Episode 10
· 17:27
Well, it's time to open the c suite. Corey, I'm Mike. So today, we're gonna talk about mergers and acquisitions, which is usually just acquisitions. And it's one of those big topics that CEOs all think they're gonna be spending all their time doing, critically important when they do it, but really complicated.
Mike Shannon:Well, and it's it's the the startup, you know, dream for many people is it's what you're thinking about how do you get to some point. They call it the exit. It's not really the exit. But there's a line out there in kind of startup world of you as the entrepreneur may go through this a handful of times in your career if you have a highly successful career as an entrepreneur versus the buyer, you know, especially if it's a corp dev team, they're doing this all the time. So you have this dramatic disadvantage.
Mike Shannon:So I'm gonna come from that standpoint. I have a little exposure here. Yep. As CEO of my first company, I was at the table twice.
Corey Ferengul:Yep. Where
Mike Shannon:we almost sold and you were on my my board. Yeah. And then, then we ended up promoting a CEO and I stepped aside and I had a front row view with, you know, maybe some comments here and there, to the the third attempt which we did end up selling. So, I think I'm dangerous enough that I can ask you some of the questions Alright. That most of the rest of us are are highly curious about.
Mike Shannon:Okay. But you've, for context, done how many deals like this and what type of companies?
Corey Ferengul:I have done dozens of acquisitions and divestitures. Okay. And, done them 1,000,000,000 of dollars of deals, over through public companies, private companies, and I've also sold companies as the executive. So kind of all over the map here.
Mike Shannon:Okay. Alright. So let's crack into that for for the rest of us. So, alright. And then you've also been on the board or investor of startups that have
Corey Ferengul:been of companies that have exited and boards of companies that have done acquisitions.
Mike Shannon:Okay. So I'm gonna speak from the startup founder. You start a company and at the naive first time entrepreneur standpoint, you just think at some point we get to enough traction that somebody's gonna buy us because we have the traction. Yeah.
Corey Ferengul:Yeah.
Mike Shannon:Yeah. What's the real reason from a strategic standpoint that the larger company and we'll just stick to that for a moment.
Corey Ferengul:Yeah. Sure.
Mike Shannon:Equity yet. But the larger company is actually looking to make an acquisition regardless of your traction.
Corey Ferengul:Yeah. I mean, first and foremost, they don't care about you.
Mike Shannon:Yeah. Right.
Corey Ferengul:Right? I mean, so every time I've been in a big company yeah. Right. I mean, every time I've been a big company and we talk about acquisitions, it's because of us.
Mike Shannon:Yeah. Right.
Corey Ferengul:Not because of you. It's because of us. Yeah. What's our strategy? What are we trying to do?
Corey Ferengul:It's not that we don't see other companies in the market. We don't see what they might provide us, but it's what they might provide us. Yeah. Right. It's what fits our strategy.
Corey Ferengul:Yeah. Acquisitions, and I'll I'll I'll say everyone always puts it through mergers and acquisitions acquisitions together. It's 99% acquisitions. So Yeah. Okay.
Corey Ferengul:Let's just get that out of the way. So acquisitions is very much driven on filling gaps or driving the strategy of the buying organization.
Mike Shannon:Yeah. Okay.
Corey Ferengul:And that could be the actual product or go to market strategy. It could be a financial strategy. Okay. But it is a strategic goal that that company has identified that acquiring another company or a product or product line or acquiring something to plug in Yep. Will fit.
Mike Shannon:Yeah.
Corey Ferengul:And and that that is what I feel those that are trying to sell their companies forget. They're like, I'm ready to sell now. No. It doesn't fit anybody else's strategy right now.
Mike Shannon:Yeah. Right. Right. And and from that startup standpoint, you know, the line often talked about is the bigger company is going to have to make at some point a buy or build decision.
Corey Ferengul:Yep.
