My guests on this episode are Tom Klein and Roland Lessard, Tom and Roland launched a partnered search after running a background screening business together and acquired a language service business focused on intellectual property in 2016, which they sold last year in 2021. In both companies, growth through acquisition was a core to their playbook and we spend a ton of time diving into best practices and things to avoid in doing so.
This is one of the best episodes of the podcast for understanding M&A, synergies, and change management, and if any of these topics apply to your business, you’ll want to tune in. This conversation covers all things M&A, shifting teams, understanding culture and structure, effective leadership, and integrations with new companies and teams.
We got on such a roll near the end that I entirely skipped my closing questions to make room for more discussion, and I think it paid off. By the end of this longer-than-usual episode, I hope you’re in agreement. Enjoy.
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.
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.
(3:58) – Tom and Roland’s Backgrounds
(13:03) – How many companies within the industry did you speak with during your search?
(16:35) – What was the company you bought and how did you plan out growth?
(20:02) – Where were the biggest pains during your massive growth from $5mm to $30mm?
(26:25) – What strategies did you use to get up to speed with everyone’s role when making changes?
(32:08) – What’s your philosophy and experience with M&A?
(42:51) – What are some Do’s and Don’ts of tuck-in acquisitions?
(58:07) – How do you implement synergies and change management when you’ve acquired one of these companies?
(1:12:45) – Additional commentary on synergies
Alex Bridgeman: I’ve been looking forward to this ever since Aaron and Scott introduced us all. So, it’s been fun to get to know you guys over email a little bit and I’m excited to chat with you in person or over the video here, unfortunately – in person one day. Maybe I’ll make a trip to New York here pretty soon, and we can get to meet for coffee or something. But thanks for joining. This has been fun. I’d love to hear a little bit about just kind of your backgrounds, how you got into search, the company you ran, and all the acquisitions you did and now you’ve sold. So, I would love to hear all about that whole timeline.
Tom Klein: Yeah, I can start us out. So, I’m Tom Klein, and I met my partner Roland a little over a decade ago. I started my career after school out in Asia, with Princeton in Asia. I spent a year out in Thailand and came back and did 5 years in finance in big banking. And then, after business school, I spent the last 12 years in what Roland and I like to call unsexy business services. So, I actually met Roland in a background screening business right when I got out of business school. We were stuck in the same office together with a poor little dividing wall, and neither of us have a sense for how to use our voices inside. And so that led to some partnership and some confrontation in that office, but mostly partnership by the end. And after that background screening business sold five or six years later, we were thinking up and drumming up ideas of where we would go next and what we would do, and it was highly appealing to us to be able to run a business, and the vehicle to be able to run a business in the form of a search fund ended up being highly appealing to us. Being able to buy a business that was a mid-sized business and not startup was appealing. The ability to be all in on one business was super attractive to us. And the ability to go long on the equity of a business rather than focusing on short term compensation was something that was very appealing to us. And so, we spent, what Roland, 18 months searching for a business here in the US, had kind of a set of key metrics and matrices that we were focused on around the characteristics of the business we wanted. And one of those actually was that it was an unsexy business service. I’ll turn it over to Roland to tell how we ended up in language translations because that’s a pretty good story.
Roland Lessard: My name is Roland Lessard, as Tom introduced me. We’ve been friends, colleagues, and I guess you could say married for about 12 years. And so, we met back in the late 2000, early 2000s after the old background screening business, sharing that office. Tom and I kind of came from different avenues but found ourselves in the same way. My background, my BS, MS and stuff is more of an engineering background, consulting background, all that fun stuff. And so, as Tom alluded to, after leaving the background screening company and setting up our own search fund for all the reasons Tom articulated so clearly, we found ourselves drawn to this translation language services industry with a focus on intellectual property. And when looking for a business, one of the things we always try to espouse folks is to like make a personal connection. And so, the personal connection we had was we had an intern that also spoke many languages and helped us look at this language services space. And the funny story with it is in the middle of searching, being in the foxhole, I would say, in looking for a business, basically being unemployed, my wife decided to do a full remodel on our kitchen, which is not something anyone would enjoy while their income is greatly diminished. But so here we are getting ready to redo our kitchen, and she fell in love with some dishwasher, and dishwashers to me were something basic to clean the dishes and they were a few hundred bucks. I didn’t know they needed to be Wi-Fi and so many decibels for silence and all this other stuff, Alex. And so, one day I got home and the dishwasher I said we’re not going to get is in my kitchen. And I said to my wife, “Well, I thought we weren’t going to buy this.” And she’s like, “Well, I’m saving money with it.” I said, “Well, how are you saving money?” She said, “Well, Roland, you’re going to install it.” And so, I took that as a fun opportunity during my search fund to become HVAC person and deal with appliances. Long story short, as I’m pulling through this Bosch dishwasher, I’m looking at the MSDS sheet, I’m looking at the instruction manual, I go to the website, and I realize that everything, the IVR system, the phone, everything has a dozen languages. Language is embedded within this product. And this is just one product of many. And so, you start thinking about translations as this ancillary thing that’s not connected to many things. And you think about just, okay, how do I have my website in two languages? No, it’s much deeper than that. And so, in today’s globalized society, foreign language, if you want to sell internationally, is embedded within every product in every organization. And so that became a realization for Tom and I, that it’s a must have service, which is one of our key drivers in why we do what we do in the business that we look at and how do you find a business that is must have, which helps obviously during slow times and recessionary times and so forth. But that is how we started finding translations. And then from that, we found a wonderful company in New York City, which was nice considering that we were also in the area, and being geographically agnostic, we kind of got a little bit lucky on that one.
Tom Klein: Yeah, Alex, we were ready to move anywhere. That was part of the handshake agreement was we were willing to move to Paducah, Kentucky, where we actually did look at a business. We were willing to move to Wisconsin or Arizona or California. It just so happened we ended up in New York City. But one of the great parts of the language services industry, which at the time, it was a $30 billion global industry, maybe today, it’s now 50, which is remarkable and would surprise most people to be of that size, but one of the greatest characteristics of it is its fragmentation, which is another key attribute we look for. And the number of targets, as you know well probably, Alex, is a critical criterion to be able to have a successful search, especially if you’re running an industry niche focused search where you’re really going deep on one specific sub industry within an industry, having the right number of targets, a high-volume number of targets really allows you to spend more time in that industry. There is a knowledge snowball effect where when you’re on your seventh or eighth conversation with an owner in that industry, you sound remarkably sophisticated, and it allows you to really get a number of at-bats, far higher number of at-bats to ultimately hopefully find success and close on a deal. So, in language services, chasing 10 to 30 million of revenue and say 3 to 5 of EBITDA, we had 150 or even 200 targets, which we used to like to say, Roland, I think there better be a minimum of 50 or 75 targets. And so, language services, one of its great attributes was having this many possible targets once we decided we liked the industry and its characteristics.
