June 27, 2024 • 46 mins
In our latest episode, Allen Born dives deep into the current state of the M&A market, shedding light on the challenges and opportunities for tech companies. 💡
Key takeaways include:
» The impact of SaaS multiples on valuations 📊
» The importance of understanding the rule of 40 for growth companies 🚀
» Strategies for navigating market fluctuations and maximizing value 💼
Tune in to learn how to avoid the hidden chasm and make informed decisions in your M&A journey.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Josh Smith (00:11):
You're listening to the hidden chasm, a podcast
where we speak with leaders ofsoftware enterprise companies to
investigate the impact thatlegacy technology has on growth
and innovation. The hidden chasmis sponsored by United Effects
where we help companies breakfree from legacy tech, improve
retention, and empower m and agrowth. Learn more at
unitedeffects.com.
Bo Motlagh (00:29):
We're back at it. Josh, how's it going, man?
Josh Smith (00:32):
I'm always chill. How are you doing?
Bo Motlagh (00:33):
I'm doing alright. I'm pretty excited about our
guest today. We've got AllenBorn from Fairmount Partners.
How's it going, Allen?
Allen Bo (00:40):
Hey, guys. Good to see you. Yeah. You as well.
Bo Motlagh (00:42):
Thank you so much for joining us. I'm gonna do the
quick read so everybody hereknows exactly what you do and
who you are. K. Allen is asenior technology investment
banker with over 25 years ofexperience advising CEOs,
boards, and investors onstrategic alternatives and
capital structures. He iscurrently a senior member of the
technology investment bankingteam at Fairmount Partners,
(01:05):
specializing in mergers andacquisitions and capital
raising.
That's a lot, and that'sawesome. Yeah. We're super
excited to have you aroundbecause we've been chatting with
a few folks about this wholehidden chasm concept, which is
just a fancy way of sayingthings that you maybe didn't
think about for years in termsof your technology and your
strategy and your strategicalignments that then come and
(01:26):
hit you in the face when itmatters most.
Allen Bo (01:29):
Mhmm.
Bo Motlagh (01:29):
And one of those moments that I think matters
most is when a company islooking to raise or sell. And,
obviously, you know, I thinkyou're gonna have a lot of
interesting perspectives on thatpiece of it. And so far, we've
had conversations with processexperts and product experts.
We'll probably having moreconversations with revenue and
technology experts. But I thinkthis is the one I'm super
(01:50):
excited about right now.
Tell us a little bit aboutyourself and what you guys are
doing at Fairmount.
Allen Bo (01:54):
Yeah. I'll give you a little bit of background. I got
into tech in the mid nineties. Iwas working at the American Red
Cross. This is like 93, 94 timeframe.
I was doing marketing for theRed Cross. And one of the things
that I had identified was wewould create these publications
that we would have printed andsent to the chapters, and they
(02:16):
would use them as part of theireducational program. And every
time we'd have to update thelanguage, we'd throw out 1,000
of dollars worth of inventorybecause the brochures were now
wrong. And so I thought, isthere a way that we can digitize
these brochures and put them onthe Internet? We didn't even
have a website at the time, butmake them available so that they
(02:37):
can print them out anddistribute them that way.
So I started talking with folksabout that. I got invited into
the task force at the Red Crossto get the Red Cross online.
Well, part of the task force wasan ISP that was based out in
Irvine, California. They werecalled Epic Internet and they
hired me away pretty quickly tojoin their team based in Irvine.
(02:58):
They were an ISP typical ISP.
We were selling fractional tones. We were selling dial up.
We were selling hosting. We wereselling web development. And I
joined I walked into an old BellAtlantic switch building in
Falls Church, Virginia, andthere's boxes everywhere and
stains on the floor.
I'm in an office with a hole inthe ceiling and the data center
(03:21):
air is coming down. So I've gota winner going on, I'm like,
what in the hell did I do? Sothat was my first exposure to
tech. And I did that for anumber of years. Our firm, the
company, we were doing reallycool things.
I mean, we were trying to becomeI used to say we were trying to
become Exodus before Exodusbecame Exodus, but no one knows
who Exodus anymore. So we weretrying to become Rackspace
before Exodus became Exodus andRackspace became Rackspace. But
(03:44):
we ran into funding challenges,and so I left to go back and get
my MBA. And I went to Duke andgot my MBA and came back and
joined the technology practiceat Legg Mason in Baltimore. So
Legg Mason, Woodwalker, Istarted there as an associate,
and I was doing all the techdeals because I knew tech.
We did a number of reallyinteresting public offerings. We
(04:04):
helped take Orbitz public twice.We helped take OpenTable public.
I got great stories aboutOpenTable. We can save that for
another time.
And then ultimately had a childin 2,008. My daughter was born
and moved up to the Philadelphiaarea to be closer to home where
I was introduced to FairmountPartners and joined Fairmount
(04:25):
Partners as an emerging growthtechnology banker.
Bo Motlagh (04:28):
Very cool. And and you and I met through PACT.
Allen Bo (04:31):
Yes. That's right. Yeah. I was, you know, the funny
thing is when I first joinedFairmount, I think it was my
first week, Charles Robbins, whoruns the technology practice
there, said to me, hey. I'mgonna bring you to this meeting
and you it's gonna be great.
You're gonna meet a lot ofpeople. And it was the steering
committee for the 1st packedforum conference. The very first
(04:54):
forum, and he introduces me toeverybody, and then he leaves.
And now I'm on the steeringcommittee. That's cool.
That's and that was myintroduction to PACT as well.
Bo Motlagh (05:05):
For our listeners, PACT is the Philadelphia
Alliance of Capital andTechnology in the Philadelphia
area. It is a really greatcommunity of both enterprises
and startups that do a lot ofinteresting events, and Alan has
been at the helm of a a few ofthem over the years.
Allen Bo (05:18):
I have. Yeah. I ended up chairing in, I think, 4 or 5
of the forum conferences, andI'm on the board of PACT.
Bo Motlagh (05:24):
Very cool. And I think this is the first time
you're meeting Josh.
Allen Bo (05:27):
Yes. It
Josh Smith (05:28):
is. Pleasure to meet you, Alan. Good to meet you too.
I've heard a lot about you.
Allen Bo (05:33):
Terrific. I will.
Bo Motlagh (05:34):
So thanks for the background. Could you tell us a
little bit more about Fairmountspecifically?
Allen Bo (05:38):
Yeah. Happy to. We are a boutique investment bank. We
cover 4 industry sectors. Wecover healthcare services, which
is really pharma services.
We cover business and consultingservices, which is a lot of IT
services and staffing. We have apractice that does industrial
and consumer, and then we have apractice that focuses on
(06:00):
emerging growth technology, andI'm part of the technology
practice. As a firm, we probablydo 20 to 25 deals a year, mostly
sell side, about 70, 80% of whatwe do is sell side. We do some
buy side m and a for areas thatwe know really well. That's
probably 10 to 15% of what wedo.
And the rest is later stagegrowth equity and general
(06:21):
financial advisory. From a dealsize perspective, we operate in
the, call it, 30 to 300,000,000in enterprise value range. And I
think over the last couple ofyears, our average enterprise
value on a sell side was arounda $100,000,000.
Josh Smith (06:36):
K. So you deal more with organizations that seek to
be acquired than to acquire?
Allen Bo (06:41):
We do. Yeah. We do we do quite I mean, interestingly,
so when I was at Legg andStifel, we were doing mostly
sell side and public offerings.We avoided buy side like the
plague. But at Fairmount, weview buy side as a way to really
get deeper into the industriesthat we serve.
And so if it's a strategic typeof a deal, so we're instant, HR
(07:05):
Tech is an area that we focus onand we're engaged with a
$35,000,000 ARR company that'slooking to accelerate their
roadmap through acquisition anddo a number of other things. So
what you do is you come up witha list of 500 names and you call
them. Right? It's a much easiercall and people are much more
willing to pick up the phonewhen you call them up and say,
(07:27):
hey, I've got somebody that isreally interested in acquiring
you, then, hey. I'm Allen.
I'm an investment banker. Can Isell your business? Yeah. It's a
different message in it. Butwhat that allows us to do, you
know, not only is it good from amarketing perspective, but it's
also really good because we'reout talking to our emerging
growth companies who are doingreally cool things, and and
we're learning about theirbusiness, and we're learning
(07:48):
about their go to market, andwe're learning about how the
economy is impacting theirbusiness.
Are software buyers buying yoursoftware? You know, are you up
10% this year? Are you down thisyear? And by having these
conversations on the buy side,you can get a really good flavor
of what's going on in thebroader market out there. And
(08:10):
then consequently, you can usethat to advise your clients.
Bo Motlagh (08:13):
I've been hearing that in M&A, it's a seller's
market at the moment. Would youagree with that or not?
Allen Bo (08:18):
I would disagree that it's a seller's market at the
moment. There's still there'sstill we're not in a headwinds
environment anymore, but we'renot in a tailwinds environment
either. So, what the the biggerso one there's there's a number
of things that are impactingtech just in the frame that I
(08:40):
deal on, which is tech. There'sa number of things that are
impacting tech m and a. Somultiples are impacting tech m
and a.
At the height of the, you know,in 2021, SaaS multiples, right,
we we have a SaaS index. Wetrack, like, a 100 SaaS
companies, and SaaS multiples,median multiples were 20 times
(09:01):
revs in 2021. By the end of2022, median multiples were 5
times revs. So the dislocationthere was huge from a valuation
perspective. Right?
And so consequently, when themultiples pull back, you have a
lot of folks who are sitting onthe fence and saying, well, I'm
(09:22):
not going out to market wheremultiples are today. Now
interestingly, if you do astraight line back to like 2018,
multiples are sort of in therange, Okay. You just had this,
you know, 2000 to 2001 blip, andif you missed it, unfortunately,
you missed it. So we don't wedon't know that that's we don't
know that that's gonna come backanytime soon.
(09:44):
But so median multiples since2000 and since 22. Right?
Because we kinda if you'relooking at median multiples, you
can't really go back into 2000and 2001 because they're just so
outsized. And so but if you lookat median multiples since 2022,
call it 3a half times revenuefor median, but a good company
(10:06):
can trade for 5 to 10, but themedian's way down. So now back
in terms of is it a seller'smarket?
