S1-E1 | Disciplined M&A Framework Overview

Transcript

SPEAKER_01 0:02

Hi, everyone. Welcome to our podcast, The Technical Founder. Today we are talking about episode one inside of our MA process series. Today is a discussion of the discipline framework that exists inside the MA process. I'm your host, Joshua Johani, here with your co-host, Ricardo Oberlander. Ricardo, one of the things we want our audience to take away from today is a core understanding of these six phases that we have identified as essential to the MA process. Those phases, as we've broken them down, is step one, preparation, step two, solicitation, step three, receiving indications of interest, step four, receiving letters of interest or letters of intent, L O I's, step five, due diligence, and step six. Finally, my favorite step, the negotiation and signing of the purchase agreement. When you look at those six phases based on all of the different MA deals you've done, is there a particular area that a technical founder should focus on or think about differently than the others?

SPEAKER_00 1:20

Hi, Joshua. Pleasure being here with you. And just thinking about actually this complex environment, which is MA, I don't have particularly a favorite, but I would stress the importance of understanding that first of all, that having a clear distinction among the phases really, really matters. Because many people operate in complex environments, investment banking, consulting, private equity, corporate leadership, but relatively few are consistently effective in them. So if you think about the reasons for failure, uh, especially on deals, deals often fail much earlier in certain invisible ways. Because, I mean, either they fail because lack of internal alignment, because it was never fully achieved, or the financial narrative was inconsistent, or assumptions were not stress-tested, or timing was reactive rather than strategic, and so on and so forth. So, in all of that traces back to one root cause, lack of discipline process.

SPEAKER_01 2:29

Yeah. I I think your point about the depth of each step is also very valid. Because if you look at so our last step we talked about was the purchase agreement, that's really a legal step. You know, the lawyers are are quarterbacking that step most of the time just because it's a it's a legal document that has to be drafted. And, you know, there's entire fields of expertise that that's all people do. And so when people get into their zone or their domain, they can overcomplicate things. Uh, there's always a ramp up and a ramp down time of anytime you bring in a new highly skilled professional. And uh, you know, partners in law firms are not necessarily used to being order takers, right? They're kind of the guys and girls that tell people what to do. And uh they're hard to control. If you let them come in too early, um, they can come in early. But if they start drafting purchase agreement items too early, it can. It can be disastrous for a process.

SPEAKER_00 3:27

You're absolutely right. And then, I mean, you mentioned about the six phases: preparation, solicitation, indication of interest, let of intents, judicial purchase agreement, or negotiation. But the important point for the professional involved in this area is not necessarily memorizing the phases. What's really important is understanding what each phase protects. Preparation protects clarity, solicitation protects leverage, an indication of interest protects optionality. A letter of intent defines commitment. Due diligence tests credibility. The purchase agreement or negotiation involved protects value legally and economically. And the risk of compressing or blur these phases with different stakeholders, like for instance, law firms, as you mentioned, is that you don't move faster. You just remove safeguards. And safeguards are what preserve valuation at the end of the day.

SPEAKER_01 4:29

I have a question about commitment. Because we when you think about a MA process, is about buying a company, selling a company, it always comes down to how committed any party is to one of the six steps that we've illustrated. And one of the, you know, the whole purpose of the IOI or the LOI is for the buyer to demonstrate commitment. And then, of course, when it's countersigned by the seller, then it demonstrates sell-side commitment as well. I'm wondering where you think commitment can be most easily broken down or be lost across the preparation, solicitation, et cetera, steps, and where you think the best indications of commitment in any party side, buy side, sell side, or service provider side, need to be doubled down on or sort of reinforce that commitment. Do you have an opinion on that?