Roland Lessard: And Tom, now that we’re getting Alex into the search fund space and he’ll be raising his own search fund shortly, I think one of the things that kind of stands out about everything Tom just conveyed around having 50 or 100 targets, when we raised our fund and began really searching in 2016, having a very centric industry focus search was kind of an outlier. And so, Tom and I, when we say 50 to 100 targets, most folks back then were doing I would say more of a shotgun approach and they would have thousands, but they’d be across multiple different industries with no clear path. And so, we took a very different approach to be a very industry centric kind of search where, as Tom communicated, we jump on the calls with owners and we would know their best friends, the other colleagues or competitors, and you’d have a very productive conversation where folks on other side of the call really believed you had been in the space and not just for a month or two but for years because when you’re working 50, 60, 70 hours a week, but you’re actually not spending time with upset employees or upset clients, and you’re spending time just learning and really understanding the market, it’s an amazing advantage that you don’t get to do in everyday work life. And so, you really become an expert quickly if you really spend all your time focusing on one space and really networking out and kind of spidering out to different folks that have an impact in the industry.
Alex Bridgeman: Yeah, it’s pretty amazing. Especially when I’ve talked with searchers who had hundreds of companies in their industry in their own region, and then another search group that has eight total companies nationwide in their industry, like it’s that specific. So, you said 150-ish companies or so, within that industry, how many do you think you talked with? Do you think you talked with all of them at some point?
Tom Klein: We’ve probably communicated with all of them, but based on the correspondence, we were letter writers, personal letters to folks, and the way we wrote those letters, I think, had a huge impact on the hit rates. We would get 50% response, some sort of response from 50% of them. And within the response rates, about half were willing to get on a call. So, I would submit we spoke with call it 30 or 40 companies within that space, but then, nicely got told no for a variety of reasons by another 30 or 40, which is fine. Sometimes all you want is a no because you want an answer. What’s worse is no response. And it’s okay, your son’s in the business, or hey, I’ve got another good 10 years in this to build and it’s my life’s work and I’m only 50 myself and want to run it. And so just getting an answer, Alex, including a no, we learned the value of getting a no, cross them off the list. The other thing I’d say is we don’t want to act like translations was our first industry. We burned through another 20 industries, some less attractive, some equally attractive, but for a variety of reasons, those fizzled out. They weren’t what we thought they were. They ended up with too few targets or we exhausted the targets and couldn’t get them get something moving into sort of diligence or a letter of intent. So, we certainly had our share of crossed off industries that we still like today, but one of the greatest fears was that we would run out of industries. So, I can remember well, Alex, Roland would pester me for how many, hey, how many you got left? How many good industry ideas do you have left? And so, we were always telling each other we had to keep adding ideas to the list because we didn’t want to run out of “good” industries.
Roland Lessard: And Tom, with that, I think one of the things that whenever we talk to prospective searchers or folks that are just getting going or getting engaged, and Tom and I like to kind of help guide and mentor and support different types of folks, the one question they always ask was, the company we bought, AKA translation space, was that one of your original four or five on your PBM, and the answer is always no. And so, to tell the folks listening, don’t get scared when you burn through your first PBM ones and none of them work out because that’s probably more the norm than anything else. And as Tom mentioned, I think really thinking about that sales funnel and having a good response rate is more important than having more opportunities on top that mean nothing. And so, I’d rather have a 50% response rate on a hundred targets that are tailored that we understand that are the right size, than a 3% response rate on 500 targets that we know nothing about. And so, I think it’s just an important concept. And being letter writers, the one joke I would say is that besides Tom and my wife, the only person that I knew best was the postmaster at the local post office. Walking in to buy a hundred stamps every single month was always an interesting way to spend my time and my money.
Alex Bridgeman: Yeah, certainly. Let’s talk about the company you bought then. So, what company did you buy? How large was it? What kind of shape was it in when you acquired it? And then from there, what was your growth plan for it?
Tom Klein: I can start, and Roland can finish that. So, we bought a company named Morningside Translations, which was based in New York City but with a bunch of offices around the US and also overseas in the UK, in Germany, and Israel. The company had about 130 employees when we bought it and was doing something near 30 million of revenue at the time. And the company provides intellectual property translation and filing services to corporations and law firms. So, they are providing the service of translating patents and then filing them around the world. And with that comes a fair amount of regulatory complexity, I should say, and local patent office knowledge around the world. If you think about a company spending a half a billion or a billion dollars on important R&D over 5 or 10 years and coming up with 1 or 10 or 50 patents from that work, companies want to go secure those rights overseas for when they ultimately commercialize. And so, companies may want to secure rights in two countries but maybe a hundred, and each time they do that, assuming the local patent office language is not English, like in Australia or Canada, you’ve generally got to translate the patents and you’d better get it right because there’s no margin for error in terms of securing the proper rights to your innovation. So, that was the business, and I’ll let Roland finish that.
Roland Lessard: Yeah, I’ll kind of share a little color on the state of the business. And so, I guess another thing for all the folks listening is that all companies have hair, all companies have warts. And so, does the market, does the dynamics, the people, the industry, the sub-niche, does that outweigh some of that hair and some of those warts? And from our perspective, it did. And so, I would say the business was very entrepreneurial. And so, the founder was the epitome of an entrepreneur, like profit second, let’s just grow, let’s figure it out afterwards. He didn’t have an HR department. The finance department didn’t do a budget. I don’t know what they really did besides AR and AP. And so, the state of the business was it was a business that was growing very, very fast, but the infrastructure of the business was starting to crumble. And so, you can think about a building with a foundation and every year adding a new floor, the building is getting taller and taller. It’s going from 5 million to 10 million to 15 to 30. However, that foundation was built on a $5 million infrastructure, and so it was starting to crumble. And so, that was something that Tom and I did notice and understood quite clearly. And we will speak a little more about that as far as getting in early and really understanding the management team and the folks that are part of it. And so, we knew where the work had to be – how do we sustain the growth of the organization while creating structure and helping them move and cross that chasm from a small business to a medium sized business? And so that was kind of the challenge at hand that we understood walking in based on how the founder before us ran the business. Again, great guy, just lack of structure from a back office and a front office perspective. And so that was kind of the state of the union of Morningside when we acquired it.
Alex Bridgeman: So, when you talk about the systems were built for a $5 million company, but now it’s 30, where did you feel those crumbling systems the most? Like where was the most pain felt?
Roland Lessard: That’s a great question, but I would say forget systems, I would talk about people. And so, in the history of the world, you could look at very, very few people that have ran a $5 million startup all the way to a billion-dollar company because the skill sets are generally different for someone growing a venture from scratch versus someone starting to scale a medium sized business versus someone with a large fortune 500 company, which is just also a very different beast in itself. And so, I think Tom and I would say obviously, I wouldn’t go into systems, whether it’s a CRM, whether it’s the IT system, or whether it’s a lack of software development at all, but I would say that the key would be on the first and foremost, are the right people here with the right skill sets to scale versus start something from a garage. And so that is the area that we had to focus on first, Alex, was do we have the right people in the right seats on the right bus heading in the right direction? So, what we always said was we kind of had the business, we kind of did like old blood and new blood. So even our executive committee was kind of 50/50 of old legacy leadership and then new leaders that we brought in, where we kept the matriarch of the business, we kept the sales guru of the business, but we brought in finance leader from a past life that did a lot of work in M&A with us historically. And then our Head of Operations was actually someone that we met during our search process. In what, as Tom mentioned earlier, kind of like connecting and networking in, I met a gentleman who’s very savvy and kind of worked for a large player in the space and we kind of poached him. So, when we closed, he was working with us about a month and a half later. And so, we really kind of helped offset that team with greater, bigger business thinking but while still keeping the spirit and the entrepreneurial gusto of the original business, and so how do we kind of blend those two together, where we move away from the reactionary way of the business when you’re a small company and move to a more proactive way, but we don’t want to become a bureaucratic, we want to keep the entrepreneurial spirit. So that was a challenge that Tom and I faced from the onset.
