said this was before submitting an LOI, this part of the 10 calls or so?

Ryan Turk: It depends. I think that’s situational. So, I wouldn’t say one’s better than the other. I think if you feel like it’s time to get your investors’ input on something, then that’s the right time. For me, there were two opportunities. One of them, I did not do a round of calls until after the LOI was signed. The other, I brought before the LOI was signed.

Alex Bridgeman:  Was there a speed element there too where maybe there’s some time pressure to put an LOI together and calls would take more time than you would ideally have?

Ryan Turk: No, I don’t- my data set is small. So, I’m just relying on my experience. There’s definitely some time pressure from the other party to get an LOI, put up or shut up, so to speak. But I never felt like I couldn’t get all that done in an appropriate amount of time. So no, I don’t think that was a consideration for me.

Alex Bridgeman:  Keith, I would love to hear some of your breadth of experience across multiple deals for investor management and communications and sharing materials, questions, all that work.

Keith Gross: Yeah, absolutely. So, I think Ryan hit one point pretty well, which is don’t try to manage all of your investors throughout the diligence process. That’s not the best use of your time. We’ve already talked about having to make time to keep the pipeline up, make time to do diligence. And so trying to manage your 8, 10, 12, 15 investors, whatever the number is, in a fully engaged way throughout the entire diligence process is really tough. So, to Ryan’s point, I would suggest working with folks who can engage and lean in, whether that’s they have a lot of experience doing diligence on companies, or they have specific industry experience for that, the deal that you’re currently working on, just making sure that you’re working with a subset of folks who can help you get to the right answer. So that’s part one. Part two is to bring all your investors along. Just because you’re not deeply engaging with them on weekly calls to hear their questions and sharing all the analysis doesn’t mean you want to go dark and show up at the end with a fully baked cake and say, here’s the cake, do you want to eat it? Bring them along for learning purposes and to be able to ask questions along the way. That’s really important too, to maximize your probability of getting a deal done. But at the end of the day, I would just reemphasize this sort of underwriting and figuring out is this the right deal for you, is this a good industry, is this a good company is the most important thing. And to that end, not all questions are created equal. So be sure, to Ryan’s point, to prioritize which questions you’re trying to answer. But also, as great as it is when your entire investor group participates, that’s not a goal in and of itself. There might ultimately be people who say they’re not interested. And that’s okay. You’re just sort of seeking the truth relative to your underwriting case. And some people will agree with that. And some people will respectfully disagree, and that’s okay. What you want to make sure is you’re getting to the right answer for you in an intellectually honest fashion.

Ryan Turk: And Alex, I can touch on that second piece about bringing your investors along because I completely agree with that philosophy and that priority. And maybe I can just offer how I did that through my deal. So, I laid out a document for my investors that said, here are my key questions and my diligence priorities. And then here are the set of activities that I’m taking to address those. So, I’ll use a specific example. My business has capital expenditures more than the typical search business. And so, one of the key questions from investors was, is this a capital intensive business or not? And does that- And the answer will decide whether it’s attractive. So, the line of work there was kind of a unit economics analysis of for every dollar of CapEx that we spend, what’s the return on that? And periodically, I would, it wasn’t a strict cadence, but when it made sense to report back on some of those findings, I would, and I would lay out, as a reminder, here are the key bets, and here’s the work stream. And then the next two pages are the answer to that first one. And I’ll send this back again and so on. And what was really happening was the incremental creation of my SIM, the document that you circulate at the end that sort of is the whole viewpoint of the company. And my goal was that by the time all my investors saw my SIM, they had probably seen 60% of it already in chunks over time. So it was largely the same format, the same answers. So that was one piece of bringing investors along over time was grounding them in the framework that I was using and what the key questions were, and then over time, incrementing up the answers to those. Then one other thing I did towards the end of my deal, let’s just call it maybe the last four weeks, was I actually held a weekly live Zoom call with all my investors. They were all invited to attend. It was optional, so some didn’t. And what I would do is I would stand up in front of my group, so to speak, and I would give them some live updates. And then I would answer questions live in front of the group. And the reason for this was twofold. One, there is a time- as the deal gets towards the end, there’s definitely time pressure, and it was much more efficient to do this call all together and get the questions answered in real time and then circulate an FAQ afterwards. I think also, there’s a credibility building piece to it that happens, which is I’m willing to stand up in front of my group and take questions live. And where I know the answer, I’ll be confident; where I don’t know the answer, I’ll be honest. And I got quite a- I got a lot of positive feedback at the end of that process that it was efficient and effective. So just another way that you can bring your investors along because one thing to consider is that, to a certain extent, as a searcher, you’re being evaluated too through this deal process. How much confidence do I have that this individual can go and run this business? So I felt a little bit of that, and I think for the searchers out there, consider doing some kind of live call towards the end of your deal for those reasons. It worked for me.