If you're a really hot SaaScompany that's sort of on its
way or past $10,000,000 in ARR,that's rule of 40, and what rule
of 40 means for those that don'tknow is rule of 40 is if you add
(10:30):
your growth rate, so I grew at20% last year, to your EBITDA
margin, my EBITDA margin was 20%last year, That combination is
rule of 40. So in that scenario,rule of 40. But typically, for
emerging growth, it's theirgrowth rates like 50%, 60%, and
they're burning a little bit ofmoney. Right? But if you're so
(10:52):
for a rule of 40 company, sogrowing rapidly, has some size,
and is close or can beprofitable, those are the ones
that are still trading at bigmultiples because there aren't
that many of them out there.
So there's a scarcity effectthat is for really good
(11:13):
companies driving up valuationmultiples. But if you're a
median company or a below mediancompany, it's tough to be a
seller today.
Bo Motlagh (11:22):
I'd imagine there's also, especially in this
economy, like a fire sale thinggoing on with a bunch of
companies as well.
Allen Bo (11:29):
Well, yeah, we haven't seen a lot of it yet, but I
think we will see it. And thereare companies out there. So
there's a lot of founders whohave raised money who've never
lived through a recession. Theycame out in 08, 09 when it was
easy to raise money andeverything went up into the
(11:49):
right. So there's a whole hostof folks who raise money and who
raise money in 2021 where wethink everything's gonna
continue to go up and have spenta lot of it and are now in a
position where VCs have pulledback and PEs have pulled back
because, one, they need tosupport the companies that are
gonna be their winner.
(12:10):
If they don't have you tagged asa winner and you're running out
of cash, they're not gonna reup. So there are groups out
there who have raised a bunch ofmoney, spent a bunch of money,
and are now in a position whereVCs have pulled back. They're
much more discriminating interms of new deals, and so
you're gonna have, there will becompanies that come up that need
(12:34):
to find a home, And, you know,so so does that look like a fire
sale? Yeah. A lot of times itdoes.
Bo Motlagh (12:41):
How involved are you in Fairmount post acquisition,
post transaction?
Allen Bo (12:46):
That's a great question. So it it really it it
really depends. So one of thenice things about being an
investment banker is you developa really deep relationship with
your client. Right? You gothrough a 9 month process, you
are their adviser, you are theircounselor, and you develop
(13:10):
friendships.
And that's I mean, that's one ofthe things that I love about
doing these deals is that youget to know a really interesting
business and a reallyinteresting founder, and you're
able to add to create wealth,meaningful wealth for them, and
that's just like a really goodfeeling. And so, you know, if
some if a company sells to astrategic right? So there's
(13:32):
there's 2 flavors of m and athat we typically see at
Fairmount. So one flavor is yousell to a strategic, your
company gets absorbed, and theyintegrate you, and that's kind
of the end of it. And maybemaybe you've got a product name
or something like that, but youbasically get absorbed by the
bigger entity.
We'll stay in touch with thosefounders, and we may stay in
(13:55):
touch with people who are a keypart of that process. For
companies that get sold toprivate equity, which is the
other flavor, we will continueto try and add value because
those companies, you know,private equity has a holding
period of call it traditionally3 to 5 years where buy a
company, grow it up, sell it.Mhmm. We typically get involved
(14:21):
with companies early before theyever sell. So our our what we're
trying to do is meet a company ayear to 2 years before they ever
think about an exit so that wecan help guide them and provide
support.
Similarly, for a company that'sbeen acquired by PE, you know,
our you know, we don't stopreturning their calls once the
(14:43):
deal happens. Sometimes they'llsay, hey. I've got an issue with
my board. Can you help me thinkabout how to deal with it? Yes.
We can. Can you help us with ourfinancial modeling? Yeah. Sure.
Happy to do that.
We wanna continue to supportcompanies. We think about the
life cycle of a company. Wewanna add value when they're
early, help them when they'reready to raise money, Help them
(15:06):
when they're ready to exit. Ifit's an exit to PE, help them
where when they're ready to dothe next exit.
Bo Motlagh (15:11):
That makes sense. And what you were talking about
with the strategic acquisitions,what I was hearing is sort of
these bolt on or tuck in deals.
Allen Bo (15:18):
Yeah. That's right. So a PE would call that a bolt on
or a tuck in. A big strategicwould just say, yeah, we're just
gonna buy it and absorb it. Butthat's exactly right.
So what you're doing in thistype of a transaction is and
we've done a bunch of them. So,you know, big PE backed company
has a product gap. Mhmm. And andthey are looking to good example
(15:44):
is the the buy side that Imentioned earlier. They've got a
product gap.
So you find a company that youthink can fill the product gap,
and that that becomes therationale for your acquisition.
So you're bringing in a neworganization to help fill many
times a technical gap within theacquiring company.
Bo Motlagh (16:04):
And this has been a really interesting piece of this
for us as well because I thinkbringing this back to the whole
hidden chasm concept, that'swhere you can really run into a
lot of trouble. Have you seen astat actually I read about, the
last week or so? I think it wasthe Harvard Business Review put
out that between 70 90% of M andA is considered a failure, which
(16:27):
kind of blows my mind. I'm alsovery curious. Yeah.
Our stats
Allen Bo (16:30):
are much higher.
Bo Motlagh (16:31):
Oh, really? Well, I mean, that's a good question.
Like, what does failure mean inyour mind post acquisition?
Allen Bo (16:38):
That's a good question.
Josh Smith (16:38):
I mean, I so you could also flip it and say, what
are the key conditions ofsuccess?
Bo Motlagh (16:44):
There you go. Yeah. Get positive about it.
Allen Bo (16:46):
That's a good question. So when we think about
an acquisition, there's part ofthe rationale that you you lead
with is synergies. Right? Sothere's there may be cost
synergies related to duplicatepersonnel, duplicate systems,
and we can come back toduplicate systems, are they
(17:07):
really duplicate? So there'scost synergies related to
personnel and then there may besales synergies, revenue
synergies related to the abilityto cross sell a product.
So when it works, that synergystory holds and you have a
situation where 1 +1 equals 5.Right? We're now selling a lot
(17:31):
more. The Target's selling a lotmore. The acquiring company is
selling a lot more.
The product sets go togetherreally well. They fit nicely
with each other. You're able toachieve some cost synergies on
the back end. And so what'shappening is is that the
acquisition is paying foritself. So is the acquisition
(17:52):
paying for itself?
If it is, then that's a success.What can go wrong is you acquire
a company that you have a theorythat your buyers are gonna wanna
buy that product, but theydon't. And maybe it's because,
you know, you're you're anenterprise buyer and you acquire
(18:14):
SMB focused business, and yoursalespeople can't sell that
Yeah. To SMB. And the SMB guys,the SMB salespeople don't know
how to sell enterprise.
SMB is very high velocity, a lotof churn, enterprise is very
long sales cycles, hopefullystickier. So even that, if you
(18:36):
have a product that at facevalue might make a lot of sense
together, if it's built for aparticular company or if the
focus of the target and theacquirer is at odds in terms of
who their ICP is, their idealcustomer profile, that can
create a lot of problems.
Josh Smith (18:54):
That resonates with me just someone who has stood up
and run, user research practicesso that you run against
companies with mindsets wherethe people in positions to make
decisions about what's in aproduct and what can sell
believe that it's somethingtheir their value in the
organization is based on theirability to make it up, to just
(19:15):
think it. They're smart enough.And Yeah. Having to figure out
how to train them to be morecurious and to say, let's put in
processes to evaluate, perhapsvalidate assumptions. You
mentioned the word theory.
Evaluate these theories, reducethe risk of being wrong or be
wrong as quickly as possible sowe know not to go down that
(19:35):
route so that we can learn whatour market, what our customers,
what our users really value andreally want before we make a
critical and expensive decisionto implement. I assume there's
some sort of similar process
Allen Bo (19:52):
for you all as well in
Josh Smith (19:54):
your investigation discovery of the opportunities
for sellers.
Allen Bo (19:59):
Well, there is for sure. What we want to do when
we're representing a seller iswe're trying to describe the
unique characteristics of acompany. If you think about it
as an asset, what's unique aboutit? What's unique about the
tech? Do they have a moat?
Do they have a technologicalmoat? Do they have a 2 year lead
(20:20):
ahead of somebody else? Right?So we we try and really
understand that, and we try andcommunicate that along with,
hey. Here's the tech stack thatwe're using and, you know,
trying to describe the dataflows and things like that so
that people will not only And wethink that's important because
(20:44):
it needs to work on theacquirer's platform.
Right? So unless they wanna keepit as a stand alone. Right? And
and keeping it as a stand alonecan be really, really expensive.
So, you know, here's an exampleof one that didn't work.
We helped a company acquireanother business, and it's part
(21:08):
of the deal. We didn't we justbought the assets. The acquiring
company who I was representingdidn't bring on any of the
people. So when they started tospin up the product, so and it
came with a bunch of customersand what they found was that,
first of all, there were a bunchof customers who are already
pissed off about how the thingwas functioning and they had not
(21:32):
disclosed that to us. But also,our guys were on Azure.
They were on AWS. And so nowyou're running 2 different
environments, and that'sincredibly expensive. And then
when stuff started breaking,didn't have access to the people
to come and fix it. So that wasa really tough situation. You
(21:55):
try and raise these issues, youtry and identify them early, you
try and identify them during duediligence.
There were other reasons whythey decided to ignore red flags
and pursue it anyways, but youtry and do this early and it's
and it's really helpful. Sothat's one of the reasons why
you gotta bring in really goodadvisors, not just financial
(22:17):
adviser. It's important to bringin somebody who can come in and
evaluate, what am I acquiring?Or if you're, you know, if
you're a sell if you're on thesell side, what am I acquiring?
But also if you're a seller, youwant them to be evaluating your
tech and making sure that allfits and that there's a path to
(22:37):
integrate it because if itdoesn't work, you may have an
earn out tied to that.
Bo Motlagh (22:43):
Right.
Allen Bo (22:43):
Right? And if it doesn't work, you're not getting
your earn out. So before yousign that deal, you wanna
understand, okay. What's our init? We've not yet signed the
deal.
Maybe we're under a letter ofintent, but you're gonna have an
integration plan related toheadcount. What's our
integration plan related to thetech? That's equally as
important because if it doesn'twork, that's worse than having
(23:05):
somebody, you know, a headcountperson slide in the wrong spot.
It's significantly worse.