Tom Klein: We were also missing significant numbers of departments, Alex. I mean, we added five new groups within the first three months, shifting roles and responsibilities. I’m not talking about hiring; we were hiring for sure, but we were shifting roles and responsibilities and making them clear and precise. I mean, it was so entrepreneurial that people were, first of all, everyone was in sales. So, everyone was allowed to sell, just as an example, literally everyone. You had your technologist doing new sales calls. Secondly, Roland mentioned departments that you would expect at 20 or 30 million of revenue to exist and 130 employees didn’t. So, there was no HR department. We didn’t have a technology development shop. We didn’t have a product department. We had not yet developed account management, an account management function. So, there were significant departments to set up. And additionally, there were issues around the world we needed to deal with. The existing departments that did exist generally did not exist globally. Meaning, for example, an operations group in the US was doing different stuff than folks in the UK or Israel. So, making departments global and one company for those departments that did exist was another critical kind of people and organizational factor. So, I think our employees received maybe- they thought- they were wondering when it was ever going to end. They received ten emails titled Organizational Changes within the first three months. We tried to be open and explain why we were doing things, but it felt like every two weeks they would get a organizational announcement PDF for the first three months, maybe ten times.
Roland Lessard: And I think that’s one key point Tom said, I think people should really think about, and it goes back to M&A and finding the gems. And so, as Tom alluded to, one of our mantras was like how do we do more of the same? So, people say, do more with less, like how do you do more of the same? So how do you keep your same head count but do more? How do you grow into it? And so, when you had- we had offices all over the world, and they were still run like their own little standalone business. And so, when you are able to merge these, again, there’s no walls in today’s global world, when you’re able to kind of operations is one operation group, you automatically gain efficiencies right there. And so that’s where you are able to repurpose some of these people into different roles. And so, the mistake of just going out and hiring everybody to backlog in your org is the most important part of your first year by far, but how do you reuse folks in different aspects? And so, like Tom mentioned, our product group, our product group was going to being four or five folks strong. Every single person was already there, and we were able to repurpose some solid folks. And so, we did that, even in account management a lot with some of the sales folks. So how are we able to build on these functions without- again we had to hire some folks but how could you build out functions without having to continually increase your OPEX? And so those are things that we spent a lot of time thinking about, and you can do that through scale and efficiency.
Tom Klein: By and large, I mean, people were happy, I think. We certainly lost some people who felt that the sort of card blanche entrepreneurial element of the business was gone. But guess what? That’s what happens when you have a 30 million revenue business. So, we lost some people, some of whom we miss, some who we didn’t. But by and large, folks that stayed, I think, appreciated the clarity that had been missing around their roles and responsibilities and the identity and mission of their department. So, it gave them marching orders. It wasn’t to micromanage, but it set the table for what they were supposed to be focused on and why, and then who around them was going to be on their team and where we were going. So, it was a lot in the first 90 days, but it was absolutely critical work that set the stage for future success.
Alex Bridgeman: And how did you try to quickly get up to speed with what each person was actually doing? Because to figure out where people should be placed, you have to figure out what they’re doing to begin with. So, what sorts of tactics or strategies did you use to try to get to that understanding as quickly as possible so you can make those changes?
Roland Lessard: So, I think I’ll just jump in to start that one, but I think there’s kind of like two main answers there, Alex. I would say the first one and then we’ll speak about this probably a little more when we talk about M&A, one of the secret sauces that Tom and I did, and whether it was a Morningside or prior life where we did I don’t know, another 7, 8, 9 bolt on acquisitions together, so we have a strong history of doing deals together, is getting in early. And so well before close, we met the management team not once, not twice, but several times, private lunches, private meetings, getting into the weeds of the company, spending time with what we like to coin as breaking down the sergeants versus the officers are. And so, when you spend time with folks and they open up and you listen, it’s amazing what you can learn about what they’re doing on an everyday basis. I think folks sometimes get too enamored with like this is where we’re going versus figuring out where they are. So, it’s like how do you figure out your desired state if you don’t know what your current state is? And so, we spent a lot of time really listening and learning even before we closed. And then, again, as a first few months went by, that’s really where you have to like listen and learn. And the other mantra Tom and I live on is org metrics and activities, and kind of that order matters tremendously. And so, especially with smart, aggressive people, when they see a problem or they see an opportunity, an activity, the first inclination is to let’s go fix this, fix that, and before you know it, you’re running around with your head chopped off fixing problem after problem after problem. Instead, you should be figuring out first, who is my team? Are they in the right seats? And what did they do? And so if you focus your efforts on org first, do we have the right people on the bus? And do we have the driver, the backseat driver, the navigator? And then do we know where we are, and do we know where we’re going from more of a metrics and data perspective? It becomes much easier to understand activities and where we’re going when you have the right people and you understand where you are and where you are going. So having a clear set of metrics really allows the CEO to fly at 15,000 feet versus going from 30 to 5 and back and forth all day. And usually when you do that, you’re causing disruption. You’re not actually benefiting the business long term. You’re having quick wins that don’t have any longevity to them. And so, I would say that’s, again, part of what we’ll call our secret sauce when thinking about a business is getting in early and really spending time in that order with org metrics and then activities. And so that’s probably, to me, the best advice we could give.
Tom Klein: And just to add to that, when we talk about sergeants, these secondary and tertiary lieutenants who are absolutely critical to the business but might not appear, or are unlikely, I should say, to appear in a management meeting, you’ve got to meet those people and you’ve got to meet them without the owners of the business or the CEO of the business. You’ve got to hear from them directly, and there’s a time and a place for that. It’s not early on, but it’s somewhere midway through. And that’s where you’re going to get amazing insights on culture. That’s where you’re going to learn where the bodies are buried. That’s where you’re going to learn everything you need to do for day one planning. It’s our strong belief that your first day and your first week owning a business are the most essential time period. It’s your first impression, it’s how you handle employee and customer anxiety – we may get into that. But these meetings that Roland mentioned with these sergeants are so important for how you prepare for day one. And the meetings we had specifically in our search fund acquisition really got us a two months head start on the work that we knew we had to begin planning for and the listening we knew we had to do because we realized that there were going to be a lot of changes likely in that first three months. So, to get two months on the other side of the acquisition, in terms of us knowing that this was going to be coming and beginning to kind of pave the landscape for that, was critical to our success, to begin planning before acquisition, Alex.
Roland Lessard: And Alex, that is a key. And we spoke about this at a few round tables, but you think about those old World War I movies with trench warfare and that officer from West Point standing up and just getting shot. Meanwhile, everyone’s following the dirty, grungy sergeant when they have a problem. So, the question is when the employee has a question or a challenge, who do they go see? That’s the sergeant. So, like they’re generally not going to another easy member or maybe a vice-president or something, someone that’s a good employee of the company and has great strategic vision and so forth. But when there’s a problem, who do they go see? When there’s a question, who do they ask? And so, if you can figure out who those people are, those the people that are really spinning the wheels of the business. And if you can get them on your side and moving the same direction from a change management perspective, you have all the power in the world. Because your easy arms are going to follow you no matter what because you’re already tied in with them. You have very common goals. You’ve already done that, you’ve established that, but how do you get that next layer of management, or wherever those folks may be, to be on your side? And once you do, you then have won the company over.