Alex Bridgeman:  You mentioned a couple of things, mentioned a live call with investors, circulating an FAQ afterwards, building a SIM. I’d been curious just on the communication piece with the broader investor group, not just with the three or four so investors that you’re doing the most communication with, which sounds like a lot of that can be ad hoc as well as a recurring meeting, what cadence worked well for you in communicating with a broader investor group and in what formats? Like, early on, was it more email, less call or less of a live together calls versus near the end? Like, what cadence has worked for you?

Ryan Turk: Yeah, and I think that it’s important to say that this is what worked for me, but it may not work for everybody. The way that I circulated information for the majority of the deal was via email and documents. And I tried to follow generally good communication principles of making sure that the headline was upfront, that there was ample context and that there was clearly presented analysis and answers to questions. You don’t want your investors to have to put together a science experiment or a puzzle to figure out what you’re trying to tell them. But it was mostly just circulated via email and with no particular follow up on my end, just sort of like, hey, this is for your information. And rather than an arbitrary cadence of okay, I’m going to do this weekly or every two weeks or what have you, I did it on a as needed basis. And there’s probably pros and cons to that. But what I didn’t want to do was an update theater, if you will, of, hey, I’ve been diligencing for two weeks, I don’t have a lot to say, but I’m going to send you an update anyway, because I felt like it would dilute the- it would dilute my message, as opposed to setting an expectation that if Ryan is emailing you about his deal, he has something to tell you. And he’s going to be respectful of your time and make it easy for you to understand. I think that, to me, was the better expectation to set. So, to answer your question, that probably ended up being like maybe a three to four week cadence at the beginning. But then it starts to neck down into a more frequent weekly cadence of those live calls. So that’s what worked for me.

Alex Bridgeman:  I love the phrase update theater. I’ve never heard that before. One day, I’m going to use that.

Ryan Turk: Close cousins with metrics theater, which is what happens on the company side.

Alex Bridgeman:  I love that too. Keith on cadence, what has made sense and worked for other deals you’ve seen with investor communications as a broader group?

Keith Gross: I think Ryan makes a great point. You want to keep people in the know, particularly when there’s new things to know. That enables them to continue to learn alongside of you. You also want to make sure that you bite size it because going dark for two and a half weeks then saying here’s 41 pages of my learnings over the last two weeks is a lot harder to digest than maybe two or three shorter punchier messages that help bring the group along. So, it varies, but to Ryan’s point, every two weeks, week early on, call it two weeks early on, but that accelerates over time. So, I think that’s really a good measure there. On the people you’re working closely with to get to the answer, the people you’re working more closely with on underwriting, I would more strongly recommend ad hoc for that experience. Because as you’re learning, waiting for some scheduled call on a Friday, if you’ve got a key learning on a Tuesday, means you’re losing three days of something, whether that’s collaboration or a different path you could be running on or even if that was a deal killer, and you should be walking away from the deal, again, with time as your most valuable resource as a searcher, making sure that you’re keeping in close contact as you learn is very important for that core group.

Ryan Turk: I was very focused- Keith, you bring up a good point. I was very focused on kind of the broader group. But answering the same question for the folks you’re working with more closely, it would be hard for me to characterize what that was like because it was so connected at the hip, so to speak, and ad hoc, and I mean, I’m incredibly grateful to the folks that were sitting sidecar with me during the deal on that, but I agree with you that for the folks you are working more closely with, an organic natural cadence probably emerges depending on where you’re at in the deal.