Bo Motlagh (23:09):
I love that because I'm a tech head. So I think
you're speaking to the thing Ilove about these problems and
solving them. But I think, Imean, what I'm hearing you
describe is really theimportance of a strategy and a
clear understanding of how thesethings are going to fit together
and not just once. Right?Especially if you're the buyer
on, like, a bolt on strategy,after it.
(23:30):
So what is this gonna look like?
Allen Bo (23:33):
Well, it's not yeah. It doesn't scale. And then the
other thing that we look at is,you know, is tech debt.
Bo Motlagh (23:41):
Right.
Allen Bo (23:41):
Right? The acquiring company. Alright. So we're
representing somebody somebodythat's a that that's we're
represent a company that'seither trying to raise money or
trying to sell themselves. Andit's 2024, and they built their
platform in 2012.
So you've got systems that areold, that are held together by
(24:02):
duct tape, and they just haven'tinvested in modernizing the tech
stack. Right? And you see thatall the time Yeah. Because it's
expensive to modernize a techstack. And so what are the
implications of that?
Well, the implications of thatare when a buyer starts to do
the work on, okay, how are wegonna integrate these companies?
(24:23):
What becomes relatively apparentpretty quickly is it's gonna
cost a lot of money to updatethat text stack such that it can
integrate within hours. So thatbecomes very expensive. If that
company is looking to raisemoney, a savvy investor out
(24:43):
there is looking to understandyour tech stack and what sort of
Ted debt may be there, and thatgoes into their valuation
calculation. If it's gonna cost$10,000,000 to upgrade the tech
stack, they're gonna beresponsible for that.
Bo Motlagh (24:56):
Right.
Allen Bo (24:56):
Right? They stroke that check. But guess who's
gonna pay for it? You are misterseller or the guy who's taking
an investment. So people look atit and they quantify what is
needed to bring this up to date.
And if you haven't done a goodjob and, again, you're the
company that's thinking aboutraising money or selling, if you
haven't done a good job ofmaintaining your tech stack, it
(25:19):
will be it will be veryexpensive, And the longer you
wait, the more expensive it'llbe.
Bo Motlagh (25:28):
How how often well, I mean, we called we call this
whole thing the hidden chasmbecause a lot of times it's a
surprise.
Allen Bo (25:34):
So It is very much a surprise.
Josh Smith (25:37):
It shouldn't be a surprise.
Allen Bo (25:39):
It shouldn't be a surprise, but it is often it's
often a surprise, you know, whenI mean, this is why it's
important to have good advisorswho who can who can think about
this stuff. But people need tobe people need to be focused in
on the blocking and tackling ofputting companies together. Very
(26:01):
often, you've got a dealadvocate on one side and a
seller on the other side whothinks about 1 +1equals5, and
the strategic rationale isreally great. And there's a
tremendous market TAM that wecan go after together, and it's
gonna be awesome. There's noreason why we shouldn't be doing
(26:22):
this deal.
We have every reason to do thisdeal. But they think up here.
Yeah. And you need and and andmany deals happen where they
don't consider, okay, how are wegonna when when Lend got bought
by Stifel, which I think Imissed in part of my bio, was I
was at LAG for 5 years. Stifelacquired it in 2,005, and I left
(26:44):
in 2,010.
But anyway, when Stifel acquiredLAG, like Mason Woodwalker, the
Capital Markets Group, and theydidn't announce it until it was
done. So we had no idea. Andthen I got an org chart. So
deals close without actuallypeople actually thinking about,
okay, where do people go? Wheredoes tech go?
(27:05):
And it happens all the time.It's not often. It's probably
5050 where do you have somebodyactually really leaning in on
the integration piece during theLOI period? And if you don't, it
becomes really, reallychallenging. And deals happen
all the time where they don't.
Bo Motlagh (27:23):
I always joke on paper, it sounds great to buy 15
houses and make an apartmentbuilding. In reality, that could
be kinda hard.
Allen Bo (27:32):
Yeah. Exactly. That's exactly right.
Josh Smith (27:34):
Yeah. It feels like what is it? An ounce of
preventions worth a pound ofcure? And I've I've heard
several things. Several you youyou heard the word you you said
the word synergies.
And I'm thinking, you know, youtalked about the synergy of
value early on. Understand,like, what's the actual value to
the user base on the buyer sideor the customer base on the
buyer side of this product gap.And then the technical
(27:58):
integration side. Alright. Mhmm.
If even after that's validated,if there's no way to integrate
it in from a technical side,then it's
Allen Bo (28:09):
Yeah. So right. So so if if your if your thesis is
that we're going to we've got aproduct and we can add a new
product into our bundle andeverything's gonna work together
seamlessly. If that's yourthesis and it turns out that
this piece doesn't talk to thispiece, then it's hard to execute
(28:32):
on that. And so you end uprunning things in parallel so
that this great theory that youhad that we'd have we, you know,
we can sell you one platform andyou'll have one throat to choke.
Well, if the stuff doesn't talkor work together or integrate,
even at the product level, nevernever mind the back end level,
(28:55):
your whole thesis is out thewindow because I still need to
have have this and I still needto have this.
Josh Smith (29:01):
Then you talked about the 3rd component. So,
like, even if you got those 2correct, the I'll say the word.
The agility or the velocity withwhich you can pivot and adjust
and shift is dependent upon thesize of the legacy or the tech
debt. So you can get those 2taken care of, but then if
you've got a huge burden in thetechnical debt or the legacy
(29:21):
tech, whatever you learn needsto adjust based on the
integration and the value inorder to achieve that value is
going to depend upon that 3rdpiece. Is that accurate to say?
Allen Bo (29:33):
Yes.
Bo Motlagh (29:33):
What I really like is the point you made that I
mean, it's it's a little easierto talk about this problem from
a buyer perspective because youhave to build the machine. But
you made the point that it'salso very, very important from a
seller perspective because, notso much because you're trying to
build all these integrations,but because you need to be easy
to integrate with because it'snot like you can't just assume
(29:56):
as founder that you're going tobuild this thing, get a check
and walk away and everything'sfine. There's gonna be real
financial repercussions if itdoesn't work.
Allen Bo (30:04):
And that's exactly right. And part of it is being
really thoughtful about how youput the components of the tech
stack together. Part of it isbeing thoughtful about, are you
using, open source? And ifyou're using open source, are
you building with the rightlicensing? How are, you know,
are you are you doing a reallygood job of documenting and
(30:26):
maintaining your tech specs,tech stack and your code base?
We did a deal where we sold acompany called Petrus. It was an
oil and gas data managementbusiness and we sold them to
Halliburton. And they ran a codescan, a black duck scan, on
Petrus, the seller, and thattech was cobbled together over
(30:50):
20 years. Mhmm. And so theyfound, like, you know, all these
licensing issues.
And what it did is it delayedthe process, because now they've
identified a page full of thingsthat we need to mitigate. So
we've got to go through andmitigate all this stuff. And
(31:11):
some of it was pushing out newcodes to all your companies. But
the problem was a lot of themwere not on the cloud. So it was
on prem.
Now you've gotta push out newversions on to to on prem
customers. And how do you dothat? You know, so that that
process cost us 2 months becausewe didn't know it was in the
(31:34):
code. When you're first gettinginvolved with a new potential
buyer or seller Mhmm.
Bo Motlagh (31:34):
Before you potential buyer or seller Mhmm.
Allen Bo (31:38):
Before you've really been able to do the due
diligence or
Bo Motlagh (31:39):
anything like
Allen Bo (31:39):
that, are there
Bo Motlagh (31:40):
KPIs you look for and other indicators that
basically set off your spideysense like, hey. I I should
probably have somebody look atthis.
Allen Bo (31:52):
Yeah. So I'll tell you that most of them are on the
financial side.
Bo Motlagh (31:56):
Yeah.
Allen Bo (31:56):
Right? So we think about what does revenue
retention look like? Are we ableto track gross margin by
customer? What's the LTV tocustomer acquisition cost, stuff
like that. Right?
Those those metrics, we willbenchmark companies against.
What's your gross margin? Ifyou're a SaaS company and your
gross margin is 55%, well, whyis that?
Bo Motlagh (32:15):
Right.
Allen Bo (32:15):
Right? Because that's really bad if you're a SaaS
company. We'll track a lot ofthose, and a lot of times those
can help identify operationalissues within the organization.
Right? So it could be that yourmargins are down because your
development guys are busyhelping customers make their
(32:38):
product work.
That could be a reason. Okay. Sothat identifies a problem. If
you're sort of out of the boundsof normalcy on any of these
metrics that people track forSaaS companies, or even gross
margin is something that we lookat, and we try and compare you
against your peers. If it'sextra high, why is that?
If it's extra low, why is that?How much are you spending?
(32:58):
Here's another one. How much areyou spending on R and D? So when
we look at a company's financialstatements, if they're not
spending 20 to 30% on R and D,are they maintaining their
product?
But if their r and d spend is10%, okay, well, who is making
sure that your product is up todate? Who is working on the next
generation of the product that'sgonna keep you ahead of the
competition? So that's somethingthat you look at it from a
(33:20):
financial perspective, r and das a percentage of revenue. And
if it falls below what we knowto be kinda normal, it raises a
red flag.
Bo Motlagh (33:31):
The opposite would probably be true as well. Right?
If you're spending like 40% on Rand D, but your customer
retention is going down andyou're just basically keeping
the lights on.
Allen Bo (33:39):
Yeah. That's exactly right. And if you're spending
40% on R and D and there's nogrowth. Okay, well, where are
the new products? You know, talkwalk us through your road map.
If you're spending 40% on r andd and you don't have a road map
with features that are like thislong, what are they doing?
Bo Motlagh (33:56):
You and I chatted about a company a while back
where the operational costsstepped up linearly with every
new customer acquisition andlittle things like that where
that shouldn't happen.
Allen Bo (34:07):
That's exactly right. SaaS companies in particular
should be scaling.
Bo Motlagh (34:10):
Right.
Allen Bo (34:11):
Right? So so we look for, okay, what's the flow down
model? At scale, how much ofevery dollar of revenue is
dropping to EBITDA? And youshould see that increasing with
a really good SaaS company. Andif marginal costs are increasing
dollar for dollar compared torevenue, the flow down model
that you look for in a SaaScompany doesn't hold true.