SPEAKER_00 5:25

Just an opinion based on my personal experience. But I think the critical phases to show and demonstrate commitments are indications of interest and the purchase agreements. Because those are possibly the steps or the phases where each side actually are moving one step ahead, I mean, with considerable concern and respect for each other. And that's where trust starts getting built with more definition, let's put it this way. And I mean, bearing this in mind is that you have to understand, or my audience has to understand that this discipline in MA is not about rigidity, it's about intentional sequencing. It's knowing when to speak, when to disclose, when to wait, and when to accelerate. Discipline means that you're not emotionally driven by the moments, but we're structurally guided by the process.

SPEAKER_01 6:30

I think that's a really good point. Is because discipline, you kind of have a military association with it sort of automatically, and that kind of invokes rigidity, but that's really not the case at all. The MA process exists very much on a continuum. And I see a lot of times sellers oversimplifying the process do become quite rigid. The fact of the matter is that every step between preparing, solicit, IOI, LOI, due diligence, and purchase agreements becomes more detailed. And so when you think about knowing what to negotiate at an IOI stage versus what to negotiate in a due diligence stage, some things can be cans of worms down the road, and some things are totally inappropriate to negotiate an IOI stage. We see that a lot at Japani is that we'll have a seller or a buyer that in an IOI is just totally engrossed with an incredibly complex and specific purchase agreement, term, or function that is really just distracting and is something that we'll need more information along the process to come to light before we can even make a decision on. And it ties back to that comment of commitment where we were discussing is that you want commitment to be matched between a buyer and a seller. You don't want to have a seller that's more eager than a buyer or a buyer that's more eager than a seller. And that level of commitment can be managed based on what is being discussed and negotiated at the time, and making sure you're keeping both parties on task, which you know we talked about how lawyers don't like to take orders. Even worse, right? Even worse.

SPEAKER_00 8:11

You're right. I mean, and and that's uh leads to um to another critical point for us to to highlight here, which is the difference between being busy and being effective. And that difference is everything, mean a lot. Because busy professionals react quickly and say everything immediately, jump into negotiations prematurely, perhaps, rush to exclusivity, whereas effective professionals can anticipate second-order consequences, protect your optionality, create competitive tension intentionally, think three steps ahead. It's not checkers, it's three-dimensional chess sometimes. And the busy professional focused on motion, the effective professional focus on outcome. And that distinction, that differentiation is a career-defined distinction at the end of the day. Agreed.

SPEAKER_01 9:09

Yeah. So as we wrap up our first episode of the MA process, what are those key takeaways that you would want the technical founder or our audience to receive?

SPEAKER_00 9:24

I have three in mind, and I would like to know your perspective as well. First of all, the discipline beats talent in complex environments. Talent creates ideas, discipline converts them into outcomes. Structure creates leverage. When sequence is controlled, valuation and momentum are protected. And thirdly, being useful means reducing uncertainty for others. That's the highest form of professional competence. Because at the end of the day, we're looking for a kind of chain reaction here. When you bring discipline, you reduce uncertainty. When you reduce uncertainty, you increase trust. Trust increases speed, speed increases leverage, leverage increases value. So that in a nutshell, what I think is important to take away from this session. What about your views, Joshua?

SPEAKER_01 10:21

I agree with all of those. I think that the importance of defining these terms that people might take for granted is very high. Discipline not being about rigidity and about structure creating leverage between steps in the process. As an investment banker and an MA guy, I view it perhaps a bit more simply. You know, our job in quarterbacking these deals is to get all parties, seller, buyer, buyer's cousin, if there's cousins involved, right? Which happens, lawyers, accountants, ourselves, to the next phase. Um, a lot of this stuff in MA, it's very needed, and we obviously go through all six steps with a lot of intention, uh, but it's optional, right? I mean, you don't have to get an IOI. You don't have to get an LOI. You need to sign a purchase agreement and wire the money. And um, keeping sellers and buyers focused on that end goal and making sure that the needed things to be negotiated are negotiated, and things that need to be left to the future are left to the future, is something we focus on and what we talk a lot about at Jahani. Excellent. Thank you everybody for listening to episode one the MA Process A to Z, a discipline framework. We will see you on the next episode where we go into the specifics of preparation.