Everything about acquisitions - types of M&A, minimum deals made, who should expect an acquisition and much more by Dan Tamkin.

This is Fundraising Radio and today as a guest speaker we have Dan Tamkin, founder and managing director at resurgent capital partners.

in this episode we're mostly going to focus on acquisitions or is it strategic versus financial acquisition? Who can expect which type of acquisition was the meme amount of the acquisition.

Because most people think that, acquisition is something throwing off 1,000 million and in most cases it's actually less than that.

Dennis is going to tell us about that and also we'll cover typical terms off the acquisition.

den Alaska called by giving us some background on yourself and on resurgent capital parkers.

Sure.

Well thank you for having me on today.

yeah, my background is all over the place.

So I started in venture capital.

I was associated at a venture firm here in Los Angeles and we did software investments like most VC firms.

went off and started my own, software company in the, call center technology space focused on transportation companies and built that up over five years.

we sold it to a very, to a strategic, which we'll talk about what that means later, to a large French company. which point I started a new division for them and became the CTO of their $2 billion business.

kind of had the, the investment side of startups then ran my own company to exit and it was at a big company, so I did a lot of acquisition work for the big company as well as the technology side.

I spun out and started my own private equity firm.

so I've had, you know, varied experience.

I'm maybe perhaps not an expert in any of them, but I've touched all of them.

which, which seems to be rare from my background.

Most people tend to, get in one lane and stay with it.

I get bored quickly.

that, that has never really quite worked for me.

I've, I've bought seven companies and so far sold four.

it's not like I've done hundreds of them, but I've usually been either I've been the guy leading the deal and all those acts and all those, whether I'm the buyer or the seller.

I'm very close to the deal process at each time. Got it.
That's pretty interesting.

we'll move on to this part where you said that he bought seven companies insult for so far because that's something really interesting and that sounds really intriguing.

first we'll talk about strategic versus financial position.

What's the difference between them?

Sure.

so, so you're touching on the two main acquire types out there and in any time you say, something's a strategic acquire financial quarter, obviously there are people in between millets talk more broadly.

A treat, a strategic acquire is generally someone that has an operating business and they want to buy a business that they think is complimentary.

Kind of the old saying of one plus one equals three.

Salesforce might buy another software company cause they want that Target's capabilities available in their platform and they believe that if they have that they can sell that add on or that piece of software to all their existing customers to their existing sales channels.

That would be an example of a, like a strategic acquisition.
Two competitors can merge also and to take costs out of the market.

For instance, if Uber and Lyft merged, they basically have reduced, they have driver acquisition costs, which are pretty redundant going after the same people and competing against each other customer acquisition costs, which are redundant and competing after each other.

they could merge and probably consolidate all a lot of their costs. that would be another example of a strategic acquisition.
strategic is just a broad catchall term for, one plus one equals three. So financial acquirers are different.

that's like a private equity firm, which is what I run.

basically it's, you don't have an operating company and you're buying something because you think it's a, you can get a good financial return on it.

now there are certainly circumstances where private, a very common private equity playbook is to buy a bigger company, typically a platform and an asset, but it's to strategic acquisitions with that asset.

the point of differential between strategic and financial part is really just to try to figure out the motivations of who, and broadly traits and not freely available but cheap rates.

you see that sometimes actually financial acquires might pay more in the strategic, so it gets muddy. in general, broadly, strategics pay more than financial acquire.
That's actually surprising.
I was pretty sure that financial is being more than strategic.

let's talk about, actually, I'm curious, how do you raise private equity firms? So we said that you've started going

with your own versatile, what does a private equity mostly do in terms of fields and how do you raise a private equity for,

yeah.

let's talk about, where P is in startups.

maybe the way to back up is the term private equity is kind of certain private equity, a big catch-all.

I'd say there's three big categories of private equity.

believe it or not, VCs under private equity is venture in three big categories is venture capital growth, equity and leverage buyout, the leveraged buyout, which means leverage is taking on debt to buy something.

that's usually what PE is thought of.

each of those three types of three asset classes underneath private equity, they kind of have different ways of achieving the same outcome, which is usually, across their fund of investments or crossing investments at 25% IRR.

in D C it's massive growth, right? it's, it's betting on something small that it's going to be big in growth equity.