Bo Motlagh (34:34):
I think we're kinda coming back a little bit, A lot
of what we've been describing interms of how to be successful,
at least from a technologystrategy perspective, I think
what you're describing, which isgreat, is that these are not
distinct concepts. If your techstrategy is off, your financials
are going to show it. Yes. Andthere's only so much blurring
(34:55):
you can do between them. And Ithink, you know, I see this a
lot.
I'm curious. I think there are alot of executives sort of think
this piece will just sort offigure itself out. Engineering
will get it. And you don'trealize that it's part of the
same machine. You have to bethinking about it the same way.
Allen Bo (35:12):
That's exactly right. I think it's important for the
strategy of an organization tobe communicated through IT. I
think people need to be aligned.The knock that we hear and I'm
not a tech guy, so if this youknow, if you if if
Bo Motlagh (35:26):
I think that's what makes it more powerful.
Allen Bo (35:28):
Yeah. But the thing that we hear is that IT doesn't
wanna do new projects. IT wantsto just focus on what they're
focusing on, and the thought ofbringing something new makes
their brain hurt. If that's thecase and they're unaware of the
vision of the organization is tobring in something new, and it's
really important that our teambe pumped up to make it all work
(35:51):
and create, you may haveorganizational issues that you
need to address.
Bo Motlagh (35:57):
It makes a lot of sense. The other thing I was
gonna say is I think a lot ofwhat you talked about in terms
of what are we actually sayingneeds to be working correctly is
data. Yeah. Right? At the end ofthe day, what makes your old
tech work or your new tech workand them work together?
It's how data is being processedand flowing between them.
Allen Bo (36:17):
Yes. 100%.
Bo Motlagh (36:19):
Yeah. It's really interesting to me that so much
of this is really just a dataproblem and and always viewed
that way.
Allen Bo (36:26):
Well, it's a data problem and a pipe problem.
Bo Motlagh (36:28):
Yeah.
Allen Bo (36:29):
Yeah. But but you're right. I think you're spot on.
I'm
Josh Smith (36:33):
seeing also people problems.
Bo Motlagh (36:37):
Well, yeah. Yeah. Of course.
Josh Smith (36:38):
We said this is hidden chasm. And I and I say,
you know, it shouldn't behidden. Why is it hidden? Why
aren't people looking at it? Whydo we like to battle symptoms so
often and not spend time lookingat the underlying causes and see
the connections between thesethings.
Allen Bo (36:56):
At big organizations in particular, they may not know
at the senior management levelthat the pipes are held together
by duct tape. Just frightening.It is frightening. And you would
think that they should know, butyou need a cohesive organization
where you've got good lines ofcommunication between senior
management down to the systemsguys who are holding everything
(37:19):
together. And they need to feel,at the lower levels, empowered
to say something's breaking orsomething's bending, and we need
to focus on this.
And if and and and a junior guyneeds to raise their hand
because a lot of times stuffages and there's no more modern
(37:39):
things. But a lot of times it'snot as simple as that. And if
you've got good communication upand down an organization,
there's no repercussions toidentifying a problem.
Bo Motlagh (37:49):
Right. You
Allen Bo (37:49):
know what I'm saying?
Bo Motlagh (37:50):
What would you advise a CEO who's basically
finding that they have all ofthese issues? And if you were in
that position and you're lookingaround and you're going, we
probably need to talk before weput out a letter or anything
like that or put you on themarket. What do you advise in
those situations?
Allen Bo (38:08):
I would advise that either internally or externally,
they have somebody who canunderstand at depth what the
issues are and understand whatneeds to be done to mitigate the
issues and what that's gonnacost. Yeah. And you don't and
(38:32):
then you have a choice. I amgonna present to a buyer. I will
tell them upfront what theissues are, and I will tell them
upfront what our road map is tomitigate those issues.
And I will full disclosure onit, And there may be an impact
on valuation, but that impactwon't be something that happens
post LOI because I want toprovide as much information as
(38:56):
possible before I enter anexclusivity period with
somebody. So when I still haveall the momentum or when I still
have all the leverage, I've got5 buyers who are interested in
me. I'm gonna let them know whatmy tech issues are, what needs
to be addressed, what my plan isto do it, how much it's gonna
cost. They're gonna know thatwhen they bid. Mhmm.
That way, you can, fulldisclosure, you're still in a
(39:19):
competitive process, bid withthat knowledge, but also bid to
win.
Bo Motlagh (39:24):
Right.
Allen Bo (39:24):
Right? So you could so that's that's one way. If you
wait until you get into underexclusivity, the buyers get all
the leverage at that point. Andif you haven't disclosed an
issue, there you were gonna gethammered. So you'd rather
disclose when you have all thelevers.
Sorry. So that's one route. Theother route is to just address
(39:45):
it.
Josh Smith (39:46):
Yeah.
Allen Bo (39:47):
Identify it, quantify it, address it and implement a
plan. And you don't necessarilyhave to be all the way through
your plan potentially, but atleast you need to be starting on
it and making some progress onit so that people can feel good
about the fact that this area ofrisk is something that I don't
have to worry about.
Bo Motlagh (40:05):
Yeah. I'd imagine the story of I mean, every sale
is a story. Right? The story ofhow this is going to be resolved
is almost more important thanhaving had completed.
Josh Smith (40:16):
The failure to disclose or the disclosure route
always reminds me of the TomHanks film The Money Pit.
Allen Bo (40:23):
Yeah. Yeah.
Josh Smith (40:24):
Beau, you said, yeah. It ultimately was a data
issue because, like, if youtreated every issue in that
house as an infrastructureissue. But the second route you
mentioned, Alan, seems much moreadvantageous to identify,
assess, and address. Yeah.
Bo Motlagh (40:41):
Yeah. Well, but there's a cost. Right? There's
an upfront cost.
Allen Bo (40:45):
So you're gonna bear the cost. And I think with your
advisor, you need to try andfigure out, okay, what's the
impact on my process if I don'thave this done? Well, if you're
growing at a 100% a year andyou've got great retention
metrics and you look like a staror an A plus asset, you may be
(41:06):
able to get away with notaddressing it. If you look like
a B asset, you're gonnamaterially impact in today's
market, you're gonna impact yourbuyer interest. And when you
impact your buyer interest, youdon't have as strong of an
auction, which just getting toan auction phase where you've
got multiple people bidding onyou itself will create value.
(41:28):
Right. If if you've if yourunderlying problems are
significant and we're gonna bevery expensive to address,
you're gonna limit your interestso that you may not get to the
point you may only get onebuyer. And we and, you know,
we'll always we'll always tryand maintain the illusion of a
competitive process when it'snot there. But our job becomes
much more difficult when it'snot as high quality of an asset
(41:52):
and somebody chooses not to dothe things in advance that are
really important. And that andour our guidance is typically
take pause, get it fixed, makesure it works.
If it delays going to market bya year, that's okay, but you'll
have a much stronger process.
Bo Motlagh (42:10):
I'd imagine that the other sort of, I don't know,
factor there would be who you'retargeting as a buyer as well.
Because if you're targeting abuyer who has the technical
infrastructure and elements tosort of bypass what you have and
they're just gonna tuck you in,the value prop changes is that
as well.
Allen Bo (42:27):
Yeah. That's exactly right. If there's a way to sort
of uncouple the products fromthe challenges
Bo Motlagh (42:34):
Right.
Allen Bo (42:35):
And layer them into the buyer's tech stack, then it
doesn't matter. You're right.They might still try and ding
you for it from because they'llalways try and find something to
ding you.
Josh Smith (42:43):
So the valuation potential is dependent somewhat
on the buyer. The technicalintegration, the ability to
integrate right now, would yousay more or less dependent on
the buyer as well at this pointin time?
Allen Bo (43:02):
Well, it depends. If you've got a broad platform that
can integrate with a lot ofthings Mhmm. Then that's great.
If the buyer is limited in termsof what they can integrate with
and they don't integrate withyou, it's kind of both your
problem.
Josh Smith (43:17):
Okay. Both sides.
Bo Motlagh (43:18):
Then it really just becomes who's got the bigger
checkbook.
Josh Smith (43:21):
But if you on the seller side, would it be wrong,
Allen, to assume or write out toassume that on the seller side,
if if they vetted and realizedthese issues and address them,
and we're now at a point wherethey have more integration
options than ever. Their techdebt is reduced significantly so
that it can pivot faster as theylearn. And Yep. Would you say
(43:43):
that those things have an impacton the potential for their
multiples?
Allen Bo (43:48):
Yeah. It can. It can. Right? So if you've got so if
you've got a clean organizationthat is now highly scalable and
has the infrastructure to scale,you look like a different
organization than one thatdoesn't.
(44:10):
And so there's naturally somemultiple expansion that comes
with something that is a verymodern, highly scalable asset
versus one that's not. And youcan't really quantify. Is it a
half a turn? I don't know. Youcan't really quantify it.
But really where you see it isin the interest in the company
(44:32):
in a transaction and thevaluations that come out of that
level of interest. Strong,scalable, modern architecture
companies get a lot moreinterest than ones that are not.
And so it's that competitivenature that's really what pushes
on the multiple.
Bo Motlagh (44:49):
Makes sense. Well, we have covered a lot of ground.
Thank you so much, Alan. Thishas been, I think, one of the
more interesting conversations,and I think a lot of people are
gonna be fascinated to listen tothis. Wanna give you the
opportunity here.
If there's anything you'd liketo plug or anything you'd like
people to know about, please goahead.
Allen Bo (45:08):
Yeah. So just, you know, I I will tell you that if
you are an emerging growthtechnology company that is sort
of scaling towards 10 and isgrowing and has a pathway to
profitability and you'rethinking about your exit
options, we are here to help. Wewanna get involved with
(45:29):
companies early. If you're ayear out from transacting or
more, that's better. We like toinvest in relationships and
invest in companies that wethink we've got an opportunity
to do business with and itdoesn't cost you anything.
So reach out.
Bo Motlagh (45:45):
And how would they reach out?
Allen Bo (45:46):
They can reach out on LinkedIn or my email is
Bo Motlagh (45:53):
Very cool. Well, thank you again, and you've been
listening to The Hidden Chasm.Join us next time.
Josh Smith (46:00):
Thank you, Allen.
Allen Bo (46:00):
Thanks, guys.