Alex Bridgeman:  Before moving on to external parties, legal accountants, any tech diligence, is there work with your investors prior to closing on the company around thinking about how your board might be constructed? Or what amount of effort with designing your board is too preemptive given that, Keith, as you mentioned, there’s like a 20, 30% chance this is actually the deal that closes versus waiting till close before thinking about your board and who that would look like?

Keith Gross: Yeah, great question. We could probably do an entire episode on board construction and high performing boards. But to answer the more narrowly focused question, you probably want to start thinking about board toward the end of business diligence because for those first four to six weeks, you’re very focused on figuring out the company, the industry, and really underwriting the what you need to believe to see if this is a deal that you want to pursue. If it is, that’s when you have to start thinking about, okay, we’re going to go through confirmatory diligence, ultimately get the deal closed, who’s going to best set me up for success as a first time CEO in this business. And so that doesn’t necessarily mean it’s the people who worked most closely with you on the deal. It probably does because you’ve probably picked someone who you’ve been very close to or is a large investor or has industry experience. But that is not necessarily a one to one trade off. It might not even mean someone who’s directly in your group, if there’s expertise either in the search fund community or in the broader industry at large, that can be really useful. Because what you’re doing here is you’re building the bench, the team that’s going to support you in the day to day, not that they’re going to be talking to you day to day, but they’re going to be closer to you than your other investors are. And so a good board will have an operator to help you really think through how to be a first time CEO, a good capital allocator, which is more than just broad capital structure decisions but really how do you think about allocating capital within the business, part of which is capital structure, and some industry expert, someone who has experience either in the business model or the industry. Those don’t necessarily need to be three distinct people. But those are the three roles you’re seeking to fill within your board. And so thinking about that framework as you exit business diligence and move toward closing the deal through confirmatory diligence is probably the right timing to start building that framework and working closely with the folks you’ve been talking to you throughout diligence.

Alex Bridgeman:  Yeah, I agree. There’s definitely a full episode on boards to be had there for sure. Ryan, in thinking about managing external parties, I like the thoughts you shared earlier around tying the messaging you have with your external parties to the key bets, key priorities, and keeping that framework consistent across all the parties you’re working with on any given deal. How do you relate those key bets to folks who run maybe the more structured parts of diligence, like the Q of E and whatnot?

Ryan Turk: Yeah, I think just like your investors, you want to contextualize for them what the business does, why you’re interested in it, and within their scope of diligence, whether any of your key bets fall there or whether there are particular parts of the diligence that are really important to you. And so, I’ll use tech due diligence as an example with my business. When I was buying RDC, software is a big part of our business, but it’s not our product. So, we offer a tech enabled service. We have a proprietary piece of software that powers that. So, it’s important, but it’s not the product. And so, sitting with my tech diligence provider and saying, hey, look, let me explain you what we do. Let me talk to you about how software plays a part. Let me talk to you about what I’m not worried about, meaning we’re not trying to sell this product, like the software, meaning I’m not trying to like bundle this up and sell it to customers. But what I do need to know is that this thing works rock solid because if it stops working, the business grinds to a halt. So, shaping it for them in that way is really important because you can imagine a tech due diligence provider that does ten SaaS diligences a week, kind of applying the same framework. Now, these are all smart people. But again, this is just about aligning on what the most important things are. And then I think the further part was that in my business, one of the key bets was we’ve got a lot of concentrated experience in a few key people on the technical software side of the business. And I’d like your assessment on their abilities, how well the thing is documented, etc. So just, I think you can kind of get them accelerated on the most important stuff pretty quickly.

Alex Bridgeman:  Keith, you’ve talked about confirmatory diligence being kind of this area of the deal process confirming kind of the other key questions you answered earlier to the themes around key bets and whatnot. Can you dive into that just a little bit more? I’d be interested to hear your thoughts on what are the questions that Q of E and legal tech are actually answering for you and it’s not necessarily related to the key bets that you’re making.