Mike Shannon:And in many cases that means that if they build, they might just kill your startup or if they buy that'll like make a dream come true. So, why isn't it always a build decision? You've got all the resources. You can wipe this out.
Corey Ferengul:And that's where your your traction in market really comes into play. Right? So, you know, as I've sat around the table before, and we've may had those buy versus build decisions. You know, one example as CEO, we decided we started to try and build.
Mike Shannon:Okay. And
Corey Ferengul:we said, this is gonna be harder than we think. We're lacking some of the expertise. We have to go hire a few more people. And if we could find an acquisition that would fit these criteria already got
Mike Shannon:the team.
Corey Ferengul:Then then and and and we found someone that wasn't a perfect fit, but they were an 80% fit and we were at 20% on our own. Yeah. Okay. So it's
Mike Shannon:like,
Corey Ferengul:let's just roll. Yeah. Let's just go into it. So, you know, you you you typically try and build 1st
Mike Shannon:Mhmm.
Corey Ferengul:But that build may never make it past paper. Yeah. Okay. You know, the build is the discussion. Yeah.
Corey Ferengul:And then you say, you know, how long is it gonna take? Yeah. Does somebody have traction we're gonna have to overcome? Do we have some unique capabilities that building would take advantage of? Would it be too hard to integrate with someone else and get those to work together?
Corey Ferengul:That, you know, would does somebody else in the market really solve what we want? So Yeah. The decision to make an acquisition is all about how it fits my strategy. But part of that strategy might be, do I need to show the market that I've got this much revenue in this area faster?
Mike Shannon:Yeah. Okay.
Corey Ferengul:Right now, I am seeing companies trying to do acquisitions of artificial intelligence technology because their investors, their shareholders, public or private, want to know that they're in the AI space. Okay. So they're like, we can't get there fast enough. We can't hire fast enough. Let's go buy something.
Mike Shannon:Yeah. Okay.
Corey Ferengul:You know? So that is so it's, you know, I now can say I have the technology and I've got revenue that's AI driven.
Mike Shannon:Yeah. Okay.
Corey Ferengul:That might be the strategic need for the moment.
Mike Shannon:Yeah. Okay.
Corey Ferengul:But it all comes back to a strategic need.
Mike Shannon:Alright. So, let me ask you this from from the company that that would be bought. Whether it's startup or these could be, you know, private equity backed larger companies that still at some point are looking at we're probably going to sell whether it's Yep. The financial group or another company. How do you as the CEO or leadership team of that company routinely, you know, get yourself informed by what your potential buyers strategies are?
Mike Shannon:Is it worth your time at all? Do you just put it off until the end? Like, how do you Yeah.
Corey Ferengul:Recognize it? If you are a CEO or senior executive or the term Mike mentioned early corp dev, corporate development, which is typically a department in a larger company that is responsible to find acquisitions. Yeah. If you are, you know, looking at, from a smaller company, get to know the corporate development, get to know the executives at those larger companies as soon as possible. Okay.
Corey Ferengul:Create all of those relationships.
Mike Shannon:Even if you're concerned that they might built?
Corey Ferengul:Yes. And you may limit what you share with them Okay. But you need to be on their radar. Why? Because when they have the discussion on build, you want them to know enough to think of you.
Mike Shannon:Yeah. In a respectful way that's like, hey, they're not something to shrug off. They're actually That's right. Strong team. That's right.
Mike Shannon:Okay.
Corey Ferengul:And and there is all this thought, oh, I need to run under the radar. I need to not let people know who I am. Or if we just keep our heads down and execute but keeping the heads down and executing is great unless your goal is to get acquired.
Mike Shannon:Yeah.
Corey Ferengul:In which case, someone's gotta know who you are.
Mike Shannon:Yeah. Right.
Corey Ferengul:Right. Right. And rarely do large companies buy other companies out of the blue.
Mike Shannon:Yeah. Okay.
Corey Ferengul:There's there's usually some there there's some impetus to that. Right? There is some, I need to do it right now because of the strategic need. Yep. There's a financial need.