Josh Smith (46:01):
Thanks for listening to The Hidden Chasm Podcast with
your hosts, Bo Motlagh and JoshSmith, and sponsored by
United Effects. We hope youenjoyed our deep dive exploring
the impact of legacy technologyon enterprise agility. Follow
along as we explore this furtherby subscribing to the podcast at
thehiddenchasm.com. Thanksagain, and we'll see you next
time.
You're listening to the hidden chasm, a podcast
where we speak with leaders ofsoftware enterprise companies to
investigate the impact thatlegacy technology has on growth
and innovation. The hidden chasmis sponsored by United Effects
where we help companies breakfree from legacy tech, improve
retention, and empower m and agrowth. Learn more at
unitedeffects.com.
Bo Motlagh (00:29):
We're back at it. Josh, how's it going, man?
Josh Smith (00:32):
I'm always chill. How are you doing?
Bo Motlagh (00:33):
I'm doing alright. I'm pretty excited about our
guest today. We've got AllenBorn from Fairmount Partners.
How's it going, Allen?
Allen Bo (00:40):
Hey, guys. Good to see you. Yeah. You as well.
Bo Motlagh (00:42):
Thank you so much for joining us. I'm gonna do the
quick read so everybody hereknows exactly what you do and
who you are. K. Allen is asenior technology investment
banker with over 25 years ofexperience advising CEOs,
boards, and investors onstrategic alternatives and
capital structures. He iscurrently a senior member of the
technology investment bankingteam at Fairmount Partners,
(01:05):
specializing in mergers andacquisitions and capital
raising.
That's a lot, and that'sawesome. Yeah. We're super
excited to have you aroundbecause we've been chatting with
a few folks about this wholehidden chasm concept, which is
just a fancy way of sayingthings that you maybe didn't
think about for years in termsof your technology and your
strategy and your strategicalignments that then come and
(01:26):
hit you in the face when itmatters most.
Allen Bo (01:29):
Mhmm.
Bo Motlagh (01:29):
And one of those moments that I think matters
most is when a company islooking to raise or sell. And,
obviously, you know, I thinkyou're gonna have a lot of
interesting perspectives on thatpiece of it. And so far, we've
had conversations with processexperts and product experts.
We'll probably having moreconversations with revenue and
technology experts. But I thinkthis is the one I'm super
(01:50):
excited about right now.
Tell us a little bit aboutyourself and what you guys are
doing at Fairmount.
Allen Bo (01:54):
Yeah. I'll give you a little bit of background. I got
into tech in the mid nineties. Iwas working at the American Red
Cross. This is like 93, 94 timeframe.
I was doing marketing for theRed Cross. And one of the things
that I had identified was wewould create these publications
that we would have printed andsent to the chapters, and they
(02:16):
would use them as part of theireducational program. And every
time we'd have to update thelanguage, we'd throw out 1,000
of dollars worth of inventorybecause the brochures were now
wrong. And so I thought, isthere a way that we can digitize
these brochures and put them onthe Internet? We didn't even
have a website at the time, butmake them available so that they
(02:37):
can print them out anddistribute them that way.
So I started talking with folksabout that. I got invited into
the task force at the Red Crossto get the Red Cross online.
Well, part of the task force wasan ISP that was based out in
Irvine, California. They werecalled Epic Internet and they
hired me away pretty quickly tojoin their team based in Irvine.
(02:58):
They were an ISP typical ISP.
We were selling fractional tones. We were selling dial up.
We were selling hosting. We wereselling web development. And I
joined I walked into an old BellAtlantic switch building in
Falls Church, Virginia, andthere's boxes everywhere and
stains on the floor.
I'm in an office with a hole inthe ceiling and the data center
(03:21):
air is coming down. So I've gota winner going on, I'm like,
what in the hell did I do? Sothat was my first exposure to
tech. And I did that for anumber of years. Our firm, the
company, we were doing reallycool things.
I mean, we were trying to becomeI used to say we were trying to
become Exodus before Exodusbecame Exodus, but no one knows
who Exodus anymore. So we weretrying to become Rackspace
before Exodus became Exodus andRackspace became Rackspace. But
(03:44):
we ran into funding challenges,and so I left to go back and get
my MBA. And I went to Duke andgot my MBA and came back and
joined the technology practiceat Legg Mason in Baltimore. So
Legg Mason, Woodwalker, Istarted there as an associate,
and I was doing all the techdeals because I knew tech.
We did a number of reallyinteresting public offerings. We
(04:04):
helped take Orbitz public twice.We helped take OpenTable public.
I got great stories aboutOpenTable. We can save that for
another time.
And then ultimately had a childin 2,008. My daughter was born
and moved up to the Philadelphiaarea to be closer to home where
I was introduced to FairmountPartners and joined Fairmount
(04:25):
Partners as an emerging growthtechnology banker.
Bo Motlagh (04:28):
Very cool. And and you and I met through PACT.
Allen Bo (04:31):
Yes. That's right. Yeah. I was, you know, the funny
thing is when I first joinedFairmount, I think it was my
first week, Charles Robbins, whoruns the technology practice
there, said to me, hey. I'mgonna bring you to this meeting
and you it's gonna be great.
You're gonna meet a lot ofpeople. And it was the steering
committee for the 1st packedforum conference. The very first
(04:54):
forum, and he introduces me toeverybody, and then he leaves.
And now I'm on the steeringcommittee. That's cool.
That's and that was myintroduction to PACT as well.
Bo Motlagh (05:05):
For our listeners, PACT is the Philadelphia
Alliance of Capital andTechnology in the Philadelphia
area. It is a really greatcommunity of both enterprises
and startups that do a lot ofinteresting events, and Alan has
been at the helm of a a few ofthem over the years.
Allen Bo (05:18):
I have. Yeah. I ended up chairing in, I think, 4 or 5
of the forum conferences, andI'm on the board of PACT.
Bo Motlagh (05:24):
Very cool. And I think this is the first time
you're meeting Josh.
Allen Bo (05:27):
Yes. It
Josh Smith (05:28):
is. Pleasure to meet you, Alan. Good to meet you too.
I've heard a lot about you.
Allen Bo (05:33):
Terrific. I will.
Bo Motlagh (05:34):
So thanks for the background. Could you tell us a
little bit more about Fairmountspecifically?
Allen Bo (05:38):
Yeah. Happy to. We are a boutique investment bank. We
cover 4 industry sectors. Wecover healthcare services, which
is really pharma services.
We cover business and consultingservices, which is a lot of IT
services and staffing. We have apractice that does industrial
and consumer, and then we have apractice that focuses on
(06:00):
emerging growth technology, andI'm part of the technology
practice. As a firm, we probablydo 20 to 25 deals a year, mostly
sell side, about 70, 80% of whatwe do is sell side. We do some
buy side m and a for areas thatwe know really well. That's
probably 10 to 15% of what wedo.
And the rest is later stagegrowth equity and general
(06:21):
financial advisory. From a dealsize perspective, we operate in
the, call it, 30 to 300,000,000in enterprise value range. And I
think over the last couple ofyears, our average enterprise
value on a sell side was arounda $100,000,000.
Josh Smith (06:36):
K. So you deal more with organizations that seek to
be acquired than to acquire?
Allen Bo (06:41):
We do. Yeah. We do we do quite I mean, interestingly,
so when I was at Legg andStifel, we were doing mostly
sell side and public offerings.We avoided buy side like the
plague. But at Fairmount, weview buy side as a way to really
get deeper into the industriesthat we serve.
And so if it's a strategic typeof a deal, so we're instant, HR
(07:05):
Tech is an area that we focus onand we're engaged with a
$35,000,000 ARR company that'slooking to accelerate their
roadmap through acquisition anddo a number of other things. So
what you do is you come up witha list of 500 names and you call
them. Right? It's a much easiercall and people are much more
willing to pick up the phonewhen you call them up and say,
(07:27):
hey, I've got somebody that isreally interested in acquiring
you, then, hey. I'm Allen.
I'm an investment banker. Can Isell your business? Yeah. It's a
different message in it. Butwhat that allows us to do, you
know, not only is it good from amarketing perspective, but it's
also really good because we'reout talking to our emerging
growth companies who are doingreally cool things, and and
we're learning about theirbusiness, and we're learning
(07:48):
about their go to market, andwe're learning about how the
economy is impacting theirbusiness.
Are software buyers buying yoursoftware? You know, are you up
10% this year? Are you down thisyear? And by having these
conversations on the buy side,you can get a really good flavor
of what's going on in thebroader market out there. And
(08:10):
then consequently, you can usethat to advise your clients.
Bo Motlagh (08:13):
I've been hearing that in M&A, it's a seller's
market at the moment. Would youagree with that or not?
Allen Bo (08:18):
I would disagree that it's a seller's market at the
moment. There's still there'sstill we're not in a headwinds
environment anymore, but we'renot in a tailwinds environment
either. So, what the the biggerso one there's there's a number
of things that are impactingtech just in the frame that I
(08:40):
deal on, which is tech. There'sa number of things that are
impacting tech m and a. Somultiples are impacting tech m
and a.
At the height of the, you know,in 2021, SaaS multiples, right,
we we have a SaaS index. Wetrack, like, a 100 SaaS
companies, and SaaS multiples,median multiples were 20 times
(09:01):
revs in 2021. By the end of2022, median multiples were 5
times revs. So the dislocationthere was huge from a valuation
perspective. Right?
And so consequently, when themultiples pull back, you have a
lot of folks who are sitting onthe fence and saying, well, I'm
(09:22):
not going out to market wheremultiples are today. Now
interestingly, if you do astraight line back to like 2018,
multiples are sort of in therange, Okay. You just had this,
you know, 2000 to 2001 blip, andif you missed it, unfortunately,
you missed it. So we don't wedon't know that that's we don't
know that that's gonna come backanytime soon.
(09:44):
But so median multiples since2000 and since 22. Right?
Because we kinda if you'relooking at median multiples, you
can't really go back into 2000and 2001 because they're just so
outsized. And so but if you lookat median multiples since 2022,
call it 3a half times revenuefor median, but a good company
(10:06):
can trade for 5 to 10, but themedian's way down. So now back
in terms of is it a seller'smarket?
