HoldCoConf 2022 ALFREDO GARCIA - DEAL SOURCING TOOLKIT

foreign [Music] [Applause] [Music] recordings for holdco conf 2022 are brought to you by axial axial is a lower Middle Market deal sourcing platform to learn more and to start accessing New Deal slow today head to axial.net axial Works we've used it and I'm excited to have them here to talk about the deal sourcing toolkit they've got a wide ranging conversation that for all of us deal junkies the 95 percent of attendees who want to buy something this year it's a great resource and excited to hear what they have to share so enjoy excellent thank you Kelsey thank you all for being here and welcome to deal sourcing in the lower Middle Market um before we we jump in I'll just introduce myself my name is Alfredo Garcia I'm a Director of Business Development at axial I I lead a team of seven professionals that are fully focused on Deal sourcing we manage relationships with south side intermediaries and with private company owners with the aim of encouraging them and incentivizing them to contribute their deals to the buyers that we work with so just a quick snapshot on on axial uh we operate as a two-sided Marketplace so on one side of the platform we have about 1600 sellers these are intermediaries and and private companies that are looking to sell their business or raise capital and on the other side of the of the marketplace are buyers acquires we work with about 2 000 total buyers that are interested in buying businesses in the US or Canada in the lower Middle Market are our sweet spot is really transactions between a million and ebitda up to about 10 million and last year in 2021 we sourced just under 8 000 deals for our our buy side members so today over the next we have about 30 35 minutes of content so feel free to jump in at any time with any questions uh but what we'll hope to cover is one just describe the lower middle market in terms of its size the number of participants um we'll discuss Business Development as a function for deal sourcing in in private Equity we will then um hopefully give some ideas of how to operationalize your own deal sourcing strategy uh and and lastly I'll hand it over to Dave who's the VP of product uh at axial uh to discuss how you can leverage software uh to help with with deal sourcing all right so the lower Middle Market so before before we jump into the numbers um it's important to just Define what we're talking about you oftentimes you'll hear about the broader mid-market which is typically defined as transactions under half a billion dollars so 500 million dollars we look at the lower Middle Market as sub 100 million dollar deals um pitchbook estimated that last year there was about 130 billion dollars in transaction value in the US in in the lower middle market and just over 4 500 unique deals that got done again in the U.S lower Middle Market what's most interesting to me about this is that the 132 billion makes up 20 of the broader mid-market but the 4 500 unique deals make up 67 percent of the total deals that were done so just to illustrate this this first chart here shows volume over time and as you can see you know a small portion of the total transaction volume is is sub 100 million dollars but if you look at the same chart by deal count much more significant so why why is this important this is this is important because of just the level of fragmentation that exists in in our part of the market um so another way to think about fragmentation the sheer number of folks that are involved in these deals is by looking at our participants and so we we estimated this data looking at our CRM we've been you know building out our our CRM over the last 10 years or so um we've bought a bunch of data we've analyzed a bunch of data uh We've contributed a lot of data and we estimate that there's just over 6 000 South Side intermediaries that bring deals to Market every year and just over 130 000 private companies that would consider selling or raising capital uh and on the buy side there's over 11 000 potential acquirers so these are folks that ultimately you would compete with right if you're if you're trying to buy a business in in this market so when you think about covering this part of the market and making sure that you're seeing the right opportunities at the right time it can obviously be be a bit of a challenge and I think this this chart does a nice job of illustrating this and so on the y-axis you see the number of deals that an individual intermediary works on in a given year and on the x-axis is the total number of intermediaries that are that are active on the axial platform so as you can see you know we we think about cell set firms by tiers so a tier one sells that firm for us is a firm that works on 10 or more deals a year that only makes up 16 of the total participants on axial on the sell side whereas tier three intermediaries which work on one to three Deals a year make up 62 percent of the participants and so sure you can spend time developing relationships with the tier one firms um and call on them and and spend time with them and and that will yield results for you but you could be potentially missing out on and the deal volume is very similar over 60 percent of our deal volume comes from these tier three advisors and so how does a acquirer how does a holding company how's the private Equity Fund how do they think about making sure that they're seeing the right deal at the right time in order to be competitive and that's where the role of Business Development has emerged so over the last 10 years or so private Equity firms and and other