Corey Ferengul:That other company might be at a point where it may it it's time now. They hit a financial milestone we wanted. They developed some new technology, but I only knew that because I knew them.
Mike Shannon:Yeah. Right. Right. Right.
Corey Ferengul:Right? So, you know, very rarely. I have bankers say this all the time and boards I'm on and such. You know, we're gonna run a competitive process. We're gonna get a bid, then we're gonna go shop to 10 other companies.
Corey Ferengul:Yeah. And I'll ask most of the bankers, like, how often does that actually lead to truly competitive bids? Yeah.
Mike Shannon:When we finally did get to the table to explore a sale, which happened a few years in a row. Right? The relevant potential buyers for the most part were the parties that we almost by accident had gotten to know over the last few years. And it Yeah. Wasn't like a strategic thing from me or my team members.
Mike Shannon:Eventually, it was. But Yeah. Not all, but most of the parties just happened to be previous relationships. And there's a great part in, this book Exit Right, which is our friends here in Chicago, Mark Acker and Mark Mert Iseri, where they talk about boards of startups should have an exit talk
Corey Ferengul:Yeah.
Mike Shannon:At least once a year. Not every board meeting, but an exit talk once a year, which is a counterintuitive thing because as the founder, at least, like, when I was starting up 2012, 2013, you kinda have this mentality that if I go to you as the board member and say, hey, let's talk about, you know, where we might exit to Yeah. Is Corey gonna think that I'm losing focus, I'm getting fatigued, that I'm tired. Right.
Corey Ferengul:And so I
Mike Shannon:I thought in that book, that's a great mentality shift of you wanna talk about it early and often so that those relationships have years to develop. That's right. It's not me as the founder being fatigued or, like, wanting to get out, but it's this is a long term relationship that has to be developed for the most part.
Corey Ferengul:1 100%. And on the other side of the table, not the company's just selling Habitat, but if you're a buying company, if you're a company that does acquisitions, you probably should be keeping the list of likely companies. Yeah. You should probably be socializing that with your board at least twice a year. 2 board meetings a year, like, hey.
Corey Ferengul:These are possible targets. And always keep a bit of a thesis on what's going on. I was always big on if I knew companies in the space that I might want to acquire one day Yep. I needed to have relationships with them.
Mike Shannon:Yeah.
Corey Ferengul:And and and that's the other side. Right? So now I'm reaching out to them because I wanted to know them. I wanted to see where they would fit in our strategy. Yeah.
Corey Ferengul:And and maybe we never would get there, but I needed to know when it made sense to pull the trigger.
Mike Shannon:Alright. So let me ask you this then. When we, first hit the Inc 500 Yep. List of, you know, whatever, certain Yeah.
Corey Ferengul:Yeah. Upgrade and we're, you
Mike Shannon:know, above 10,000,000 revenue, all of a sudden I get all these emails from private equity associates.
Corey Ferengul:Yeah.
Mike Shannon:Yeah. Mostly, Pete, maybe some some companies as well. Are those emails a founder should respond to? Do you take the meeting? Because Yeah.
Corey Ferengul:At one point,
Mike Shannon:it was a lot. And so I thought they were just kinda spam emails. Some of them ended up being relevant relationships. But why is that Right.
Corey Ferengul:And
Mike Shannon:do you respond to them or not?
Corey Ferengul:So there's 2 schools of thought on it. One school of thought is take all of them, take the calls, get your name out there among the PE class. Now this is different than strategic. Right. If it's coming from a strategic, every time.
Corey Ferengul:Yeah. And by strategic, you mean a company. Company. If it's coming from a company and it's typically gonna come from the corp dev team
Mike Shannon:Yeah.
Corey Ferengul:I would take that every time. Because that means you've got a large company or associate with your sector that wants to know who you are, every one of them.
Mike Shannon:Which means you're going against the fear of them Yes. Just taking your intel and building it
Corey Ferengul:Yes.