It's betting on something that has momentum that is going to keep growing at a fast rate and in leveraged buyout or private equity, it's betting on somebody as a smaller growth rate.

You can take a lot of cost out, but because you're using a lot of debt, you can get those same returns.

it comes to the leverage buyout or private equity side, really don't have much play in the startup world because those are to borrow money, you need a profitable company.

Usually.

There are certainly exceptions to that, like venture debt and some of the royalty based financing that's out there for software companies.

generally, you need a profitable company so you can borrow money against, right? Because lenders prefer to lend against the company that they're pretty sure can pay them back.

Absolutely.

Got it.

So, how do you source, so do you have, so you said that you bought seven companies so far.

How'd you find those companies and what type of companies do you usually buy? So you can give me like an example of one company that you bought recently.

Sure.

Well, maybe backing up is in our world, in the private equity LBO world, we have intermediaries or investment bankers.

in general, like the world breaks out three ways.
it took me a while to learn this.
I think it's for anyone who's looking to go buy a company, as opposed to starting one.

if you're looking for something, 2 million, what we call EBITDA, which is earnings before interest, taxes, depreciation and amortization.

if you're looking for something above 2 million EBITDA and really probably 3 million EBITDA, you're looking at the investment banking world and those deals get really big and in between kind of one to 3 million in EBITDA, you have what's called what I call MNA intermediaries, which are, some which are, those are still smaller businesses, but there need to be more professionally represented and they might have a more narrow buyer set.

the next category, which is small businesses, which are a million and in a EBITDA and under, and that's usually business brokers and where you go and find those deals is in those three categories is very different.

generally the million and under you can go on to BizBuySell or many different places.

and, there's, there's little markets that have popped up to sell software companies or eCommerce companies out there that are available for you to look at too.

not just by myself, but you can find assets to assets or companies to purchase. those are basically like, it sounds buying company off a website.

the, that middle tier of kind of one to three is a bunch of small local guys that they don't want to advertise a decent sized business on biz buy sell because most people in best buy, sell can't afford a business above a $9.

they're trying to go to, they're trying to go to, wealthy individuals, family offices or a firm like mine maybe.

the 3 million and above is where, most of private equity plays are, we look at those deals too.

I, and that, 3 million above is a, that's a big universe, right? Cause 3 million is a pretty low tier.

You have businesses out there that make, hundreds of millions a year and then are, you can see out there.

those are the more professionally represented businesses with longer processes and, that, that are, they're also more selective, whereas, they're not going to go to 'em.

They're not going to send a book for a $15 million EBITDA business to, some executive that's sitting at home. whereas the broker on BizBuySell is happy to speak to that person.
but, and we'll speak to anybody who fills out a form on the website for the most part.
just a very different way of going to market and being a fiction.

speaking of go to market and differentiating between big and small deals. Let's talk about small deals.

most of my listeners are actually early stage startup founders and I'm curious, what's the minimum size acquisition that you've ever seen that made sense? Well, I mean I've been paid to take companies, so I guess the minimum size for me has been a negative purchase price.

can you explain that ? Yeah.

Sometimes generally larger, companies, conglomerate types will buy a bunch of stuff under a strategy that an executive may have put together.

Generally the CEO, and either somebody like the coronavirus might come along or they changed the executive and the strategy and all of a sudden they have these pieces of the puzzle that no longer fit.

some of these pieces of the puzzle are not very, we're, again, they're a strategic acquisition meant to roll up to something interesting and now they're not.

so those companies want those assets gone.

in some cases those assets are damaged or impaired in a way that it makes the business very difficult to shut down.

They might have longterm contracts or something like that, but they don't want that business and that business may be losing money.

they will pay you to take it off their hands.

that they look, that's a rare circumstance.

when you get one of those, you, you get what you pay for.

it means you got work to do.

we recently had a business, were pretty much paid, low hundreds of thousands of the tape that we probably have.

probably turned around, to make a little under a million in that. So that's an example.
It looked that's one that went really right.
There's obviously some that go really wrong.

those are the, those are unique deals.

as far as minimum size a deal can be, whatever a deal really comes down to what is somebody interested in? I think for your listeners, when they're looking at getting acquired by like, let's say a strategic, the minimum, one of the problems you have for them is that it's about the same cost to do a, a, a small deal and a big deal.

if I'm the VP of corporate development at a medium or big sized firm, and I'm looking at buying your software company,

if you're doing 2 million in revenue, it's about the same cost of time and, and lawyers and accountants and all that.

to buy a company three times your size.

one of the things to remember is that it's about kind of their conservation of movement.

it worth their time to deal with you? So there really isn't necessarily a minimum size.

