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- [00:02]
A
Welcome to the Path to Exit, a podcast to help software and Internet founders understand the process to raise capital or sell their business.
- [00:20]
B
Hello and welcome everyone. I'm Mike Lyon, founder and Managing Director at VistaPoint Advisors and this is the Path to Exit. This show is dedicated to helping founders of software and Internet businesses understand what it takes to raise capital or sell their business and how to do it well. My guest today is Mike Greco, managing director at VistaPoint Advisors and frequent guest on the podcast. In this episode we'll break down who belongs on your deal team when you're preparing to sell or raise capital, and how to assemble the right experts to ensure a smooth, well run transaction. Please enjoy my conversation with Mike. Mike, welcome back.
- [00:51]
C
Thanks. Thanks for having me.
- [00:53]
B
Mike, start us off here with just outlining who should be on the dream team when you put it together, what are the components that make for a strong transaction team when you're going to market?
- [01:02]
C
Absolutely. So the first couple are the private wealth, the investment banker, the transaction lawyer, the CPA firm, and potentially a quality of earnings we can get into each one of those. But that's kind of the four or five key areas of the deal team that will get you to the final line.
- [01:19]
B
Absolutely. And we'll try to walk you through what we think is the right order to hire the team in. Although every transaction can be a little bit different. But let's start maybe with the person we think you should think about hiring first, which is a private wealth person. Mike, maybe talk about why do you want to hire them first, what are the considerations? And then let's also get into what should a founder look for when they're interviewing private wealth firms, like what feels like a good fit for a founder of a fast growing SaaS business.
- [01:46]
C
So the private wealth person is really kind of the first point of contact on how to optimize consideration. And so the reason you get involved with the private wealth so early in a process is really because of this idea of cost basis. So once you start collecting IOIs or bids from parties, essentially what it does is it creates cost basis which negates some of the benefits they can do, or for lack of a better term, games around perfecting this structure. And so getting these folks involved early on helps you structure from a personal perspective what you ultimately want to get done. And so it's more important for founders to do this as opposed to call it a heavily venture backed business. Those are pass through entities you are not. And so making sure that you personally are well suited and situated to optimize the outcome is just really important and this can take time, but it also can influence what is the art of the possible.
- [02:47]
A
Yeah.
- [02:48]
B
And the reason why this one is really important for founder led businesses is usually there's large liquidity checks in these transactions. So it's a lot of money. And there are some tax strategies where if you're trying to pass money on to family members, maybe your children, or you're thinking about charities long term there's some things that can be done particularly around like irrevocable trusts that can really help to minimize taxes at the time of the transaction. But. But there are some complications if you do this too late. The other thing I would say about Private wealth is they're kind of like bankers. They do quite a bit of work upfront to kind of help founders and then obviously their objective is to help manage your money after you do a transaction. They also have a really good stable trust and estate attorneys. So if you do move forward with some of these irrevocable trusts, the private wealth firm isn't going to do that work for you. They're going to help advise you on structures and then you're going to have a really good trust and estate attorney doing that work. And I think that's something where you don't want to skimp in terms of cost because there's actually real hard dollar savings around cost. Other things I would encourage you to look out for when you're talking to them is do they have a deep expertise with founder led businesses? Founder led businesses are just different than some of their corporate clients. If you have qsbs is a possibility for you. You want someone who has deep expertise in that because that's potential savings for a lot. We've talked about that in other podcasts and and then I already mentioned the trust and estate planning. Those are all the core things you care about. And then maybe if they do have some access to like proprietary investment funds, that's usually post deal. But engage with these guys early. They have lots of good ideas and frankly they're gonna do a lot of work for free for you upfront to try and win your business later on. Mike, anything else to add there on Private Wealth?
- [04:28]
C
Again, the earlier the better, but I think that's spot on.
- [04:32]
B
Moving on. We had second on the list, hire the banker. I know we have a whole podcast on this so we won't spend too much time on it, but Mike may just touch the highlights here and what they should look out for in hiring a banker.
- [04:43]
C
Yeah, absolutely. So deep sector expertise SaaS and verticalized SaaS shouldn't be a part of their portfolio. It should be all that they do, the scale of the transaction. I would say the thing to keep in mind here is it's more about the check size than the actual enterprise value. And so making sure that aligns with what your goals of the transaction are. And unconflicted. Obviously VPA embodies this to our core. But the more conflicted your banker is, the more buy side and deals they run for private equity and strategics, the more conflicted and less competitive the process will ultimately be.
