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Green, Yellow, Red: What Signals Investors

What’s not often discussed is the soft side of a deal - the people, their behavior, and what it signals to potential investors. It’s impossible to do a good deal with bad people, which means the personalities, proclivities, and oddities play a large part in dealmaking. 

We’re fortunate to see a lot of opportunities, over 2500 just last year, and are constantly in conversation with executives. This affords us the ability to recognize patterns and develop specific criteria of behavior that provide insights into an owner’s motivations, and subsequent corporate culture. Here are some of the signals and how we interpret them. 

Compounding Knowledge and Returns: 2016 Year in Review

Read about the lessons we learned at throughout 2016 as we reviewed acquisition opportunities in the private markets, continued operating and investing in our portfolio companies, and tried not to screw up too often. 

Why We Love to Buy Boring Businesses

We’ve had the opportunity to evaluate and invest in all types of companies, including some “sexy” businesses — ones with high growth, brag-worthy products, or screw-the-rules teams with an average age of 25. While the “sexy” factor is never why we choose to invest, it can certainly be exciting. But the other end of the spectrum also attracts us; it contains what we call “boring businesses,” the almost invisible layer of the economy that hums under the radar, quietly supplying you with what you want and need.

4 Frustrating Initial Approaches of Investment Bankers

We’ve worked with investment bankers that, to put it frankly, have frustrated us to the point that we don’t want to pursue an opportunity — even a seemingly perfect fit — because the idea of continuing the process with them would require too much effort, patience, or both. Here are four approaches we’ve categorized from these frustrating encounters that we would like to offer up for consideration.

Questions Investors Ask on a Management Call — and Conclusions They Draw

When we are interested in an opportunity, we build two lists of questions: one data-specific list for written response and one with largely open-ended questions for discussion on a management call. We actively avoid processes in which we are not permitted to ask questions before submitting an indication of interest.

A good financial package provides the facts, a great CIM provides the story, but our questions for intermediaries and sellers are not just trying to gather additional details. Here’s what we’re trying to learn, but not explicitly asking, in those question sets:

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11 Reflections on M&A in 2015

As 2015 came to a close, we at had a chance to take a breath and think about what we observed, and learned in the past year. These reflections were generated from reviewing over 2000 investment opportunities, of which we deep-dived on 397, leading to 17 indications of interest, 5 letters of intent, and three acquisitions. We hope these thoughts prove useful in adjusting strategies and expectations in the new year. 

From 2000+ to 3: Our 2015 Investment Recap is entering the new year wiser, stronger and a great deal larger. In the course of making 3 late stage acquisitions and 27 early stage investments, the future of, and who will contribute to it, became a bit more clear in 2015.

Choosing An Acquirer: Hot Date Or Life-Long Partner?

Selling your business can be a lot like dating. Are you looking for a one-night stand or for that perfect girl to take home to the family? Knowing the difference is crucial to finding the right person, or group, to buy your company.

At some point every business owner needs to exit. Some want to travel, spend more time with loved ones, or just step out of the pressure cooker. Others have health issues, are underfinanced and underequipped, or feel they could benefit from a strategic partner. But when it comes time to transition, many owners have little idea what they’re looking for. Like dating, every prospective buyer has upsides and downsides, and your job is to understand them.

Here’s a framework to help: 

  • Sexiness: The sexy part of any deal is the valuation and, all things being equal, more is obviously better. But like most things in life, the number always comes with strings attached. What adjustments are the buyers making for deal fees, working capital, or transaction expenses? In some cases those can add up to 15 percent, or more, of the total transaction.
  • Values: What’s important to you and do you share those core values with the buyer? Do you care how your company will be run? Do you want your firm to maintain independence? Is it important to maintain the company culture? It’s crucial to find clarity and understand how the buyer’s intentions overlap.
  • History: Talk is cheap. Actions speak louder than words. A tiger can’t change his stripes. How’s that for a barrage of platitudes? But they’re true. How has the buyer treated past partners? What are the results after they take over a company? How long do they plan to own the company? Doing your homework will save considerable heartache.
  • Interests: We’re all good at some things and inexperienced at others. Does it matter who makes decisions at your company? Of course it does. The buyer’s background is crucial and there are opportunity costs to every skill set. A buyer with deep industry expertise will have better intuition, but won’t bring a fresh perspective to the table. Conversely, a marketing expert is unlikely to see the nuance of the industry-at least, in the beginning. What you need is situation-specific, and you certainly need to understand the situation.
  • Finances: The leading cause of divorce is money problems, and business partnerships are no different. If you’re a conservative operator, you probably don’t want to marry a spendthrift who’s happy to go deep into debt. You should understand what type of debt the buyer plans to put on the business, how they plan to re-invest, and they’re capacity to fund the company if potholes are hit.
  • Adversity: Relationships are messy and take work. Your ability to successfully transition the company will depend on developing trust with the buyer. A key piece to the puzzle is how the buyer handles conflict. What are mountains, and what are molehills? Is the buyer a screamer, or a stoic? Do they have patience, or tend to be trigger-happy?