Keith Gross: Just to reiterate what we talked about earlier, the most important diligence you’ll do in this process is the business and industry diligence. If that doesn’t hit the bar, then third party diligence, tech diligence, legal diligence, accounting, it doesn’t really matter. This is confirmatory. This is for everything I can see, this is a business I want to buy. This is it’s well positioned in its industry, its customers find value. Now, let’s make sure that all the other things, tech, scalability, the people, the processes, legal, all the various things get tied into legal diligence, just basically check the box. And the questions that those providers care about, to Ryan’s point, are not generally the questions you care about. You, again, care about industry and company, they care about making sure they can get through their check the box list that they are paid to do. And so, launching them too early in a process can actually distract you. We’ve talked to a couple times now about how do you manage your time. You have your pipeline going, you’re doing diligence. One way to manage your time is to also not launch tech diligence, accounting diligence, legal diligence because they’re going to ask questions that you don’t necessarily need to know the answer to before moving forward, while distracting the sellers with what will be complicated and involved questions. You have two different goals, so to speak, with these diligence providers. They want to get the analysis you’re asking them to do, they want to get it done correctly and as fast as possible. You want to get the answers you’re looking for while also keeping the seller engaged and happy as you move toward close. And those two things are not necessarily in conflict, but they can be. And so as you see questions like is the profitability what we thought it would be? We’ve done all our industry diligence, our business diligence, we believe the business to be x profitable. Accounting firm, can you confirm EBITDA profitability over the last 12 month period as well as the two years prior? That is a question you need to know, the assumption being that that is true, you’ve done some business diligence, and we’re going to trust that what the company has given us but verify it with Q of E. But it’s not the key focus of everything you’re diving into.

Alex Bridgeman:  Yeah, specifically around legal as well where there’s seemingly endless numbers of terms and questions and ways that the deal can change. Can you talk a little bit about key bets and questions and keeping your legal adviser focused and focused on the right things and knowing when it’s okay to not give up but just be okay with certain terms or how things go while keeping that focus?

Keith Gross: It really varies by situation. So, what are the things that lawyers are digging into? They tend to be things like are the contracts you’ve signed with customers enforceable, the term limits, what does it allow you to do on pricing. They’ll do some diligence to make sure that you’re not violating any IP if it’s a software product. They’ll make sure that there’s no or they’ll seek to understand any outstanding lawsuits or potential liabilities in the company. So these are the sorts of things that the lawyers have a very long and involved checklist that the company will find very annoying to answer and fill out. But those are the kinds of things they are digging into. And some of them will matter a lot more than most. And so, for instance, if you find out that your contracts with customers are not enforceable for some reason, the terms of those contracts, and I’m not talking about some termination for convenience clause that got buried in there, but rather something more unenforceable at a state level or federal level, that’s something that’s pretty bad because we’ve just done a bunch of work about revenue quality only to learn maybe our revenue quality is not what we think it is. So that feels like one that’s tougher to live with than, hey, they have some outstanding liability on XYZ, we’ll just make sure that we document that really well on the APA. And if that liability comes to fruition, the seller needs to pay it versus us. And so, it’s always good to think about as a searcher, which of these are existential to the underwriting, that actually impact the what I need to believe that could change the way in which I can pull all those levers and hit all those “or” statements. Versus we’ll just need to make sure this is documented really well in the final agreement.

Ryan Turk: I don’t have a lot of specificity to add to Keith’s answer. But I think one thing that comes to mind just about when you start to manage external parties more broadly, is that when you’re doing business or commercial diligence, you’re the one that’s in the driver’s seat. As the searcher, you’re the diligencer. When you start to engage external parties, you put them in the driver’s seat, and so you’re getting a tremendous amount of information, feedback back to you. And my observation, as I reflect on having run my business the last couple of years and on my search is that was an early opportunity for me to practice the ability to read signal from noise. And what I mean is, you hire a high power accounting firm to do a quality of earnings. There’s a tremendous amount of information coming back at you. And as a searcher, you say, oh wow, okay, I guess a bunch of these receivables have to be written off and that’s not on their books. Well, is that signal or is that noise? Versus wow, we just found out that they’ve been calculating cost of goods completely wrong. And that has a material impact on what these financial statements look like. That’s probably more signal than it is noise and that might be something you spend more time on. So you multiply that across accounting, legal, tech, regulatory, whatever it is. I think it’s important as a searcher to know that there’s going to be a wave. And you have to be really thoughtful about picking out what matters and what doesn’t.