It's just more like how bad do they want it? Is this something, is this an asset they really want? They see it fitting.

I mean I think you guys see all the time companies with zero revenue getting bought for hundreds of millions, right? While they have something that someone wanted.

that made it so I think size is, it, is it sizes? Size is more a factor when you're talking to financial acquirers.

if you're going to affirm that, most private equity firms like ours, you put right on the website which are willing to buy and not.

if somebody calls me about a business that makes $250,000 a year, if it fits into what we're doing and some of our companies would probably interested, and we might be interested just cause we're more kind of all over the place.

most firms that have committed capital have a very dedicated, this is the band they play in because they can only make X number of investments.

if they make a small investment, it doesn't work to make their overall fund economics.

So you really see minimum size thresholds.

there generally in our world, based on earnings, in private equity, when it comes to VC, which is different than acquisitions because you're not taking full control, you could see right on the guy's website, Joanie, where they play, if they're seed stage or if they're, if their growth or where they are, you don't want to take a seed deal to a growth guy.

Growth guy wants to write $20 million checks, not a million dollar check.

even the greatest deal on world, they can't do it because it doesn't make their fund economics work.

Yeah that does make sense.

you mentioned earlier on a site codes these sell, buy, sell, buy, sell.

I was close, I was close enough away for his third Foundry to accelerate process of.

acquisition.

for example, one of my previous speakers actually basically got saved, by getting acquired and he got saved because he already knew the guy who acquired them later on.

They built this relationship really early on and when he needed the acquisitions, you faced a lawsuit from California forgetting some, some small thing, but it's turned into a pretty big, some of my fines and this acquisition position basically saved him and gave him plenty of profits, afterwards.

do you think there is a good way to explain this process of gaining acquired? Do you think there is a good way of building this relationship with potential acquirers?

Yeah, and I think what you're w what the prior person did is a good example of that.
I mean, in general, the way I think about it is you want someone to buy your company, you don't want to sell it.

that sounds like a plan where it's, but it's important to step back and think about, because if someone's coming to buy your company, it means that you've built something valuable over time that they want.

that means in likely they're going to pay more for it versus selling your company.
you saying it's you saying that you're done.
Like I want to sell this thing.
This is for whatever reason, good or bad that I'm going to sell this thing is just think about it.

Like if I come to you and say, will you buy what I have?

You're, the price in your head is lower than if you come to me and say, can I buy what you have? Right.

It's just, it's just different.

It's just, it's just different mentality to start with.

I can tell you a lot of small business owners, a lot of PE firms we do proactive reach out where you'll call an owner who may not be selling.

if you call them and say, okay, I'm interested in buying your business.

Doesn't matter what the average price is in their industry, that guy is dollar signs are skyrocketing in that guy's head because what he's thinking is, well you called me.

you must think it's worth a lot.

I try to think as much to that as possible is how do you more firm, how do you figure out, kind of the best value and I think what your prior spirit did is the right way that from the entrepreneurial view, I try to think of building the company.

I I don't think of like how do I build a company to sell cause I think it's very hard to predict outcomes.

The first company I sold unified dispatch, becoming Transdev as I mentioned in the intro, bought it and they didn't even exist when the company started.

They were a roll up of a lot of different assets.

I could have never sat in my little office and said, okay, well I'm going to do this, that and the other thing and transit is going to buy it.

The product that they really wanted out of unified didn't exist until a few years later. And I certainly didn't have a car.
I didn't have an idea of that product at the start.
So like things happen over time.

I think the most important thing to realize is that if you're building good products and you're strong, you have strong relationships with partners or customers and you have a good team and you're making customers happy, someone's gonna ultimately value that.