Alex Bridgeman: Let’s talk about M&A because that’s a big part of your growth story as well. I would love to hear just a high-level overview of what kind of M&A did you do? And then what was your thinking and philosophy on acquiring other companies as bolt-ons?
Tom Klein: Yeah, so kind of stepping back, when we were in the employment background screening business, which was the unsexy business we were in prior to patent translations, we bought seven bolt-on acquisitions in about the same number of years. This is sort of 2010 to 2015 or maybe 2009 to ’15. And that was in a similarly fragmented space with lots of employment background screening companies in the call it 10 to 30 million revenue range. And so Roland and I were able to partner on all those deals, and we kind of split things down the middle. I was in charge of finding those targets, building relationships with those targets, and then running all the diligence and getting the deal across the finish line with the buy-in of our leadership team and key executives. And of course, Roland was charged with integrating the business. And so in some cases, we had different incentives. If I was being incentivized to purchase the company, and Roland was being incentivized on achieving the synergies, you can imagine who was maybe the bull or the bear in terms of the forecasting. So, we had to find that common ground, which actually really helped us forge our relationship and ultimately partnership outside of that. But we were looking for background screening businesses that had good growth that had low customer concentration. And then we were generally looking for businesses that had some qualitative gem in them where there was something we were getting beyond a great customer base. So, were we getting some great employees? Were we getting a new product or service that we could launch? Were we getting a new location that would benefit the company? And so, I think that philosophy was one we took into patent translations and patent filing. Could we find pretty good growing businesses? Could we find businesses that were generally 5 to 10 to 15% of our size? One of our golden rules of thumb is don’t buy a business if it’s more than 50% of your size. In fact, you buy something 30% of your size, it starts not necessarily feeling like a tuck in. So, could you find something 5 to 10% to 15% of your size that had some good growth where the customer base is pretty happy and is experiencing low churn and where we could find something additive to our product portfolio, to our employee base, to our geographic reach? Could we add one of those things in addition to hopefully getting a deal at a good synergized proforma multiple? Roland, what else would you add?
Roland Lessard: No, Tom, I think you nailed it. You hit the nail on the head with how you articulated that. I would say that maybe the only thing I would add in there, and I think it became more apparent in the translation world, is not deviating from your overall vision. And so, in translation, there was a lot of different translation opportunities, like going back to sub niches. And I think what served us really well was there was a huge platform of acquisitions we could have done that were kind of nice and they were good from a synergy perspective, but they would have diluted the value that we created by being in regulated industries, such as life science and intellectual property first and foremost. And so, the discipline, especially when you’re deal hounds, to not go out and buy something just to buy something that will create financial value but might not create long-term strategic value, I think was a lesson that we had to keep reminding ourselves throughout the process. And it kind of connects to the gem conversation, but it may be a little bit even higher up, really focusing on strategy and ensuring this company, beyond growth, beyond customer concentration, all those pieces, does it fit our longer-term vision of who you want to be, especially when one sits across multiple industries?
Tom Klein: That’s a great point, and I missed that. But it’s basically ensuring you’re buying something in your core business. There were lots of translation companies we could have bought that didn’t do our core business of patent translation. And so, it’s easy to convince yourself, oh, this would be a nice tuck in when you’re potentially fundamentally changing your identity. That was one of the things that we spent a lot of time on. In the first 12 or 18 months, we had a lot of discussions and debate about who we wanted to be. We were a language translation company, but we were also an IP patent services company. So ultimately, with some 60% of our- and ultimately 80% of our revenue coming from patent, we decided to really focus on patent and IP and not on some smaller businesses that we had, although we kept servicing them and growing those businesses, we took a clear pivot toward being an IP services company rather than being a catch all translation company that did all sorts of translation. So that became important in, Alex, who we were targeting and what we were looking at. We ended up doing two deals, just to get to the other side of your question. We ended up doing two deals in about two years. The first year and a half, we didn’t do deals. We were internally focused. But we ended up doing two deals. One that was kind of a 5 million revenue tuck-in, especially focused on life sciences, and that was over in Israel. And then, we ended up buying something that was more like 15 million of revenue, but highly, highly profitable with a really big gross margin and EBITDA margin. And that was our second acquisition. And the thing I would say about that one is we talked about our rule of 50%, not buying something more than 50% of your size, this was actually 30% of our size. And even then, while we had a very successful integration, unbelievably successful, purchasing that business did force our core growth rate to slow at Morningside. And one of the unique factors in that acquisition was that our salesforce had to take over a lot of new customer relationships in the acquired company due to some missing relationships at the business we bought due to departures of some employees, including well before we purchased the business. So, we had to do more of these customer transfers to our own salespeople from a relationship management standpoint than expected. And so, that’s a lesson in when you start buying something that’s even a third of your size in bolt-ons, you got to be ready for the core business to end up absorbing a bunch of energy and bandwidth that then leaves current priorities less attended to. So, I think that’s a good lesson. And some of this stuff we knew, some we didn’t going in. But as you start getting up there, 30, 40, 50%, it’s a whole different ball game than buying something that’s 5 or 10% of your size and kind of impacts employees around the edges. When you start getting up there on 30%, you’ve got many more people involved in the business and it’s taking a lot more of their time.
Roland Lessard: And so, there was one thing Tom said there that I just don’t want folks to gloss over when thinking about it, obviously, as you start with some of our history, we did, whatever, seven deals prior together before Morningside. So obviously we’re well-experienced working together. Again, people could consider us deal hounds in some way, but as Tom mentioned, no deals in the first year and a half. And that was on purpose. And that goes back to our earlier conversation of org structure first, learn your business first. And so, I see a lot of folks wanting to jump right in and get into acquiring companies, especially when they have good opportunities. However, if your business is not structured, if you don’t have all the right people in place, you don’t have the right data, it makes that integration and that bandwidth soft from your core business exponential because you’re trying to move them into your sausage making machine. And if your sausage making machine is spitting out bologna, like you got a problem in how are you going to create steak when your own business is not figured out yet. And so, taking the time to really build out your team, build out your data, like such an important concept because then it makes M&A integration so much easier because you have the right people, you understand your business, you have the data to fly at 15,000 and understand pros and cons and hits and miss without having to be in the dirty, dirty weeds. And so, to me, I think people like, again, be patient, build your organization out, learn your business before stepping in, and especially if you’re buying a company, as Tom mentioned, a third or larger size, you really need to make sure you have your organization in tip top shape before you go about it.