Alex Bridgeman:  Yeah, that’s a good framework to have, especially when it comes to managing sellers, which is probably the last chunk for our conversation and managing that seller relationship. And we’ll have a whole episode dedicated to managing seller relationships. But in terms of the diligence, and as bumps along the road come through that process, what are some ways that are helpful to keep that seller relationship positive? And both of you alluded to the relationship bank concept, which I love and also subscribe to. So I’d love to hear your thoughts around seller relationships.

Ryan Turk: Yeah, I can jump in first on this one, Alex. Since you alluded to the concept, I’ll describe my version of it, which is you call this person out of the blue and you say, hey, I’m Ryan, and I’d like to by the last 25 years of your life’s work and the last seven years of your family’s work. And there’s interest and you set off on this journey together to do this deal. And what feels kind of euphoric at the beginning for both sides to sign that LOI and kick it off, those who have done deals know that there’s good times and there’s bad times in a deal. And so, this idea of investing in the relationship bank is that you are making time for the person you’re buying the business from, to get to know them, to understand what success looks like for them, what are their hopes, fears, dreams. You’re sharing all those things as well, to the extent that it’s appropriate. And you’re viewing them as a partner in getting this deal done, not as an adversary. So that’s just kind of generally this idea of investing in the relationship bank. So it means traveling to the business, getting to know who their spouse or children are, understanding why they’re selling, all these other things. And the idea is that while the times are good, you’re making those investments because when the times are not good, and there’s a materially bad finding in diligence, or you have to renegotiate the networking capital peg or whatever it is, rather than some nameless, faceless automaton that’s trying to buy a business, you are Ryan, the guy from Virginia with three kids and a wife and dreams of running a business, and wow, we like the same restaurants and we root for the same sports teams. There’s just a tremendous amount of importance in building a real relationship that is going to last what is often a tumultuous experience.

Keith Gross: I totally agree with Ryan there. I think it’s important to remember that the relationship bank you have with your seller and making ongoing deposits into that relationship bank, it’s an ongoing exercise, not a moment in time exercise. And so one key pitfall we sometimes see is people put a lot of really good energy and effort into developing a seller relationship and establishing that relationship bank and making frequent deposits. And then the LOI gets signed, and all of a sudden, alright, I’m in diligence transaction mode, head down, I’m only going to ask the seller hard questions and really try to make- not trying, but it’ll feel like they’re sort of picking apart the seller’s business, rather than consistently reminding them no, I’m Ryan from Virginia with three kids, and I’m just trying to seek the truth, not trying to do anything one way or the other. Because at the end of the day, yes, the owner is selling you their business at some price, but there’s a lot of places they could have gotten that price or higher, and they’re choosing to sell to you. And the more you act like nameless, faceless private equity, who signs an LOI and goes straight into head down diligence mode, the more you act like that, the more likely you are to have a problem at the end when you go to make a withdrawal from that relationship bank and find out that your balance is zero, that’s how you’re bankrupt. And so just keeping, just consistently reminding yourself, you’re not just buying a business, you’re also forging a relationship. And you can do that with go to dinner with them. Don’t even talk about the diligence process. Talk to them about what they’re going to do after they retire or what you’re so excited about or what happened on the sports, the event of the team you both like or whatever it might be, just make sure to continue making those deposits. And don’t forget that there’s a human on the other side as well.

Ryan Turk: My advice would be that you approach the- there’s a place for mechanics and a sort of deliberate nature in this. And then there’s a place for just being a human and being genuine. And what I mean is I deliberately planned out all of my trips down to Austin, Texas, to visit RDC. And I was very thoughtful about how often they were and where they hit, okay, right before we kick off Q of E because that’s going to be stressful, I’m going to be there in person. Before we negotiate a seller note, I’m going to be there in person. All of that was very methodical. But when I got there, and we went out to dinner, I didn’t have a script. I wasn’t trying an angle. It was like just two guys going and grabbing a steak and a beer and having conversation. So, I think, to say it again, you should be methodical and thoughtful about this. But then when you’re in the moment, and you’re actually engaging with this person, if you have too much of an angle or if you’re not genuinely curious and interested in them, I think that will come off. So you’ve got to figure out how to get yourself there.