So I would work harder.
I work more towards that.
So look, relationships are important.
any time.
how I got to the, staying with the unified story is, they were, unified and trans though they were a customer. my flight was late.

I told one of the customers said, Oh yeah, we're building this technology that connects, private transportation fleets with, para transit agencies and transit agencies.

they said, Oh wow, we're looking for that too.

the next thing was, would we, would you be interested in selling your company? And the answer to that is always sure, right? I'll take, what, why wouldn't you listen to what someone has to offer? Right? and then 10 months later, it's how long it took.

they, they bought the company.

And so that conversation probably never occurs.

It just never occurs unless a flight's delayed.

we had already had a preexisting relationship, they were, they had been a customer for two or three years.

and, and we had kind of built the relationship where we could kind of sit in a room and just talk back and forth if we didn't have specific business.

it just kind of led to that.
I'm not saying everything has to be serendipity like that, but a relationship matters.

I mean, it really gets you, it gets you, that extra statement allows you that extra moment in the room when they might ask you a question and you answer it innocently and honestly.

it leads to, you know, an acquisition. relationships are a big piece of it.

again, if you're building the business right, you're going to have customer relationships, you're going to have partner relationships, vendor relationships, you're gonna know, you're gonna know a lot of people.

those are three examples of strategic relationships that often end up in strategic acquisitions, like trends of buying unified, right?

Right.

Actually one of the speakers that's coming soon, fundraising radio, she sold her first company to her, one of her first customers as well.

So it's pretty interesting.

she also got funding from her customers as well.

it's a pretty fun and fun strategy, through for funding through your own customers.

And it does make sense.

let's talk about how acquisition looks like from a point off sellers.

from a point of stirrup founder was pretend that I have a company, it's kind of fine, but it's not like unicorn or something like that.

for example, I'm making, I know a million in annual recurring revenue.

what happens? Sure.

if, if you're, if someone's knocked on your door as opposed to, again, like we talked about hiring a banker or broker or whatever to take it out to market to sell.

generally the process looks like there's an indication of interest, which is basically a broad range of what they think the company's worth.

in very loose terms, there's a letter of intent, which tightens up the terms more in what they're looking for.

if you sign the letter of intent, that gives them a period of exclusivity to get the deal done.

there's the agreement to buy the company.

If you, again, if someone knocked on your door, maybe they don't do the indication of interest, maybe it's not necessarily, maybe they go straight to letter of intent.

in a bank deal you'd have in a large bank process like what they call an auction deal, you would have a, you definitely have an indication of interest to a letter of intent to definitive agreement.

you'd be slimming down the parties, any trout, obviously only one person can sign the definitive agreement to buy the company.

from my side as the acquire, first I, the most important thing, again, this is more as a financial acquirers need to see some financials, just need to have some idea of what the company is doing.

usually what I'm going to try as quickly as possible is to figure out generally what do you think the company's worth.

the reason for that is most people think company's worth way more than we think it's worth. conservation of our time is the biggest piece.

it's different if someone's knocked on your door because, you may not have thought of that if it's a bank process, you should have, before you go through the process, really a thought of, what is this thing worth?

generally your banker's going to help you understand that.

the smaller the bank, the less they're probably gonna do to help you understand that they may just go out and just take the thing out to market and see what offers come back.

my general suggestion is as is don't do that.

have an idea of what you want and, figure out how realistic or unrealistic it is.

Cause these processes are very long.

They take, they take a while to get done.

they're just, they're disruptive to your business.

once you've signed the letter of intent to sell your business, the thing that will kill your deal is if your business starts slipping because you're paying too much attention to the deal and not getting the business done.

The victory and getting a deal done isn't getting a letter of intent signed.

It's it's getting the definitive agreement signed.

it's like when you sign a letter of intent, you're not only dealing with the acquire, but I would suggest you work 50% harder out of your business to make sure that it's going to be okay.

that you're not going to have some issue right before.

Mmm.

that can, so that process can take anywhere from, the IOI LOI agreement.

I've seen it in really hot situations be 30 days.

smaller businesses transact anywhere from 30 to 90 days.

Sometimes people are going out and get a small business administration loan and that may add, 30 to 60 days to the process.