If you're a really hot SaaScompany that's sort of on its
way or past $10,000,000 in ARR,that's rule of 40, and what rule
of 40 means for those that don'tknow is rule of 40 is if you add
(10:30):
your growth rate, so I grew at20% last year, to your EBITDA
margin, my EBITDA margin was 20%last year, That combination is
rule of 40. So in that scenario,rule of 40. But typically, for
emerging growth, it's theirgrowth rates like 50%, 60%, and
they're burning a little bit ofmoney. Right? But if you're so
(10:52):
for a rule of 40 company, sogrowing rapidly, has some size,
and is close or can beprofitable, those are the ones
that are still trading at bigmultiples because there aren't
that many of them out there.
So there's a scarcity effectthat is for really good
(11:13):
companies driving up valuationmultiples. But if you're a
median company or a below mediancompany, it's tough to be a
seller today.
Bo Motlagh (11:22):
I'd imagine there's also, especially in this
economy, like a fire sale thinggoing on with a bunch of
companies as well.
Allen Bo (11:29):
Well, yeah, we haven't seen a lot of it yet, but I
think we will see it. And thereare companies out there. So
there's a lot of founders whohave raised money who've never
lived through a recession. Theycame out in 08, 09 when it was
easy to raise money andeverything went up into the
(11:49):
right. So there's a whole hostof folks who raise money and who
raise money in 2021 where wethink everything's gonna
continue to go up and have spenta lot of it and are now in a
position where VCs have pulledback and PEs have pulled back
because, one, they need tosupport the companies that are
gonna be their winner.
(12:10):
If they don't have you tagged asa winner and you're running out
of cash, they're not gonna reup. So there are groups out
there who have raised a bunch ofmoney, spent a bunch of money,
and are now in a position whereVCs have pulled back. They're
much more discriminating interms of new deals, and so
you're gonna have, there will becompanies that come up that need
(12:34):
to find a home, And, you know,so so does that look like a fire
sale? Yeah. A lot of times itdoes.
Bo Motlagh (12:41):
How involved are you in Fairmount post acquisition,
post transaction?
Allen Bo (12:46):
That's a great question. So it it really it it
really depends. So one of thenice things about being an
investment banker is you developa really deep relationship with
your client. Right? You gothrough a 9 month process, you
are their adviser, you are theircounselor, and you develop
(13:10):
friendships.
And that's I mean, that's one ofthe things that I love about
doing these deals is that youget to know a really interesting
business and a reallyinteresting founder, and you're
able to add to create wealth,meaningful wealth for them, and
that's just like a really goodfeeling. And so, you know, if
some if a company sells to astrategic right? So there's
(13:32):
there's 2 flavors of m and athat we typically see at
Fairmount. So one flavor is yousell to a strategic, your
company gets absorbed, and theyintegrate you, and that's kind
of the end of it. And maybemaybe you've got a product name
or something like that, but youbasically get absorbed by the
bigger entity.
We'll stay in touch with thosefounders, and we may stay in
(13:55):
touch with people who are a keypart of that process. For
companies that get sold toprivate equity, which is the
other flavor, we will continueto try and add value because
those companies, you know,private equity has a holding
period of call it traditionally3 to 5 years where buy a
company, grow it up, sell it.Mhmm. We typically get involved
(14:21):
with companies early before theyever sell. So our our what we're
trying to do is meet a company ayear to 2 years before they ever
think about an exit so that wecan help guide them and provide
support.
Similarly, for a company that'sbeen acquired by PE, you know,
our you know, we don't stopreturning their calls once the
(14:43):
deal happens. Sometimes they'llsay, hey. I've got an issue with
my board. Can you help me thinkabout how to deal with it? Yes.
We can. Can you help us with ourfinancial modeling? Yeah. Sure.
Happy to do that.
We wanna continue to supportcompanies. We think about the
life cycle of a company. Wewanna add value when they're
early, help them when they'reready to raise money, Help them
(15:06):
when they're ready to exit. Ifit's an exit to PE, help them
where when they're ready to dothe next exit.
Bo Motlagh (15:11):
That makes sense. And what you were talking about
with the strategic acquisitions,what I was hearing is sort of
these bolt on or tuck in deals.
Allen Bo (15:18):
Yeah. That's right. So a PE would call that a bolt on
or a tuck in. A big strategicwould just say, yeah, we're just
gonna buy it and absorb it. Butthat's exactly right.
So what you're doing in thistype of a transaction is and
we've done a bunch of them. So,you know, big PE backed company
has a product gap. Mhmm. And andthey are looking to good example
(15:44):
is the the buy side that Imentioned earlier. They've got a
product gap.
So you find a company that youthink can fill the product gap,
and that that becomes therationale for your acquisition.
So you're bringing in a neworganization to help fill many
times a technical gap within theacquiring company.
Bo Motlagh (16:04):
And this has been a really interesting piece of this
for us as well because I thinkbringing this back to the whole
hidden chasm concept, that'swhere you can really run into a
lot of trouble. Have you seen astat actually I read about, the
last week or so? I think it wasthe Harvard Business Review put
out that between 70 90% of M andA is considered a failure, which
(16:27):
kind of blows my mind. I'm alsovery curious. Yeah.
Our stats
Allen Bo (16:30):
are much higher.
Bo Motlagh (16:31):
Oh, really? Well, I mean, that's a good question.
Like, what does failure mean inyour mind post acquisition?
Allen Bo (16:38):
That's a good question.
Josh Smith (16:38):
I mean, I so you could also flip it and say, what
are the key conditions ofsuccess?
Bo Motlagh (16:44):
There you go. Yeah. Get positive about it.
Allen Bo (16:46):
That's a good question. So when we think about
an acquisition, there's part ofthe rationale that you you lead
with is synergies. Right? Sothere's there may be cost
synergies related to duplicatepersonnel, duplicate systems,
and we can come back toduplicate systems, are they
(17:07):
really duplicate? So there'scost synergies related to
personnel and then there may besales synergies, revenue
synergies related to the abilityto cross sell a product.
So when it works, that synergystory holds and you have a
situation where 1 +1 equals 5.Right? We're now selling a lot
(17:31):
more. The Target's selling a lotmore. The acquiring company is
selling a lot more.
The product sets go togetherreally well. They fit nicely
with each other. You're able toachieve some cost synergies on
the back end. And so what'shappening is is that the
acquisition is paying foritself. So is the acquisition
(17:52):
paying for itself?
If it is, then that's a success.What can go wrong is you acquire
a company that you have a theorythat your buyers are gonna wanna
buy that product, but theydon't. And maybe it's because,
you know, you're you're anenterprise buyer and you acquire
(18:14):
SMB focused business, and yoursalespeople can't sell that
Yeah. To SMB. And the SMB guys,the SMB salespeople don't know
how to sell enterprise.
SMB is very high velocity, a lotof churn, enterprise is very
long sales cycles, hopefullystickier. So even that, if you
(18:36):
have a product that at facevalue might make a lot of sense
together, if it's built for aparticular company or if the
focus of the target and theacquirer is at odds in terms of
who their ICP is, their idealcustomer profile, that can
create a lot of problems.
Josh Smith (18:54):
That resonates with me just someone who has stood up
and run, user research practicesso that you run against
companies with mindsets wherethe people in positions to make
decisions about what's in aproduct and what can sell
believe that it's somethingtheir their value in the
organization is based on theirability to make it up, to just
(19:15):
think it. They're smart enough.And Yeah. Having to figure out
how to train them to be morecurious and to say, let's put in
processes to evaluate, perhapsvalidate assumptions. You
mentioned the word theory.
Evaluate these theories, reducethe risk of being wrong or be
wrong as quickly as possible sowe know not to go down that
(19:35):
route so that we can learn whatour market, what our customers,
what our users really value andreally want before we make a
critical and expensive decisionto implement. I assume there's
some sort of similar process
Allen Bo (19:52):
for you all as well in
Josh Smith (19:54):
your investigation discovery of the opportunities
for sellers.
Allen Bo (19:59):
Well, there is for sure. What we want to do when
we're representing a seller iswe're trying to describe the
unique characteristics of acompany. If you think about it
as an asset, what's unique aboutit? What's unique about the
tech? Do they have a moat?
Do they have a technologicalmoat? Do they have a 2 year lead
(20:20):
ahead of somebody else? Right?So we we try and really
understand that, and we try andcommunicate that along with,
hey. Here's the tech stack thatwe're using and, you know,
trying to describe the dataflows and things like that so
that people will not only And wethink that's important because
(20:44):
it needs to work on theacquirer's platform.
Right? So unless they wanna keepit as a stand alone. Right? And
and keeping it as a stand alonecan be really, really expensive.
So, you know, here's an exampleof one that didn't work.
We helped a company acquireanother business, and it's part
(21:08):
of the deal. We didn't we justbought the assets. The acquiring
company who I was representingdidn't bring on any of the
people. So when they started tospin up the product, so and it
came with a bunch of customersand what they found was that,
first of all, there were a bunchof customers who are already
pissed off about how the thingwas functioning and they had not
(21:32):
disclosed that to us. But also,our guys were on Azure.
They were on AWS. And so nowyou're running 2 different
environments, and that'sincredibly expensive. And then
when stuff started breaking,didn't have access to the people
to come and fix it. So that wasa really tough situation. You
(21:55):
try and raise these issues, youtry and identify them early, you
try and identify them during duediligence.
There were other reasons whythey decided to ignore red flags
and pursue it anyways, but youtry and do this early and it's
and it's really helpful. Sothat's one of the reasons why
you gotta bring in really goodadvisors, not just financial
(22:17):
adviser. It's important to bringin somebody who can come in and
evaluate, what am I acquiring?Or if you're, you know, if
you're a sell if you're on thesell side, what am I acquiring?
But also if you're a seller, youwant them to be evaluating your
tech and making sure that allfits and that there's a path to
(22:37):
integrate it because if itdoesn't work, you may have an
earn out tied to that.
Bo Motlagh (22:43):
Right.
Allen Bo (22:43):
Right? And if it doesn't work, you're not getting
your earn out. So before yousign that deal, you wanna
understand, okay. What's our init? We've not yet signed the
deal.
Maybe we're under a letter ofintent, but you're gonna have an
integration plan related toheadcount. What's our
integration plan related to thetech? That's equally as
important because if it doesn'twork, that's worse than having
(23:05):
somebody, you know, a headcountperson slide in the wrong spot.
It's significantly worse.
Bo Motlagh (23:09):
I love that because I'm a tech head. So I think
you're speaking to the thing Ilove about these problems and
solving them. But I think, Imean, what I'm hearing you
describe is really theimportance of a strategy and a
clear understanding of how thesethings are going to fit together
and not just once. Right?Especially if you're the buyer
on, like, a bolt on strategy,after it.