Dating Pool

After you’ve thought about what you’re looking for, it’s important to understand the dating pool. What are the types of fish in the sea?

  • Private Equity Group (PEG): These come in two distinct flavors, funded and unfunded. The funded groups have raised committed capital they need to deploy, while unfunded groups are waiting until they find a deal to seek equity investors. Both plan to buy the firm using considerable leverage (2 to 7X earnings before interest, taxes, depreciation, and amortization), use free cash flow to pay down debt, and flip the company to another buyer within four to seven years who will reload it with debt.
  • Searchers: Search funds are led by one or two individuals, likely recent MBA grads, who are backed by a group of equity investors. They are looking for companies to buy and run, assuming the top management positions. Some (but not all) rely heavily on debt to finance the transaction. They typically plan to operate the company for five to ten years and then sell.
  • Family Offices: These are organizations built around the wealth of a few individuals and come in all flavors. Some act like traditional PEGs, while others function with long time horizons and commitments. It’s vital to understand the attributes of each group.
  • Strategics: These are the players in your industry and you likely know them well. Does it make sense to sell to your competitor? It all depends on your values. Strategics frequently fold the acquired company into the mothership and extract considerable “synergies” out of company structure.


Remember all that advice you got when you started dating? There was no shortage of opinions from friends, family, and co-workers, and exiting your company is no different. You’ll hear plenty of feedback, and like dating, remember that everyone comes with various biases and interests. Here’s a quick roundup:

  • Financial Advisors: When you exit, financial advisors get a big raise based on the assets you deploy with them. They’ve seen many of their other clients exit and know some horror stories. They’ll likely advise you to “get all the money up front,” because “there are lots of ways you won’t get paid out.” Plus, they’ll get more money to manage that way.
  • Lawyers: As the adage goes, the devil is in the details. Every lawyer’s background is different, but most general practice lawyers don’t make excellent transaction advisors. They frequently miss big issues and send up red flags on inconsequential matters. And depending on your future plans, they’ll also be worried about losing your business. It’s highly advisable to find specialized counsel for the transaction.
  • Intermediaries: Warren Buffett said, “Never ask your barber if you need a haircut.” Understand that much of your intermediary’s advice will be based on how fees are structured. If fees are based on a transaction, you will be pushed to do something quickly. If it’s a retained search, you run the danger of the intermediary stringing out the process. There are many types of intermediaries out there, so be sure to interview a wide variety before settling on one.
  • Bankers: If you have loans with the bank, they’re not likely thrilled with a transaction. You’ll pay off your notes and they’ll likely lose the company’s business. This might be offset if the bank has a wealth management division, of which they’ll be quick to remind you.
  • Accountants: Like bankers and lawyers, accountants will be worried about losing business. Make sure they’re readily available to help explain the company’s financials and are capable of interacting directly with the buyer. They should be able to help field questions or concerns.
  • Your Execs: It’s not unusual to bring your senior executives into the “know.” A normal, immediate response is fear. Change is scary and few things are more nerve-wracking for employees than an ownership transition. Understand that in most cases, a majority of their advice will come from a position of insecurity and concern.
  • Regardless of who is advising you, don’t outsource your judgement. You didn’t build a successful company by blindly relying on the advice of others, and your exit isn’t an exception. Understand what you want; establish a process that will likely deliver the right buyer; and think critically about the dynamics.