Tom Klein: Yeah, there’s nothing more unattractive and demoralizing to target employees who’ve been acquired than a disorganized- than a parent company in disarray. And it’s so obvious when it is in disarray. It’s so clear and obvious based on communications, based on how attentive the employees of the company that bought you can be to you, how they describe their organization, the data they have. It’s so obvious how well-run an organization is to a company that’s just been acquired. And so, we sat there, and we’re like we’re not ready to acquire anyone, and that annoyed some people who had heard we were going to come in and there’d be all this exciting M&A and some of our executive leaders a year in were I remember a little annoyed that we hadn’t done some deals because they knew that doing the deals was going to help scale the company. They also knew that it was good for economics in the business, that we could really go. And I’ve got a track record of achieving synergies in a way that made the deals fairly lucrative. And so, we eventually got there, but people were wondering where the heck are the acquisitions.
Alex Bridgeman: So, we’ve kind of dancing around a few of them or describing a few of them directly. I’d love to hear some more of the kind of do’s and don’ts of good tuck-in acquisitions, especially since you had so much practice beforehand, before getting in the language business. I’d love to hear some of the best practices and then things to avoid that you’ve learned over your careers.
Roland Lessard: I guess I’d start with maybe two of the best practices. We’ll do that first, and then we’ll dive into the don’ts. It’s always nice to be positive first, right Alex? And so, I think the first one I would say, and we definitely danced around it quite a bit already, is get in early. And so, founders and owners, again, they’re going to have trepidation, but you can’t allow them to push off manager meetings and getting to know the employees until the last minute. That’s a recipe for disaster. And so, getting in early, creating bonds with the key leaders, that’s how you really learn the business, and that’s how you form relationships. So your first month or two, you’re not like this new guy walking in, you’ve already created friendships. You’ve already created bonds. So, getting in early and getting that access to people should be a non-starter for folks. And again, a lot of owners feel uncomfortable. It’s a touchy topic. But it’s a topic you have to be relentless on. It’s not an option. And to me, it’s a red flag. If the owner, after all these comforting conversations, getting to know people, if they still don’t want you to meet folks, then there’s a red flag there because they’re hiding something possibly, and not to be nefarious, but there’s something going on that you need to explore. And so, getting in early will be the first and foremost thing I would say from an upfront process that stands out to me. And we’ll talk later about when it comes to M&A, but like getting prepared for day one would be the other one I would bring up. And so, you’ve got one shot at a first impression. And so, Tom was alluding to this earlier around having a disorganized business as an acquirer, like you have one shot to make a first impression. And so, the anxiety for the acquiree business is at an all-time high. And so, you have two choices – you can either reduce that anxiety or you can add to it. And if you add to it, your chances of success go down 50%. If you make people comfortable and you reduce anxiety, probably your success goes up 50%. And so really spending time overdoing day one is not- you cannot overdo day one. So that’s a better way to say. And so, I would say those are the two things that probably stand out to me. Tom, I guess I’ll pass the mic.
Tom Klein: Well, I’ll just add to that on that last one. That doesn’t mean you’re making any false promises or saying things you can’t bring to bear, but what you are being is being real. You’re talking to all the employees, you’re making sure you have breakouts with all departments, you’re setting a vision, setting up at least a high-level strategy, and you are really communicating and especially where you can make promises like we did at Morningside that everyone was going to keep their jobs. If you can say that, well, then say it. And there were other similar assurances that we were able to give knowing our strategy that are really important to say and repeat and not just say, but then email after. And there’s a whole methodology that we deployed to that. The other things I would add on kind of stuff people should do is they should do customer calls. Customer calls are not just important doing them at the 11th hour. And they always happen two days or a week or two before a deal happens. They’re important even mentioning them midway through the process to an owner because when you describe them as a requirement, you naturally start getting much better disclosure around unstable customer relationships or looming churn, looming customer churn. So certainly, the calls themselves are a final critical check on your assumptions on the quality of the business. But they also start ginning out more information when people know you’re going to talk to their customers. And then they also help dictate important customer tasks in the first few months when new information is learned on the call. So, you may end up quickly getting on a plane to go visit three customers where you didn’t love how the conversation went. You may think about changing an account manager. You may learn something that is flawed in operational processes that you keep hearing. So, customer calls are definitely important. And then the other one I would mention it’s important to do is I think a lot of people don’t dissect growth enough, and so historical growth. And so, there are lots of different revenue bridges that exist out there and different philosophies and methodologies around them, but choosing a revenue bridge that you’re comfortable with and then rolling it back five years to understand how growth has happened, meaning what growth came from same-store sales? What growth came from new customer wins? What growth came from customer wins a year ago that’s now ramping? What growth was lost due to customer churn? You want to isolate those, figure out patterns, and then think forward on what’s repeatable. And I think our experience has been that many buyers don’t properly dissect how growth has transpired, Alex. And therefore, they end up misunderstanding the business’s growth rate relative to the market growth rate, and they make errors in revenue forecasting, and then even can end up with errors in staffing a business development or even operations functions because they don’t understand how the business is growing and why it’s growing that way and whether past is prologue. So those are really important analytical exercises to be doing. They require a very significant amount of data requests from the owner, which they look like they’re going to be in tears when you mention it. And sometimes it’s not possible to go back five years, but that’s kind of where you want to get to. But really dissecting the growth is the point there.
Roland Lessard: I think that’s right. I think it’s spot on. As far as negatives, like the no-nos one might say, Alex, now we’ll get to a little more negative town, I think I’ll just do one since we kind of already covered a little bit earlier around like don’t buy too fast and don’t buy too big just because of the challenges associated with those. The one I would say is, and it’s a little easier when you’re doing bolt-ons, but I would say when you’re searching, it’s even more- it’s painful no matter what, but it’s even more painful for my fellow searches out there trying to land their first deal, is getting in so deep you lose the ability to walk away. And so, there’s been some very trying moments for Tom and I of spending what felt like a life looking at a company and then seeing something and being like this is no bueno. That night turned into a lot of vino and a lot of depression to get back on the horse the next day. But there’s a great story of a past life, and more on that background screening world, where Tom and I spent weeks flying out to a really ungodly part of our country in the middle of winter and being in sub-zero temperatures for weeks, eating food that wasn’t so great to look at this company that had a lot of jazz around it from the auction perspective. And it was a really great price, and we knew there was a ton of synergies, and we were easily able to articulate those. But as we dove in, going back to some of Tom’s conversations around revenue, we determined that at least 10 or 15% of that revenue was DOA within the first three months of closing. And so, the impact of synergy is okay, well, would you still buy it? Maybe, however, what is that doing to your overall growth rate as a parent company? And this was a big company. It was $50 million in revenue. It was a bolt-on in the old days. And it was painful to sit there and come back together, Tom and I, and say, you know what, this is not good for the overall business, especially after blood, sweat, and tears going into that business and spending a tremendous amount of time on creating, forging strong relationships with the management team, getting it early, doing all the things that we do, and you get to the finish line, and you’re like, wait a second, this is not good for our business regardless of the price. Even though we’re going to make a ton of money in synergies, this going to hurt the overall macro company, our growth rate, morale, the culture, everything, because they’re going to lose 50% of their clients. And the funny story with that is a year later, our background companies got new owners, and Tom and I fly out to go look at our biggest competitor in the space who bought that company. And so, we’re going through a deck, looking at this company and going through their SIM, and we’re seeing this big management meeting, and every slide, there was an asterisk for the acquisition because they did it and they lost 25% of the client base. And so, Tom and I might have undershot that by saying 50, maybe we would’ve done a little better than them, but they lost 20, 25% of the business. And they had to proforma all their data on that acquisition, and it showed the damage to that parent company. So, it might’ve been one of the best deals we did, and it was the one we didn’t do. And so, I think the ability to walk away, even when you’re so deep, is an important piece of discipline one must have in M&A.