Mike Shannon:Which is a is a viable fear, but you're saying the benefit outweighs the
Corey Ferengul:The knowing who each other are Yeah. Matters. And and just control. You don't have to go on. Here's my revenue numbers.
Corey Ferengul:Here's somebody just have a real conversation about the market, what you're seeing. If it's an investor, a private equity firm, a venture capital firm, remember, they have the equivalent of a sales development rep in STR Yeah. On staff. Their job is to get to know as many companies as they can. Yeah.
Corey Ferengul:Their job is to then, you know, listen to you, learn about you, put them you in their database
Mike Shannon:Yeah.
Corey Ferengul:And kinda keep up and determine if you're a fit for their investment profile. Okay. So I did not return many of those calls.
Mike Shannon:Okay.
Corey Ferengul:I was not a believer that cold calls mattered like that. Okay. I know a lot of people that do take all of those calls Mhmm. Just so that they can get in everybody's radar and get everyone's database. Okay.
Corey Ferengul:But here's what I found in those scenarios. I take all the calls. I talk to every venture firm. 3 years later, I'm ready to raise money. I go back to that firm.
Corey Ferengul:What? That entry level person I talked to isn't there anymore. Yeah. And then I talked to somebody there and they go, oh, yeah. You're in the database.
Corey Ferengul:It's been a couple years since we updated it. Right?
Mike Shannon:Yeah.
Corey Ferengul:So, you know, if you're talking about transacting from an investment standpoint, meaning getting, you know, a fund raise or an exit to a private equity, that's those are also relationships you're gonna keep. Those are the people that do deals from a cold start.
Mike Shannon:Yeah. Okay. Strategics
Corey Ferengul:don't do deals from cold start. In financial firms, not only they do deals from a cold start, they move faster than strategics Alright. Because that is their day job Yeah. Doing deals. Right?
Mike Shannon:Yeah. So actually, which means maybe you don't need to start the the financial relationships as early No. As the company's strategic side.
Corey Ferengul:That's right.
Mike Shannon:Now let me ask you this. So you've obviously been the acquiring company, you know, far more than most, say, founders will then sell. So you've got sort of the the advantage as the buyer. Yeah. Help us understand, like, what goes potentially wrong in an acquisition, because I think that's always an important thing to understand of, like, well, what would make this a good fit?
Corey Ferengul:Yeah. I mean and let let's let's talk to it from the standpoint of the transaction because we integration is a whole another topic for us to talk about. From the standpoint of actually getting a transaction done, it's unexpected surprises. Okay. It's numbers aren't what we thought they were.
Corey Ferengul:Growth rates aren't what they thought we were. Oh, the product's got a big hole in it. Mhmm. I had an acquisition almost fall apart one time because, it was a company based internationally, and we realized that they were paying employees out of a different entity. It was, like, woah.
Corey Ferengul:Okay. Right? So those type of things Yeah.
Mike Shannon:Okay.
Corey Ferengul:Go wrong. And, that's why you do do a due diligence. Yeah. Right? That's why you work through it.
Corey Ferengul:If you're the selling company, you should do that interrogation in advance and know what those things are they're gonna find and be prepared to deal with them. Yeah. If you're the acquiring company, I have seen so many companies get excited about doing a deal. They put the term is called deal heat. You get deal heat.
Corey Ferengul:Oh, we gotta do a deal. We gotta do the deal. That you forget these things, and you forget to do some of the important detailed work through the transaction. And this is where a board needs to be really big player and ask a lot of questions, and it shouldn't be, like, one board meeting at the end of the deal. Yeah.
Corey Ferengul:You should be if as as a board member during a transaction, I want to see 3 or 4 cuts at that, where I wanna see the thesis behind it, then I wanna see the first round of diligence, then I wanna see where we stand today, then I wanna see a final presentation Yeah. Before we approve the deal. Right? And that's as the executive leading the purchase, I'm thinking about constantly reporting back and getting buy in along the way.