- [05:20]
B
So I think for those first two, private wealth and banker, our view is you hire them kind of early on in the process. You know, the banker has a lot of work to do around positioning and advice around the data and the private wealth guys are going to help you with structuring and getting all your trust and estate planning set up. You want to have all that done long before you think about doing the transaction. Now we're going to move in to the transaction attorney, which is a little bit different probably than the attorney you currently have working for your business. But Mike, what's the criteria you should use when you're looking at hiring a transaction attorney and some of the considerations there?
- [05:52]
C
This is a really important one and something to keep in mind is the buy side, the investor or strategic, ultimately we're negotiating against. They have a really well oiled machine. The accountants, the investors, the lawyers, they've all worked together extensively in the past. So this is not their first deal. This is their 10th, 20th transaction they've worked on. And so making sure we have the right legal team in place that can go toe to toe with the other side is just crucial. So this is a really important hire, the size of the transaction that we're working on. So again, similar to the banker, making sure they've worked on similar transactions, fighting the same types of battles and making sure we're focused on the right things. Obviously sector expertise is a big part of that. No real estate investor or real estate brokers or lawyers trying to negotiate a SaaS transaction, just very different outcomes, making sure they have the bandwidth and that this fits their mandate. We have a lot of stories that we can get into, but making sure the size of the deal you're working on and the type of transaction we're working on fits with their model and they have the bandwidth to take it on. A great example of this is we were recently working on a transaction with a top five law firm on our side, but it was A smaller transaction for them just created a lot of issues around senior level attention, how we were able to move quickly throughout a process and the bandwidth they were showing us. And that can create challenges in a process. So making sure they have the bandwidth and senior level expertise and then the last being making sure they have the specialist. These specialist tax is the biggest one. But tech and all of these other IP privacy, employment, these specialists are going to go toe to toe with a very large law firm on the other side and making sure they can meet the expectations and also battle with them. It's just crucial. If you have these things outside of the law firm, it can just take more time to get them up to speed or get them engaged. And time kills all deals. And when it comes to a transaction, the lawyer and the banker really need to be in lockstep.
- [08:03]
B
A couple of things I would add to this. Mike mentioned the specialist. I think the most important one is the tax specialist. They have the ability to help actually add value in terms of dollars. Right. In terms of minimizing taxes. I probably wouldn't hire a firm that didn't have an awesome tax specialist. Some of these smaller boutique firms don't even have them and they need you to hire a separate firm. We need control of that resource. The tax guys are always the slowest ones to bring their comments. So we want an in house firm that we could go to the deal specialist and say, hey, get the attention of the tax guy. But I think that's super important. The tricky thing about hiring the lawyer for these deals is you want to hire a lawyer who's going to spend time on your deal and be super responsive. But the other side is going to hire a super high end law firm. They're probably going to spend somewhere between a million to a million and a half bucks on their buy side counsel. It's going to be someone like Kirkland and Ellis, who's super aggressive and super talented. And we want someone who can match up against that. So you want to make sure you have someone who can go toe to toe with those guys. One of the challenges with that is a lot of the firms that fit that bill also work a lot for the private equity firms. And you want to ask the question, hey, what if one of their best private equity clients is a bidder in the process? Are they actually going to recuse themselves from your deal and go work that side of the deal? That's not an ideal outcome. So you want to understand how they would deal with those conflicts. The biggest mistake I see made with the transaction attorney is oftentimes the founder is loyal to their current counsel and they want to work with them. There's always a role for the current counselor, particularly around diligence and disclosure schedules. But I would say the biggest negative we see in terms of deal outcomes is they stick with their current attorney who does not have a lot of M and A experience, who does not have a lot of SaaS experience. They're kind of defensive about that. And usually when lawyers get defensive, they start siloing information. And as Mike mentioned, we're dealing with a high performing team on the other side that's worked together a lot. Once information starts to get siloed, we start making bigger issues out of things. And one of the things we like to do as the sell side is identify the weakest negotiator on the other side. Is it the corp dev person, Is it a business person, or is it maybe the attorney? And so we're trying to figure out who's the weakest person on their side when we're trying to win certain points. What we don't want to have happen is that be turned around on us. And so siloing is bad. The other thing is just responsiveness. M and A moves really fast and we're just not going to be able to hear that a lawyer can't do a call today on a transaction because they're doing some other thing. They need to be super responsive. And sometimes I would say the local attorneys just don't work that way. So anyway, I would say that's the area where we see the biggest potential loss of value or just slowing the process down needlessly because of that siloing of information. We've got lots of stories around that. Mike, let's move on and talk about the CPA that you mentioned.