(23:30):
So what is this gonna look like?
Allen Bo (23:33):
Well, it's not yeah. It doesn't scale. And then the
other thing that we look at is,you know, is tech debt.
Bo Motlagh (23:41):
Right.
Allen Bo (23:41):
Right? The acquiring company. Alright. So we're
representing somebody somebodythat's a that that's we're
represent a company that'seither trying to raise money or
trying to sell themselves. Andit's 2024, and they built their
platform in 2012.
So you've got systems that areold, that are held together by
(24:02):
duct tape, and they just haven'tinvested in modernizing the tech
stack. Right? And you see thatall the time Yeah. Because it's
expensive to modernize a techstack. And so what are the
implications of that?
Well, the implications of thatare when a buyer starts to do
the work on, okay, how are wegonna integrate these companies?
(24:23):
What becomes relatively apparentpretty quickly is it's gonna
cost a lot of money to updatethat text stack such that it can
integrate within hours. So thatbecomes very expensive. If that
company is looking to raisemoney, a savvy investor out
(24:43):
there is looking to understandyour tech stack and what sort of
Ted debt may be there, and thatgoes into their valuation
calculation. If it's gonna cost$10,000,000 to upgrade the tech
stack, they're gonna beresponsible for that.
Bo Motlagh (24:56):
Right.
Allen Bo (24:56):
Right? They stroke that check. But guess who's
gonna pay for it? You are misterseller or the guy who's taking
an investment. So people look atit and they quantify what is
needed to bring this up to date.
And if you haven't done a goodjob and, again, you're the
company that's thinking aboutraising money or selling, if you
haven't done a good job ofmaintaining your tech stack, it
(25:19):
will be it will be veryexpensive, And the longer you
wait, the more expensive it'llbe.
Bo Motlagh (25:28):
How how often well, I mean, we called we call this
whole thing the hidden chasmbecause a lot of times it's a
surprise.
Allen Bo (25:34):
So It is very much a surprise.
Josh Smith (25:37):
It shouldn't be a surprise.
Allen Bo (25:39):
It shouldn't be a surprise, but it is often it's
often a surprise, you know, whenI mean, this is why it's
important to have good advisorswho who can who can think about
this stuff. But people need tobe people need to be focused in
on the blocking and tackling ofputting companies together. Very
(26:01):
often, you've got a dealadvocate on one side and a
seller on the other side whothinks about 1 +1equals5, and
the strategic rationale isreally great. And there's a
tremendous market TAM that wecan go after together, and it's
gonna be awesome. There's noreason why we shouldn't be doing
(26:22):
this deal.
We have every reason to do thisdeal. But they think up here.
Yeah. And you need and and andmany deals happen where they
don't consider, okay, how are wegonna when when Lend got bought
by Stifel, which I think Imissed in part of my bio, was I
was at LAG for 5 years. Stifelacquired it in 2,005, and I left
(26:44):
in 2,010.
But anyway, when Stifel acquiredLAG, like Mason Woodwalker, the
Capital Markets Group, and theydidn't announce it until it was
done. So we had no idea. Andthen I got an org chart. So
deals close without actuallypeople actually thinking about,
okay, where do people go? Wheredoes tech go?
(27:05):
And it happens all the time.It's not often. It's probably
5050 where do you have somebodyactually really leaning in on
the integration piece during theLOI period? And if you don't, it
becomes really, reallychallenging. And deals happen
all the time where they don't.
Bo Motlagh (27:23):
I always joke on paper, it sounds great to buy 15
houses and make an apartmentbuilding. In reality, that could
be kinda hard.
Allen Bo (27:32):
Yeah. Exactly. That's exactly right.
Josh Smith (27:34):
Yeah. It feels like what is it? An ounce of
preventions worth a pound ofcure? And I've I've heard
several things. Several you youyou heard the word you you said
the word synergies.
And I'm thinking, you know, youtalked about the synergy of
value early on. Understand,like, what's the actual value to
the user base on the buyer sideor the customer base on the
buyer side of this product gap.And then the technical
(27:58):
integration side. Alright. Mhmm.
If even after that's validated,if there's no way to integrate
it in from a technical side,then it's
Allen Bo (28:09):
Yeah. So right. So so if if your if your thesis is
that we're going to we've got aproduct and we can add a new
product into our bundle andeverything's gonna work together
seamlessly. If that's yourthesis and it turns out that
this piece doesn't talk to thispiece, then it's hard to execute
(28:32):
on that. And so you end uprunning things in parallel so
that this great theory that youhad that we'd have we, you know,
we can sell you one platform andyou'll have one throat to choke.
Well, if the stuff doesn't talkor work together or integrate,
even at the product level, nevernever mind the back end level,
(28:55):
your whole thesis is out thewindow because I still need to
have have this and I still needto have this.
Josh Smith (29:01):
Then you talked about the 3rd component. So,
like, even if you got those 2correct, the I'll say the word.
The agility or the velocity withwhich you can pivot and adjust
and shift is dependent upon thesize of the legacy or the tech
debt. So you can get those 2taken care of, but then if
you've got a huge burden in thetechnical debt or the legacy
(29:21):
tech, whatever you learn needsto adjust based on the
integration and the value inorder to achieve that value is
going to depend upon that 3rdpiece. Is that accurate to say?
Allen Bo (29:33):
Yes.
Bo Motlagh (29:33):
What I really like is the point you made that I
mean, it's it's a little easierto talk about this problem from
a buyer perspective because youhave to build the machine. But
you made the point that it'salso very, very important from a
seller perspective because, notso much because you're trying to
build all these integrations,but because you need to be easy
to integrate with because it'snot like you can't just assume
(29:56):
as founder that you're going tobuild this thing, get a check
and walk away and everything'sfine. There's gonna be real
financial repercussions if itdoesn't work.
Allen Bo (30:04):
And that's exactly right. And part of it is being
really thoughtful about how youput the components of the tech
stack together. Part of it isbeing thoughtful about, are you
using, open source? And ifyou're using open source, are
you building with the rightlicensing? How are, you know,
are you are you doing a reallygood job of documenting and
(30:26):
maintaining your tech specs,tech stack and your code base?
We did a deal where we sold acompany called Petrus. It was an
oil and gas data managementbusiness and we sold them to
Halliburton. And they ran a codescan, a black duck scan, on
Petrus, the seller, and thattech was cobbled together over
(30:50):
20 years. Mhmm. And so theyfound, like, you know, all these
licensing issues.
And what it did is it delayedthe process, because now they've
identified a page full of thingsthat we need to mitigate. So
we've got to go through andmitigate all this stuff. And
(31:11):
some of it was pushing out newcodes to all your companies. But
the problem was a lot of themwere not on the cloud. So it was
on prem.
Now you've gotta push out newversions on to to on prem
customers. And how do you dothat? You know, so that that
process cost us 2 months becausewe didn't know it was in the
(31:34):
code. When you're first gettinginvolved with a new potential
buyer or seller Mhmm.
Bo Motlagh (31:34):
Before you potential buyer or seller Mhmm.
Allen Bo (31:38):
Before you've really been able to do the due
diligence or
Bo Motlagh (31:39):
anything like
Allen Bo (31:39):
that, are there
Bo Motlagh (31:40):
KPIs you look for and other indicators that
basically set off your spideysense like, hey. I I should
probably have somebody look atthis.
Allen Bo (31:52):
Yeah. So I'll tell you that most of them are on the
financial side.
Bo Motlagh (31:56):
Yeah.
Allen Bo (31:56):
Right? So we think about what does revenue
retention look like? Are we ableto track gross margin by
customer? What's the LTV tocustomer acquisition cost, stuff
like that. Right?
Those those metrics, we willbenchmark companies against.
What's your gross margin? Ifyou're a SaaS company and your
gross margin is 55%, well, whyis that?
Bo Motlagh (32:15):
Right.
Allen Bo (32:15):
Right? Because that's really bad if you're a SaaS
company. We'll track a lot ofthose, and a lot of times those
can help identify operationalissues within the organization.
Right? So it could be that yourmargins are down because your
development guys are busyhelping customers make their
(32:38):
product work.
That could be a reason. Okay. Sothat identifies a problem. If
you're sort of out of the boundsof normalcy on any of these
metrics that people track forSaaS companies, or even gross
margin is something that we lookat, and we try and compare you
against your peers. If it'sextra high, why is that?
If it's extra low, why is that?How much are you spending?
(32:58):
Here's another one. How much areyou spending on R and D? So when
we look at a company's financialstatements, if they're not
spending 20 to 30% on R and D,are they maintaining their
product?
But if their r and d spend is10%, okay, well, who is making
sure that your product is up todate? Who is working on the next
generation of the product that'sgonna keep you ahead of the
competition? So that's somethingthat you look at it from a
(33:20):
financial perspective, r and das a percentage of revenue. And
if it falls below what we knowto be kinda normal, it raises a
red flag.
Bo Motlagh (33:31):
The opposite would probably be true as well. Right?
If you're spending like 40% on Rand D, but your customer
retention is going down andyou're just basically keeping
the lights on.
Allen Bo (33:39):
Yeah. That's exactly right. And if you're spending
40% on R and D and there's nogrowth. Okay, well, where are
the new products? You know, talkwalk us through your road map.
If you're spending 40% on r andd and you don't have a road map
with features that are like thislong, what are they doing?
Bo Motlagh (33:56):
You and I chatted about a company a while back
where the operational costsstepped up linearly with every
new customer acquisition andlittle things like that where
that shouldn't happen.
Allen Bo (34:07):
That's exactly right. SaaS companies in particular
should be scaling.
Bo Motlagh (34:10):
Right.
Allen Bo (34:11):
Right? So so we look for, okay, what's the flow down
model? At scale, how much ofevery dollar of revenue is
dropping to EBITDA? And youshould see that increasing with
a really good SaaS company. Andif marginal costs are increasing
dollar for dollar compared torevenue, the flow down model
that you look for in a SaaScompany doesn't hold true.
Bo Motlagh (34:34):
I think we're kinda coming back a little bit, A lot
of what we've been describing interms of how to be successful,
at least from a technologystrategy perspective, I think
what you're describing, which isgreat, is that these are not
distinct concepts. If your techstrategy is off, your financials
are going to show it. Yes. Andthere's only so much blurring
(34:55):
you can do between them. And Ithink, you know, I see this a
lot.