I've had deals that have taken almost a year, to do.

they're, they were complex cause they had lenders and a bunch of other partners at the table and they just took a while or the business owner wasn't really organized and we'd ask for something and it would take them a month to get it.

processes can kind of drag, all over the place.

the things you should be ready for before you go sell your business is you want to make sure there's no equity loose ends that you have everything kind of tied up.

Like your cap table is solid.
when who has what rights and all that, so you don't get tripped up by that.

The last minute since I'm guessing most of your listeners are software or technology companies, you want to have your IP assignment agreements done and signed before you get into this process.

Strategic acquirers get scared by that stuff.

and, and rightfully so.

you want to make sure to the extent possible any lawsuits or taking care of her buttoned up.

to the extent possible, I always suggest having limitation of liability clauses in your contracts.

generally, generally ones I always did was you can only get one year of when your max of paid fees to the company.

that way you're kind of limiting any legal, any legal problems that even if you are in the middle of acquisition and the customer sues or a part or, or partners whose you're at least in a position where you have a cap liability.

? Right.
a lot of these things are just, a lot of it to make the process go faster.
The IOI LOI agreement, the more cleaned up you are in advance, the easier it is to get them information. You have your books in order or not.

like we're talking about the IP assignments, make sure you've got your domain's own long enough here, your trademarks, all those other stuff.

having your act together is really important.

Having having key, it'll accelerate it by keeping your company clean, having a clean process so you don't have a bunch of stuff to clean up.

Absolutely.
Yeah that does make sense.
investment bankers actually help with that stuff a lot.
here I want to mention, by the way, a really interesting book that I still didn't finish, but I'm in the process. It's called barbarians at the Gates.
I bet.
I can see that's your residence.

if you want to leave, I mean, if you want to read about an ad, be collimated buyout, that's the book you need to wait to read because it's just Advil, best stories from I think best story that both, the LBO and I think the most famous one.

here we're moving on to last questions and we'll wrap it up.

it's something that I started doing recently with all my speakers and is doing this small culture action because I'm a big believer in baby steps each day.

I hope that my listeners are doing those small steps, to get to this, to the final success. Let's help them do this.

what's the baby step? Would you recommend them taking as soon as this episode is over? So what one specific thing would you like them to do right now?

Call a customer or a prospect? I mean, success in business is very, it can be very boring and predictable.

I think the deal, I think people get seduced by the deal business and think, it's like you're flying in on a private jet, you shake a couple hands, have the dinner and then you, you take a big fee and leave.

the truth of the matter is, if you've chosen to run a business, and I come more from choosing to run a business than the deal side, despite being in the deal business.

the way to succeed is figure out what the right things are and just do them every day. And the right things are very mundane.
They're very ordinary.
it's hard to get up every day and do them.

doing them is what makes you succeed.
I think a lot of people are really stuck on having to be brilliant.

as someone once said to me that there's a lot of smart people in the world and being Smart's a commodity, I'm sure all of us here and all your listeners I'm sure are smart people, but so that doesn't really matter.

Being smart, doesn't matter.
It's it's are you doing the right things and are you doing them consistently and then back towards it. If you're doing it, then somebody is going to find what you're doing valuable.

look whether you have a 10 minute, whether you end up with a million dollar in revenue business or a billion in revenue a year, there's a lot of other factors that go into that really have nothing to do with how good or, or how bad of an executive or a leader you are.

Just sometimes there's locks, sometimes there's other things and we should all acknowledge those factors, but ultimately I'm doing the right things.

Every day will get you somewhere,

right? I mean, that's the true American dream right here.

You work hard, you get something at that, and then usually that's something is a pretty good sum of money.

So be consistent, do the right thing.

right now, as soon as this episode is over, call your customer, call your potential customer or if you're afraid of Coles, just text them.

Dammit.
Tell them.
Okay.
So we'll wrap it up here. Thanks a lot Dan.

That was a great episode.

I'll definitely place it in the educational parts of my, of my podcasts and people will be able to review once they want to educate themselves.

I'm pretty sure that they will be satisfied with what they hear here because I think it was really tons of details on the acquisition part and thanks for that.

thanks for taking your time to participate on bond raising radio. Oh, thank you Konstantin.