- [10:59]
C
Yeah, absolutely. Likely. You already have a CPA and unlike the lawyer, they're likely very competent in getting the transaction completed. They are going to work hand in hand with the private wealth and the tax attorney that you guys select to structure the transaction in the best possible way. Likely from a tax perspective, rarely is it a zero sum game. So buyer tends to be pretty helpful on aligning, but we want the CPA to help us structure and ultimately get to a good outcome on consideration and deal structure. The thing to keep in mind though is the CPAs aren't used to working at deal pace and so making sure they are a part of the process relatively early as opposed to the 11th hour when we need a very specific request or a specific Answer. So ensuring that they're a participant in the process and making sure that they understand we gotta work at deal pace is just something to keep in mind and front load.
- [11:57]
B
And there may be a need to change out the cpa, but in general, back to the transaction attorney. If they have a really good tax partner, tax specialist, they're really going to be leading on a lot of things and the CPA is doing more of the execution. But just something to keep in mind, last thing we just wanted to mention is a quality of earnings provider. You don't always have to have this, but we kind of wanted to touch on this. Mike, talk about them and when we hire them and what their role in a transaction is.
- [12:24]
C
Yeah, Q of E, I would say we probably recommend them doing a quality of earnings, maybe 1 out of 10, probably even closer to 0.5 out of 10, 1 out of 20. You're going to hear a lot of companies we talk to and founders we talk to, they get a lot of feedback that you have to have a quality of earnings in all of this. That's normally coming from a middle market investment bank who's just used to walking into very clean materials, clean books, data all tightened. Really what you need the Q of E party to do is to make sure we're passing diligence. There's no world where the buy side is going to accept our Q of E simply on face. So we're still going to have to go through that process with the buyer or investor. But in the cases where we do want to get a Q of E party involved, making sure they understand SaaS, understand the size and the systems you guys are clicking into, and understand the rev rec policies that you're really targeting. SaaS is a very different animal than many other types of businesses and making sure they appreciate the context there. And so one of the biggest challenges though when doing this type of work too early is that they really can suck down a lot of bandwidth. It can be obviously costly, but bandwidth can become an issue. And for founder led businesses, that's just a death nail to not only the business but the process itself. And so I would say the investment banker should really help lead, lead on, do we need to do this or not? And a good investment banker that understands what is going to pass muster on the diligence side is going to be able to help you get through most of that diligence as opposed to having to hire a qob.
- [14:04]
B
Yeah, if you ask that question, the answer shouldn't be automatic. Yes, we do it on Every deal there's some nuance there and there's definitely trade offs. And as Mike mentioned, the biggest trade off for the types of companies we work with is it's not necessarily the cost, although that's a factor. It's the bandwidth loss. So you know, we're taking people who could be selling software or doing something else and having them focused on this quality of earnings. You only want to do that if we're really uncertain about how the numbers are going to diligence. And there's some other ways we can deal with some play in the numbers, like getting the buyers to do their Q of the outside of exclusivity. So if they do find some minor things, there's no harm, no foul. But I think just scrutinize that and make sure you actually need that before you spend the time and the money. But frankly, really the time. So on today's podcast we talked a lot about what that M and A dream team would look like, kind of who they are and when to hire them. I think the thing I want to leave you with is as we said earlier, generally the buyer side is a pretty high performing team because they've worked together many times. You want to replicate that same high performing team and sometimes I would say loyalty to existing providers can be a detriment to that high performing team. For all of your existing attorneys and accountants, there's definitely a role for them in the transaction process because no one knows the contract better or the business better is able to develop the disclosure schedule. They may just not be the best person to go negotiate head to head with a high end law firm that the buyer is going to buy. And I think that's where the Delta is. We just want to make sure we manage that in the right way. Not spend too much cost on these items, but also get maximum value. Mike, thanks for joining us on the podcast.
- [15:41]
C
Thanks guys.
- [15:43]
A
VistaPoint Advisors is a founder focused investment bank that advises software and Internet founders through M and A and capital raised transactions. We are a fully unconflicted investment bank who only works for founders on the sell side. So you know that we're always representing your best interests. Security is offered through VistaPoint Advisors member Finra Sipic. This has been provided for informational purposes only. It is not intended to address all circumstances that might arise. Testimonials from past clients may not be representative of the experience of other clients and there is no guarantee of future performance or success. Clients are not compensated for their comments. If you have any questions about the process of selling your business or raising capital. Reach out to a member of our team or check out the four Founders section of our site by visiting four Founders Guide.