I'm curious. I think there are alot of executives sort of think
this piece will just sort offigure itself out. Engineering
will get it. And you don'trealize that it's part of the
same machine. You have to bethinking about it the same way.
Allen Bo (35:12):
That's exactly right. I think it's important for the
strategy of an organization tobe communicated through IT. I
think people need to be aligned.The knock that we hear and I'm
not a tech guy, so if this youknow, if you if if
Bo Motlagh (35:26):
I think that's what makes it more powerful.
Allen Bo (35:28):
Yeah. But the thing that we hear is that IT doesn't
wanna do new projects. IT wantsto just focus on what they're
focusing on, and the thought ofbringing something new makes
their brain hurt. If that's thecase and they're unaware of the
vision of the organization is tobring in something new, and it's
really important that our teambe pumped up to make it all work
(35:51):
and create, you may haveorganizational issues that you
need to address.
Bo Motlagh (35:57):
It makes a lot of sense. The other thing I was
gonna say is I think a lot ofwhat you talked about in terms
of what are we actually sayingneeds to be working correctly is
data. Yeah. Right? At the end ofthe day, what makes your old
tech work or your new tech workand them work together?
It's how data is being processedand flowing between them.
Allen Bo (36:17):
Yes. 100%.
Bo Motlagh (36:19):
Yeah. It's really interesting to me that so much
of this is really just a dataproblem and and always viewed
that way.
Allen Bo (36:26):
Well, it's a data problem and a pipe problem.
Bo Motlagh (36:28):
Yeah.
Allen Bo (36:29):
Yeah. But but you're right. I think you're spot on.
I'm
Josh Smith (36:33):
seeing also people problems.
Bo Motlagh (36:37):
Well, yeah. Yeah. Of course.
Josh Smith (36:38):
We said this is hidden chasm. And I and I say,
you know, it shouldn't behidden. Why is it hidden? Why
aren't people looking at it? Whydo we like to battle symptoms so
often and not spend time lookingat the underlying causes and see
the connections between thesethings.
Allen Bo (36:56):
At big organizations in particular, they may not know
at the senior management levelthat the pipes are held together
by duct tape. Just frightening.It is frightening. And you would
think that they should know, butyou need a cohesive organization
where you've got good lines ofcommunication between senior
management down to the systemsguys who are holding everything
(37:19):
together. And they need to feel,at the lower levels, empowered
to say something's breaking orsomething's bending, and we need
to focus on this.
And if and and and a junior guyneeds to raise their hand
because a lot of times stuffages and there's no more modern
(37:39):
things. But a lot of times it'snot as simple as that. And if
you've got good communication upand down an organization,
there's no repercussions toidentifying a problem.
Bo Motlagh (37:49):
Right. You
Allen Bo (37:49):
know what I'm saying?
Bo Motlagh (37:50):
What would you advise a CEO who's basically
finding that they have all ofthese issues? And if you were in
that position and you're lookingaround and you're going, we
probably need to talk before weput out a letter or anything
like that or put you on themarket. What do you advise in
those situations?
Allen Bo (38:08):
I would advise that either internally or externally,
they have somebody who canunderstand at depth what the
issues are and understand whatneeds to be done to mitigate the
issues and what that's gonnacost. Yeah. And you don't and
(38:32):
then you have a choice. I amgonna present to a buyer. I will
tell them upfront what theissues are, and I will tell them
upfront what our road map is tomitigate those issues.
And I will full disclosure onit, And there may be an impact
on valuation, but that impactwon't be something that happens
post LOI because I want toprovide as much information as
(38:56):
possible before I enter anexclusivity period with
somebody. So when I still haveall the momentum or when I still
have all the leverage, I've got5 buyers who are interested in
me. I'm gonna let them know whatmy tech issues are, what needs
to be addressed, what my plan isto do it, how much it's gonna
cost. They're gonna know thatwhen they bid. Mhmm.
That way, you can, fulldisclosure, you're still in a
(39:19):
competitive process, bid withthat knowledge, but also bid to
win.
Bo Motlagh (39:24):
Right.
Allen Bo (39:24):
Right? So you could so that's that's one way. If you
wait until you get into underexclusivity, the buyers get all
the leverage at that point. Andif you haven't disclosed an
issue, there you were gonna gethammered. So you'd rather
disclose when you have all thelevers.
Sorry. So that's one route. Theother route is to just address
(39:45):
it.
Josh Smith (39:46):
Yeah.
Allen Bo (39:47):
Identify it, quantify it, address it and implement a
plan. And you don't necessarilyhave to be all the way through
your plan potentially, but atleast you need to be starting on
it and making some progress onit so that people can feel good
about the fact that this area ofrisk is something that I don't
have to worry about.
Bo Motlagh (40:05):
Yeah. I'd imagine the story of I mean, every sale
is a story. Right? The story ofhow this is going to be resolved
is almost more important thanhaving had completed.
Josh Smith (40:16):
The failure to disclose or the disclosure route
always reminds me of the TomHanks film The Money Pit.
Allen Bo (40:23):
Yeah. Yeah.
Josh Smith (40:24):
Beau, you said, yeah. It ultimately was a data
issue because, like, if youtreated every issue in that
house as an infrastructureissue. But the second route you
mentioned, Alan, seems much moreadvantageous to identify,
assess, and address. Yeah.
Bo Motlagh (40:41):
Yeah. Well, but there's a cost. Right? There's
an upfront cost.
Allen Bo (40:45):
So you're gonna bear the cost. And I think with your
advisor, you need to try andfigure out, okay, what's the
impact on my process if I don'thave this done? Well, if you're
growing at a 100% a year andyou've got great retention
metrics and you look like a staror an A plus asset, you may be
(41:06):
able to get away with notaddressing it. If you look like
a B asset, you're gonnamaterially impact in today's
market, you're gonna impact yourbuyer interest. And when you
impact your buyer interest, youdon't have as strong of an
auction, which just getting toan auction phase where you've
got multiple people bidding onyou itself will create value.
(41:28):
Right. If if you've if yourunderlying problems are
significant and we're gonna bevery expensive to address,
you're gonna limit your interestso that you may not get to the
point you may only get onebuyer. And we and, you know,
we'll always we'll always tryand maintain the illusion of a
competitive process when it'snot there. But our job becomes
much more difficult when it'snot as high quality of an asset
(41:52):
and somebody chooses not to dothe things in advance that are
really important. And that andour our guidance is typically
take pause, get it fixed, makesure it works.
If it delays going to market bya year, that's okay, but you'll
have a much stronger process.
Bo Motlagh (42:10):
I'd imagine that the other sort of, I don't know,
factor there would be who you'retargeting as a buyer as well.
Because if you're targeting abuyer who has the technical
infrastructure and elements tosort of bypass what you have and
they're just gonna tuck you in,the value prop changes is that
as well.
Allen Bo (42:27):
Yeah. That's exactly right. If there's a way to sort
of uncouple the products fromthe challenges
Bo Motlagh (42:34):
Right.
Allen Bo (42:35):
And layer them into the buyer's tech stack, then it
doesn't matter. You're right.They might still try and ding
you for it from because they'llalways try and find something to
ding you.
Josh Smith (42:43):
So the valuation potential is dependent somewhat
on the buyer. The technicalintegration, the ability to
integrate right now, would yousay more or less dependent on
the buyer as well at this pointin time?
Allen Bo (43:02):
Well, it depends. If you've got a broad platform that
can integrate with a lot ofthings Mhmm. Then that's great.
If the buyer is limited in termsof what they can integrate with
and they don't integrate withyou, it's kind of both your
problem.
Josh Smith (43:17):
Okay. Both sides.
Bo Motlagh (43:18):
Then it really just becomes who's got the bigger
checkbook.
Josh Smith (43:21):
But if you on the seller side, would it be wrong,
Allen, to assume or write out toassume that on the seller side,
if if they vetted and realizedthese issues and address them,
and we're now at a point wherethey have more integration
options than ever. Their techdebt is reduced significantly so
that it can pivot faster as theylearn. And Yep. Would you say
(43:43):
that those things have an impacton the potential for their
multiples?
Allen Bo (43:48):
Yeah. It can. It can. Right? So if you've got so if
you've got a clean organizationthat is now highly scalable and
has the infrastructure to scale,you look like a different
organization than one thatdoesn't.
(44:10):
And so there's naturally somemultiple expansion that comes
with something that is a verymodern, highly scalable asset
versus one that's not. And youcan't really quantify. Is it a
half a turn? I don't know. Youcan't really quantify it.
But really where you see it isin the interest in the company
(44:32):
in a transaction and thevaluations that come out of that
level of interest. Strong,scalable, modern architecture
companies get a lot moreinterest than ones that are not.
And so it's that competitivenature that's really what pushes
on the multiple.
Bo Motlagh (44:49):
Makes sense. Well, we have covered a lot of ground.
Thank you so much, Alan. Thishas been, I think, one of the
more interesting conversations,and I think a lot of people are
gonna be fascinated to listen tothis. Wanna give you the
opportunity here.
If there's anything you'd liketo plug or anything you'd like
people to know about, please goahead.
Allen Bo (45:08):
Yeah. So just, you know, I I will tell you that if
you are an emerging growthtechnology company that is sort
of scaling towards 10 and isgrowing and has a pathway to
profitability and you'rethinking about your exit
options, we are here to help. Wewanna get involved with
(45:29):
companies early. If you're ayear out from transacting or
more, that's better. We like toinvest in relationships and
invest in companies that wethink we've got an opportunity
to do business with and itdoesn't cost you anything.
So reach out.
Bo Motlagh (45:45):
And how would they reach out?
Allen Bo (45:46):
They can reach out on LinkedIn or my email is
Bo Motlagh (45:53):
Very cool. Well, thank you again, and you've been
listening to The Hidden Chasm.Join us next time.
Josh Smith (46:00):
Thank you, Allen.
Allen Bo (46:00):
Thanks, guys.
Josh Smith (46:01):
Thanks for listening to The Hidden Chasm Podcast with
your hosts, Bo Motlagh and JoshSmith, and sponsored by
United Effects. We hope youenjoyed our deep dive exploring
the impact of legacy technologyon enterprise agility. Follow
along as we explore this furtherby subscribing to the podcast at
thehiddenchasm.com. Thanksagain, and we'll see you next
time.
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