Tom Klein: That’s huge. And that was after months, ultimately months of work, walking away. And it’s never easy. I’d name two other things on no-nos. I think people make a huge flaw and I think it’s human nature because they’re trying to forge a relationship with the business owner and they also want to avoid difficult conversations, but assuming that a current owner can stay with the business is a huge flaw. It almost never works. We saw one time this work out of say 11 or 12 transactions we completed together. And there were very special circumstances around that person’s personality and the role, the future role they took on that made it work. So that’s one out of 12, say. They just don’t work. If you’re running a business, and often the founder, how likely are you to be able to switch into a gear where you have new bosses in close proximity, it’s your baby, you’ve run it like you have, like the way you wanted for 10 or 20 years, and even worse, it’s very harmful to employees. So employees often are getting two different sets- can end up with two different sets of direction. And some people say, oh, we’re just going to keep the founder. We’re just going to keep her or him for a year. That’s usually a year that’s lost because there was confusion. There was higher anxiety. There was greater opportunity for defect, and sometimes two bosses in the room and additionally lost huge opportunity cost spending time remediating issues that come from an owner still in the business. So, we have strong opinions on this. I’m sure there are other folks out there who’ve had successful partnerships with founders, but the takeaway really is that it’s rare that it works. And so, try to plan accordingly and have the difficult conversations upfront. That doesn’t mean you can’t have an owner rollover equity in the business, and sometimes certain owners could go on the board of a business, but an operational role below to a search fund CEO is very challenging. The other one I’d mention is we think a lot of people going out to buy small to medium sized businesses ignore customer concentration, or they minimize customer concentration at their peril. So, we have a rule for small businesses, call it 10 to 15 million of revenue or below, where you have to meet the rule of eight. Meaning that the top eight customers can’t be more than 50% of your revenue. For mid-sized businesses, maybe we take that up to say a rule of 15; your top 15 customers shouldn’t be more than 50% of your revenue. Businesses we bought, especially the platform businesses like Morningside, they had 30 or 40- it took 30 or 40 customers to get to 50% of your revenue. So why is that important? Well, frankly, it lets you sleep at night. And if you’re going to run this business for 5 or 10 years, it’s good to have sleep during that period. So, some things are outside of your control with these customers. Many things are within your control. But buying a business where the customers have too much power over you to basically effectively, in some cases, ruin outcomes and to know that upfront is tough. So, we’ve definitely walked away from a ton of deals, including translation deals, where you walk away early in those cases because you’re going to find out quite early, Alex, even on a no-names basis. It’s just a rule we’re unwilling to violate. It makes life so much harder. A lot of those businesses with a large customer, they customize a lot of their operations and processes around that customer. It’s a mess, too much focus is on that customer. Of course, they can bounce and leave and churn out, and then you’re fighting fires. So, nothing better than a business with tons of small to mid-sized customers. And we were fortunate to have that in background checks and translation, and it’s really become part of our criterion that we look for.
Roland Lessard: So well said, Tommy. I mean, think about, imagine a business with 25% is one client, which you see a lot in small businesses, your business succeeds or fails on that one client. So to Tom’s point, you’re literally building- you’re making business decisions not for the benefit of the company, you’re making them for the benefit for one customer. And that becomes very, very challenging to be successful.
Tom Klein: It is one of the first questions we ask, Alex, even when you’re not under NDA – how much revenue do you have, how fast you’ve been growing the last few years on a percentage basis, and what are your top eight or ten as a percentage of your total revenue? And it’s amazing how many people don’t seem to care about that, or they ask it, but they sort of are willing to accept whatever answer is given, except when it’s one customer is 50% of the revenue. And we saw a lot of those businesses too. But people don’t think of it as quite the risk that we do, I think.
Alex Bridgeman: Yeah, those are good questions. So when you’ve looked at a deal and you think that there’s a couple of synergies or maybe there’s a lot of synergies that you can have with bringing this company in, once you’ve acquired that company, how do you begin truly like trying to implement those synergies and just all that change management that happens when you’re bringing a new team into your current team? How do you plan out that process?
Roland Lessard: So that’s a great question. And I think it’s obviously we spent a lot of time thinking about how we analyze a business and we choose a business, but obviously, the next part is how do you execute on that business? And so, I think first and foremost, to start that conversation, M&A is change management and integration is change management. And so, anyone thinks that, again, going back to processes or activities are completely wrong. M&A is completely 100% about change management. And so, if you go in with that mindset and you keep an open mind around that, you’re starting off much better than most. So, there’s a lot of data out there that says 70% of acquisitions fail to meet their goals. And again, knock on wood because Tom and I will be back on the horse soon enough. We met a hundred percent of all of deal books we’ve ever done together. We’ve kept all the right employees and we built out, we found the gems. And so, again, I would say some of that’s luck, but I would say a lot of that was picking the right company up front. But I would say a good chunk of that also is integrating the company properly. So, without going back to what day one means and really going over and above on that day, again, having one chance at a first impression and focusing on reducing client and employee anxiety, we planned that for weeks. But the next piece is thinking about integration as a change management project. With that, when people start getting into like a merger of equals, that’s always a mistake. There’s always an acquirer and acquiree, period. Now, as an acquirer, you need to be open-minded that they may have a process better than yours. They might have an easy member better than yours. They might have a product, that gem, that’s better than yours. And if you go in close minded thinking this is a script we’re going to follow, you’re setting yourself up for missing a huge opportunity. Secondly, from that, when thinking about the overall acquisition itself, is just start thinking about how are we going to integrate this company and what are the teams that we’re building? And so, a lot of folks in M&A will hire a bunch of folks that used to do what I did for a living in consulting. And say, okay, we’re going to have four or five consultants come in and help us integrate this company. So those consultants don’t know anything about your business. They don’t know anything about the acquiree’s business. So right off the bat, you’re already setting yourself up for failure. So, you’re going to leave the keys of the kingdom to folks that do not understand your business or the acquired business. And so, Tom and I, as part of our process, was building a cross functional team made up of members from both the acquiree and the aquirerers, so like the company being bought and the company buying. And so, cross-functional in nature. So, the team would consist of a sales bucket, a member from both sides, an operational bucket, a finance bucket, a technology bucket, and so on and so forth. And that team development would be going back to how do we build a team with sergeants and not officers? So going back to getting in early, realizing who does what, spend time with even the founder or the owners, like who does what on their team, they’ll be very open and honest about that conversation too, and you build a team of sergeants that are cross-functional in nature and with that – and this is a big point to think about – synergies should be log not linear. And so, when you think about a log curve, it down and then up forever versus a linear curve that kind of goes and then spikes and goes more like a Kaizen kind of mentality, that doesn’t work. The latter does not work. You need to be thinking about strategy upfront and execution post that. And so, Tom and I have had many conversations and it takes trust with your board. It takes trust with, when we were working in a background screening company, the owner and the CEO there. But the first couple of months of your acquisition team work should all be about strategy and planning. And so, the upfront planning is everything when it comes to integration. Measure twice, cut once is the mentality one has to have. And so, if you go in and you’re like, okay, in the first month, we’re going to have these 10 synergies, we’re going to make these 10 cuts, like, what do you know about the business? What a mistake. You might be cutting a gem out or some knowledge base around a certain product or platform that no one in the business really understands and maybe you still make that call, but you make it three months later. Six months in the rear-view mirror, it doesn’t matter whether you made a synergy cut in the first month or the third month. It literally has no impact except for some minimum cash for those two months. And so really thinking about spending the time upfront with that cross-functional team, listening, learning, planting seeds. So, even though you might know the answer, you’ve got to let them come to that answer because if they come to that answer, they own that outcome. And so, helping the team by planting seeds versus directing, you’re facilitating versus leading, is a big, big to do for the leader of the acquiring company. And so, you set the culture, you set the standards. And so really embracing the change management concept, not rushing in to make a cut in the first month and figuring out with the team how we’re going to get the best of both worlds, where one plus one equals three, is the real true key to integrating a company.