Mike Shannon:Alright. How many stakeholders? I know it's gonna be different per company, but, if I'm the the company selling, maybe I'm interacting with you and it Yep. Feels like this is all a quarry. But like any sale, you've got stakeholders.
Mike Shannon:How many people are behind the scenes here?
Corey Ferengul:I mean, there's gonna be at least 5 to 10 people on the buying company side, and they're gonna have it, you know, double that in
Mike Shannon:terms of advisors behind them. Across multiple departments?
Corey Ferengul:Yeah. So you're always gonna have the CEO and the CFO, period. Full stop. They're gonna be there. A lot of times you're gonna have someone on whatever that product side is, whether it's a technology product or something, somebody on that side of the house.
Corey Ferengul:You'll typically have at least 1 person in legal, if not multiple people in legal in the organization. So we just hit 5 people without even getting into real specialties yet. Right? If things go well, the, you know, the people team, the HR team, they'll get brought into the picture Yep. At some point.
Corey Ferengul:So, you know, most of the executive team will get touched. Yep.
Mike Shannon:And Those stages of how these deals get done. Yep. You start with whatever indicator of interest
Corey Ferengul:Yep.
Mike Shannon:IOI Yeah. Yeah. Term sheet goes to legal. And so the probability from the buyer standpoint because from a startup, you're like, I've got a an IOI. I I like, the deal's done.
Mike Shannon:From the buyer standpoint, when you put down the IOI then the term sheet then the kind of like, what are you actually thinking is your problem?
Corey Ferengul:So there are there are very different ways of of approaching the indication of interest, IOI or LOI, letter of interest. Yeah. Some organizations use indication of interest just to open the door and say, hey, we're interested in in buying you. Okay. And then they wanna do some work to get to a non binding letter of intent.
Corey Ferengul:Okay. And, a letter of intent is non binding in the sense that it's not a legally bound document, but it outlines more of the terms of a transaction Yeah. And that would lead to a purchase agreement. So I see some organizations that throw around indications of interest like like candy. Like, ah, here.
Corey Ferengul:Try that. And that gets I was
Mike Shannon:looking around.
Corey Ferengul:Yeah. And then they get into the company. More times than not, if a letter of intent comes out, that's a little more thought through. Okay. You had some more conversations.
Corey Ferengul:They've thought about what this would look like. Though, you see some companies that are willing to put a non binding letter, I mean, a letter of intent out there and then start diligence.
Mike Shannon:Then, sir. Okay.
Corey Ferengul:You know, so you really should think about how much interaction have you had with this company, how much they know about you as to how seriously you take what comes over. Yeah. Right? Okay. Nothing is binding until a purchase agreement is signed.
Corey Ferengul:Yeah. And deals fall apart at a really high rate. I don't have it scientifically, but I'm gonna tell you half of them fall apart
Mike Shannon:Yeah. Okay.
Corey Ferengul:From the IOI or LOI stage. Half of them get to the finish line.
Mike Shannon:Yeah.
Corey Ferengul:The other big thing about doing a deal, and this is for buying the sell side, I have never done a deal that didn't we call it diet death before it finished. Yeah. I've heard that. Everybody walked away from yeah. But but well, we saw it with yeah.
Corey Ferengul:We've seen it, where everybody walked away from the table at some point. Yeah. This deal will never happen. Yeah. Okay.
Corey Ferengul:We could find a way. So it's gonna be that frock of process.
Mike Shannon:Yeah.
Corey Ferengul:Period. No way around it.
Mike Shannon:So Well, I think that gives us, a little touch on mergers and acquisitions, which as you said are 99% acquisitions. That's right. Maybe we do more later. But that's it for today. Opening the c suite.
Mike Shannon:Thanks.
Listen to Momentum Mode w/ Corey Ferengul & Mike Shannon using one of many popular podcasting apps or directories.