Planning A Wedding and Marriage

After dating, it’s time to settle down. But before you get married and live happily ever after, you get to go through a grueling engagement called due diligence. This process stress tests you and your company to verify the valuation. Results from these examinations may result in adjustments to the purchase price. Here are the main components:

  • Quality of Earnings: Most buyers will perform a quality of earnings assessment that tests where profits originate. The more profits that flow from higher sales or lower costs, the better. Profits from anomalies like inflation, one-time events, or changes to inventory are considered negative.
  • Capital Structure: Buyers will want proof of ownership and a list of all shareholders, options, notes, debt instruments, and any off-balance sheet transactions or liabilities.
  • Operations: Everything critical to the operations of the company will be shared and analyzed, including major customer files, strategic relationships, suppliers, competitor, and distribution information, and the research and development pipeline.
  • Personnel: You’ll share historical and projected head count by function, the current organization chart, and compensation arrangements and expectations. Personnel turnover and all employee files will be scrutinized.
  • Legal: Any lawsuits against, or initiated by the company will be reviewed. You’ll supply lists of patents, trademarks, copyrights, and licenses as well as environmental and safety records.

After this review is completed, the buyer will supply the final paperwork necessary to complete the transaction, and you’ll be on your way. But depending on the nature of the transaction, your partnership may just be starting. Many sellers “roll forward” equity and maintain a considerable stake in the new entity-making a long-term commitment to the new ownership group.

If you continue with a stake, the marriage analogy is quite apt. Each stakeholder brings a different set of baggage into the relationship, including personal reputations, routines, outside interests, and timelines. Relationships are messy and require work. Choose wisely.

This post was originally published on Forbes. 

Footwork, Day Trading And Why Our Psychology Prevents Success

If you’ve ever played tennis, you’ve probably noticed that your ability to consistently hit good shots fades in and out. When you’re “on,” shots become effortless, leaving you wondering how you could ever miss. But without warning, the tide shifts, and the game becomes impossible. No matter what you do, you can’t keep the ball alive, and you can’t figure out why.

A good friend of mine, who is an excellent player, always reminds me that tennis comes down to footwork. If you get yourself in position with plenty of time to hit the shot, good things usually happen.

For argument’s sake, let’s say you can hit the ball well 90% of the time with proper footwork. But even when you’re off-balance, wrong-footed, or slow to react, good things occasionally happen. You can still hit a good shot about 40% of the time. That means that four out of every 10 times you’ll do the wrong thing and get a good result — with each accidental success further proving that you don’t really need good footwork after all.

But sooner or later, the odds play out, and poor footwork causes a cascade of errors. This results in frustration, confusion, and a loss. What works well in the short term can create poor long-term results.

This same dilemma is apparent in the divide between investing and trading.

Footwork in the Game of Investments

Technical indicators, such as momentum, mean reversion, and historical correlation, can lead you to believe a security is about to increase in price without thinking about the value of the underlying asset. But just like bad footwork, these things work frequently enough that they fool us into believing they’re sound principles.

The truth is that without understanding the true value of the underlying asset, any “investment” is just a gamble. As anyone who goes to casinos can attest, enough payoff will lead you to believe that gambling is easy money. But in a game of odds, every successful gamble is a false positive — only leading you to bet more money you’ll eventually lose.

There are no easy shortcuts, or as Charlie Munger said about investing: “It’s not supposed to be easy. Anyone who finds it easy is stupid.”

To take it a step further, use borrowed money. In the short term, leverage can help you win big with a modest outlay. If a trade is timed correctly while employing maximum leverage, the returns can be astronomical. (One successful leveraged trade is enough to convince you that you’re a genius.) But if you continually leverage odds against trades, all you’re doing is guaranteeing you’ll eventually go broke. It’s easy to forget that leverage is an amplifier of gains or losses, not the source of them.

So returning to my tennis game: Why do I refuse to focus on good footwork? Because it feels fantastic in the moment. There’s no better feeling in all of tennis than drilling an off-balance, risky shot when the pressure is on. It also leads me to consistently lose matches against players with inferior skills.

Someday, I’ll probably make the connection and start moving my feet. Until then, I’ll keep living for the moment.

This post originally appeared on Forbes.