Tom Klein: Roland, who you put on those teams was critical. I know you spent a lot of time thinking about- I know you’ve mentioned the sergeants, but what about the types of personalities and individuals from our company and then the target company? I feel like that’s also part of the secret sauce, no?
Roland Lessard: Yeah, I think that’s true. And I feel like there were times where we purposely chose a sergeant, but they were kind of like a no-sayer. They were the person that was like in the office behind closed doors, they are the people kind of pushing people away from your strategy and your direction. And so, it is a risky move, but if you can get them on board and you know they’re valuable for your company, you want to keep that person and you want to change them and you want them to get them on the bus going the right direction, embracing that person and getting them to embrace your strategy, realizing that they have a seat at a table all of a sudden will change their outlook on the company, to change their outlook on the strategy you are moving forward. And so, there’s been numerous times where the person in technology or person in sales we had join a team that usually had a different direction in their mind based on the old founder’s mentality. But if you can win that person over, the people, all the naysayers that would go behind them are now on your team also. And so, it’s really winning that battle of emotions and change. And that’s what successful integration is all about. Because if you build a team of smart people that are energetic and have strong character, execution is easy. And so, everyone thinks execution is this complicated thing. But if you build the right team and you have the right plan in place and you spend the time upfront building a clear execution plan, that becomes an easy component of it. And that’s where you just have a basic structure. Like our M&A meetings with our cross functional team was non-negotiable. It wasn’t like, oh, I’m going to attend this meeting, but I have a call or another meeting. No, this is non-negotiable. At the same time, the people that are running the core business need to continue running the core business. And so, the acquisition needs to compliment not distract the core business. And so, the people that are moonlighting on the M&A team need to be focused a 100% on M&A while they’re there. And the people that are not on the M&A team need to focus 100% of the time on the core business. And this goes back to having breadth and depth in your organization so that you can have the ability to have people moonlight M&A, but the people that are not M&A, they might get an update. Many of our easy members were not on our teams, and they would always be nervous about what’s going on with the M&A, Tom and I, we provided an update, or we’d have our project manager provide an update to easy, but like easy, you guys are going to focus on the core business. That’s what I need you to focus on because otherwise you will have a dip in your growth, you will have a dip in your overall client satisfaction. So how do you build a cross-functional team and not distract from the business? That’s very, very important. And that’s where those sergeants really come in super handy. And I think as Tom said, finding a couple of naysayers and throwing them on the team, as long as you’re helping manage that, could create a double win for you because you’re really going to gain the traction from a change management perspective. And again, there’s some basic little things where like we’re having clear tracking, clear data. And so having a very clean deal book, having structured meetings, having a structured tracking sheet around your progress around different functions and giving the people the autonomy to come up with solutions themselves knowing here’s a goal is a very powerful thing. You’re really empowering your team to be kind of like mini CEOs of the acquired integration. And by the end, as Tom knows, people fought to get on the M&A team where you think, okay, that’s a lot of extra work, but they saw the autonomy that came with it, they saw the power that came with it, and they wanted to be in charge of making decisions in strategy. And so, in the end, it felt like extra work, but people fought to get on the teams because they knew they were going to learn something, they knew they were going to better themselves and learn about the entire company as a whole versus just a function they work in. And so, I think it was a very powerful thing for Tom and I to really bring up the level of education and professionalism within our organization by doing M&A, and doing it right.
Tom Klein: Yeah, there’s also, Alex, a bit of a virtuous cycle I think, or virtuous after effects that come from having run successful M&A and being able to track it quantitatively. And that’s that you can show lenders that process in the future. And one of the things that we did was we purchased most of our acquisitions only with debt, which may be surprising to some people. And it’s not always possible, especially when you’re talking about big acquisitions. But done right with a lender, you can really negotiate a credit agreement that gives you more credit up front for unrealized synergies. So, what do I mean there? Well, basically what you’re getting in your credit agreement is language that allows for some level of unrealized synergies to be counted or annualized upfront. So, some of those could be quite simple, like the departure of the former owners takes place on day one of the acquisition or within the first 30 days. But you get allowed the annualization, the rollback of the prior 12 months of those owners’ salaries. Other buckets are more complicated where you’re promising a series of actions with specific timelines and specific quantified cost savings, like say the sunsetting of a technology platform or reductions in similar vendor purchases in your costs of goods sold. The key there is getting credit for when you take an action and achieve that synergy in a first month. Can I get a full rollback of 11 more months of that synergy? So, sort of action taken equals synergy credit for the full 12 months. And lenders will want to see that you’ve done this in the past, that you have a high-quality integration team, that you know what you’re doing, and that you have a real track record of high-quality integration process with proven results, and that you met your deal book. But if you can bring to bear that process and those facts early on when you’re meeting with a lender and getting a credit agreement set up, it’s very impressive to lenders. And obviously there are huge advantages to being able to do this. For one, you don’t over equitize a business. You can run these tuck-ins with debt financing, which obviously has significant returns, positive return impacts if you do it well. But also, they let you keep your leverage levels, your combined leverage levels, lower and your leverage levels more tracked to kind of your run rate trajectory, meaning it’s actually not representative of the business to only get one month of credit for departing owners right when you know they’re gone and 12 months of credit for those departing owners is far more in line with the actual trajectory of the go-forward business. So anyway, your leverage levels get to come down faster or don’t rise as fast, say, and then you don’t over equitize the business. But these are nuanced discussions with lenders. And again, the table gets set with showing what you’ve done in the past. It’s not just, you’re not going to get terms like this from just saying you’re going to do it. You’ve got to show kind of a prior deal book or two, introduce the team that does it, explain the methodology and the process, and then of course get the language right, and that’s in negotiation. You’re not going to get all this stuff rolled back. And there are even penalties. The lenders will penalize you. Say those synergies you’ve got in the first month from a technology platform sunset don’t materialize the next month, well, you’re going to be penalized. So, it’s a give and take with lenders, but if you can establish that trust, there are enormous benefits for how you finance these deals.