Alex Bridgeman:  And then as those bumps in the road come up inevitably throughout your deal process, how do you communicate those with the seller? What’s the effective ways you found to mitigate some of the stress of bumps?

Ryan Turk: Yeah, I think I would encourage folks to put themselves in the other person’s shoes. And I mean, just the, I’m going to make up some numbers, but orders of magnitude. Imagine you’ve just run a business for 25 years where now you’ve got $20 million of personal wealth tied up into it. And it’s hinging on a 30 year old buying your business. Like, do you want a text message at 10pm on a Friday saying, hey, Alex, bad news, Q of E didn’t come back with the EBITDA number that we thought; let’s touch base on Monday. No, of course you wouldn’t. That’s a $20 million text message. So, I think understanding the stakes for the other individual are different but probably just as high as they are for you. And thinking about okay, is this an email, like an FYI, hey, we found out this, not a big deal, just letting you know. Or is this like a phone call? Or potentially is it let’s meet in person? And I had each throughout my deal. And the one in particular was we reached an impasse on our seller note. And it was the evening on a Wednesday, and I called the gentleman I was buying the business from and I said, Barry, I’m going to be there tomorrow because we need to sit down and talk about this face to face. And I know that we can figure out a path through this. But I don’t think we’re going to be able to do it over the phone. And so, I think you have to read the situation according to the gravity of what the finding is or what the decision is, or so on.

Keith Gross: I agree with Ryan. I think bumps will always exist. There’s no such thing as a smooth deal. But on the bright side, we’ve never seen bumps kill a deal if there’s been investment in that relationship bank. Because at the end of the day, it’s a $20 million crystallization for the seller. And the point of contention could be large, but more likely, it’s $100,000. But on a seemingly sensitive topic. And so, putting it all into perspective and helping the seller understand that you’re not trying to be, again, private equity and reduce what you’re trying to give them, you’re just being fair, is really important. And it’s really much easier for a seller to believe Ryan is treating me fairly when I know Ryan, the individual. But when it’s Ryan the 30 year old trying to be a private equity firm telling me that we need to talk about a seller note, it can feel much more, like Ryan’s word earlier, adversarial, that he’s trying to take from me, not just get to the fair solution. And so, bumps in the road will happen, but investing in that relationship bank can really minimize any fallout that could otherwise occur.

Ryan Turk: I’d like to add just one thing, which is as a searcher, there’s temptation all around you to like shirk responsibility when there’s bad news, and what I mean is, if you think about the cast of characters in a deal, there’s your East Coast, West Coast investors, and I’m being kind of snarky because that’s how some of- a lot of these folks selling their business can think about these things. But you’ve got East Coast, West Coast investors, you’ve got an attorney from a national brand name law firm, there’s a Q of E firm sometimes from a national firm, there’s all these people. And I definitely felt sometimes when there was bad news to want to say things like, well, look, my lawyer is telling me I can’t do that. Or Keith, my investor Keith doesn’t like this part of it. I think that undermines really who you are, which is this is your deal to get done. And you’re the entrepreneur and you’re the one leading this process, and to the extent that you shirk responsibility and push it off, I think that undermines your credibility, and it undermines that relationship bank, but it’s really hard. And that’s why I’m saying it, is that it’s really hard when you’re a searcher. But the real point here is that, to your question, Alex, of like how do you know how to communicate these things, et cetera, is that it can be really easy to let other stakeholders in the deal get in between you and your seller. So, it can be easy to allow the purchase agreement to back and forth between lawyers, it can be really easy to allow the accountants to ask questions and dig in in ways that might be disruptive to the relationship. So, I think keeping yourself front and center in the relationship as a searcher is the real point of the last minute of me talking about it.

Keith Gross: Yeah, make sure it’s you and the seller against everybody else, not you guys against one another.

Ryan Turk: Yeah, that’s well put, Keith.

Alex Bridgeman:  I love that that. Well, thank you both for coming on the podcast and walking through all these concepts and ideas on running a good process. So thank you both for sharing your time. I’m excited to see this one published and get some feedback.

Keith Gross: Thank you, Alex. Appreciate it.

Ryan Turk: Yeah. Thanks, Alex.