Roland Lessard: And selfishly, one of the side benefits was like when you’re first- each business was different, but like when you’re cutting your teeth with a new lender, the acquisition conversations are like hours and hours and hours and data requests and everything else as if they’re diligencing the thing. But three or four deals in, they’re like just a checkbox – sure, okay, Tom, we’re rolling. You guys are good, here’s more money, have fun. The stress goes away of worrying about funding because you have a proven track record, and they trust you. And so, I remember you had this background screening place. It was a literally like, I mean, I remember talking on a call that was two minutes. Okay fine, revenue, EBITDA, synergies, okay, we’re good. Versus the old days, having to come into a meeting and put a suit on and spend a day with these folks trying to get money. So, it was just a little side benefit that I always enjoy as we became more credible in not wasting time.
Alex Bridgeman: What else do we need to cover in the synergies credit? That’s pretty interesting. Where else could we go there in the last like maybe four or five minutes more on that? And then we can handle the closing questions.
Tom Klein: Well, I think Roland, maybe one of the things that ties into this that would be helpful for you to discuss is types of synergies and how folks love to think of the senior executives and the easy ones that sometimes actually can really hurt the business and don’t focus on the hard ones like technology platforms and cogs.
Roland Lessard: Yeah, that’s- I mean, I would say, and this goes back to our conversation, Alex, around “building the proper sausage making machine.” And so, when you build an efficient back office workflow, you have the ability to create cog synergies pretty much all the time. And again, that was a major component of our diligence. But we like to bucket our synergies obviously in a horizontal acquisition. If you were talking vertical acquisition, you have more revenue synergies and so forth, but thinking back to the bolt-on in the horizontals, like we would always- obviously, you’d have your cog synergies, which is kind of above the line in your sausage making, which is very, very important, and that’s where real value is created. Then obviously below a line, we kind of split up rushing into two buckets. One was more kind of like fixed overhead stuff, whether it’s technology expense, rent expense, insurance, basic things like that. And versus more of an employee SGA where that’s going back to getting rid of the founder and owner and so forth. And so really diving in deep during diligence and classifying each of these buckets from a synergy, from a cost perspective was an exercise that you could almost never do enough. And that also ties back to going back to strategizing with your team for the first three months. So, you’re going to do all your prelim work and build your deal book before you close. But we had this rule of updating the deal book within 30 days of close. And the reason why we give ourselves that latitude, we never ended up changing the final number, but the number might shift a little bit. Going back to Tom’s point, we might be like, hey, this lead software development guy, like we already had one, blah, blah, blah, we are moving on, we don’t need him, we’ll put in this synergy four months after we sunset the platform. Well, it comes to be that platform is a gem and/or a component of that platform, and this gentleman or lady is the expert in said platform, and actually they’re a great cultural fit. So, we need to keep that person. However, we also found additional cog savings and that we didn’t see during due diligence. And so, we’re going to shift that bucket, put up a hundred grand here and move a hundred grand over here so our total deal book numbers stay the same, but we had a plan that made more sense, and it was minor updates 30 days post-close. And so really carving up those buckets, Alex, and really having set goals with a how are we going to achieve those without super detailed, but like how are we going to do those was important. For example, like we’re going to need to sunset a platform. Well, during due diligence, you’re going to say, okay, we’re going to sunset this application, but like how are we going to do that is going to be figured out by your platform person, your product person, your salesperson. And so, understanding what clients are on it, why they’re on it, what do we have to offer that’s different or better. And so, getting those questions happens with your organization team. But deciding we’re only going to have one platform should be paramount in the beginning of your assessment. So, you’re going to get either a synergy from the client, from the acquired company or what we would coin as reversed synergies. So maybe we shut a platform down that we have, maybe there’s an employee in our company that is no longer there because the employee in their company is better. And having the ability to accept that is a very important part of being respectful of the acquired company and really believing one plus one equals three. And so, having an open mind when it comes to synergies is a very important thing, besides just classification and bucketing.
Tom Klein: And also, people I think- that’s well said, Roland. I think there are many acquirers who do not prepare a detailed deal book before close. So, you heard Roland say it gets adjusted, but I’ve seen so many acquirers, we’ve seen so many acquirers who just say we’ll do that after. And so that just takes enormous risk instead of asking the hard questions and forcing the difficult data requests that need to come. And then, the many questions that come after that when the data doesn’t make sense, and it rarely does to start with, especially in small companies, that stuff should be worked out well before closing. And then it’s also interesting how many acquirers want to just focus on the classic, like, oh, these are your five senior people, we don’t need them because we have great people, and they can destroy the culture and great leadership at that company just focusing on pay levels rather than the nitty gritty of what Roland said of no, no, let’s go look at cogs and think about how to increase our gross margin on an overall basis by putting their volume through our sausage making machine. Well, it’s also going to be thoughtful about platforms. I mean, as you know Alex, so many acquirers are, for some reason, content to run two, three, or four platforms, which destroys value in their business, it makes everything more complicated. So, there are a lot of folks, especially strategic acquirers, that gravitate to kind of simplistic synergies and aren’t ready to roll up their sleeves and really go for synergies that are harder and they take longer, but they build a much better company that is far more unified in the long term.
Roland Lessard: I think that’s so well said. And I think the other thing that people do, which is like a huge no-no when it comes to modeling out synergies and thinking about it, obviously most sellers are going to sell some kind of hockey stick growth. And so, folks that have the revenue, they’re like modeling revenue growth higher than the LGM period or even the period before that, is insane. So, like it’s absolutely insane. And you’re faking yourself into a number that it’s just not going to materialize, especially when the company is going through an acquisition. I would say more times than not, Tom and I, never mind not believe their forecast, haircut our LTM growth and really spent a lot of time digging into that. And so, you want to count on some exponential growth of the acquire. Again, at the same time, I would say that every single deal we did, I don’t know, maybe there could be one different, but I would say pretty much every single deal we did, our client retention was stronger on the acquired business than our core business, which sounds odd and doesn’t even make sense to most people when you say it, but it’s because of the amount of attention that our account managers or sales folks and even our back office folks spent on those clients because you’re so focused and so dedicated to making sure those clients are comfortable and happy and safe. And you have all these touchback loops that are part of our process to make sure that things are going well and they like what they’re seeing and so forth. So, the amount of touches with the acquired clients is actually greater than our core business. So, actually, it does make sense that our retention was generally stronger with the acquired company. Again, we wouldn’t model something like that, but you’d model going back to history. But going back to thinking about revenue growth, for all the folks out there listening, like do not model some hockey stick growth as part of your value creation for this acquisition because you’re setting yourself up most likely for disappointment. And so when you start thinking about synergies on horizontals, you’ve really got to be thinking about those buckets that we articulated and get off just the SGMA leaders that are salary based, spend the time thinking about platform integration, spend the time thinking about sausage making, and if you did a good job with your back office first, generally speaking, when you buy a company, you’re going to have a higher gross margin. And so especially because they’re smaller, they’re less scaled. And so, you should get synergies from that first and foremost, and that should be your number one focus to get going.
Alex Bridgeman: Yeah, I’d love to keep going and go for another hour, but unfortunately, we’re out of time. And so, we’ll skip closing questions, but I’m glad we did because there was so much more interesting stuff that we were able to cover with this extra time. So, thank you both for sharing your time today. This has been really awesome. This has been one of the most fun episodes I’ve done so far. So, thank you both for taking part of that.
Tom and Roland launched a partnered search after running a background screening business together and acquired a language service business focused on intellectual property in 2016.