acquirers have dedicated a specific function of their business to deal sourcing this slide discusses uh the four key strategies of a business development professional or of a business development function in private equity the number one goal is to create qualify and develop a pipeline of of healthy opportunities right that give you the visibility that you need in order to participate as an acquirer the second role is relationships so this is really all about can you develop a relationship with someone primarily an investment bank or M A advisor or business broker that will show you a deal early that will give you an opportunity to compete before they broadly marketer before they go about the auction process how can you distinguish yourself to these counterparties to give your firm a better opportunity of finding the right deal and of getting it done data analysis has really taken off in the last five years just with more people more focus on Business Development um using you know the business development people are the feet on the ground right they're the ones that are having the conversations or when they're reviewing all the teasers calling the bankers calling the Brokers and so you gain insights and if you can take those insights in in your everyday job put them into your CRM analyze them in different ways then you can develop contributions to the overall investment strategy and this has allowed you know Business Development folks to to rise within private Equity firms they're they're CEOs and P firms that came from a business development background there's people on the investment committee and that's really how they've been able to distinguish themselves and the last component is typically marketing and fundraising usually the folks that are on the front lines calling the business owners calling the intermediaries staying top of mind with them tend to also contribute to marketing and tend to also use those skills to manage LP relationships right it's a similar process you have to develop relationship with the wide group of people and encourage them to trust you and to think about you think of you as a as a legitimate investor so how does one go about developing this function inside of your own firm this is something that you know axial has been working on for for 10 years and we're still constantly trying to get better at it you know I've been I've been in this seat for four years and I'm I'm just starting to crack the surface um we really think about it you know in three ways one is do your business development people have the right software the right mix of tools to be able to effectively cover such a large Market do you have the ability to customize your strategy based on who you're speaking to the way and what's important to a business broker is different than what's important to you know tier one investment banker versus a private company owner and you have to customize your approach in order to be successful right know your end market and then lastly is how do you incorporate content media and events uh to really distinguish yourself and to be a thought leader that folks want to transact with that they want to send the early looks to so let's let's start with software we have thought about it in these three categories so the the first is contact prospecting how do you have the right email with the right phone number with the right title for the right firm at any given time right it's it's a challenge especially given how much turnover there is in our industry there's an entire head hunting Industries fully focused on moving people around and that can be that can be a challenge once you have that information you need to populate it in a CRM so that you can splice and dice it in different ways you can customize your your different email campaigns towards your different audience and then you can make sure that you're being insightful in what you're sharing with them at the right time and lastly it's it's marketing and Outreach right so when you're talking about thousands of participants how can you effectively reach all of them with valuable information uh based on who they are and what you've learned about them we've listed a bunch of different providers that we've analyzed and we've spent time with uh ultimately where we've landed uh currently and what my team uses is sales nav and zoom info for for contact prospecting getting the right info on the right people uh we use Salesforce we're we're massive Salesforce junkies we use it in every part of our our job uh for our CRM and then on the marketing and Outreach we use mixmax uh and we're actually just now in uh implementing HubSpot for uh some of our marketing automations so let's do dig in a little bit to the different sources of deal flow that that we interact with and that we try to customize our strategy for so we we really think about we really think about the top four as the primary areas where we spend most of our time and the percentages you see there both illustrate two things one is what percentage of our total intermediaries are made up by each category and then typically how much time do we spend with each category we we tend to align those two things invest in Banks we think of them as reputable Brands usually work on 10 or more deals a year a lot of investment Professionals in addition to chain of control transactions they work on Capital raises they might do fixed income they might have a private wealth arm uh these are folks that we take a very personalized approach with we have four people on on the team that are fully focused on calling on them and really learning about them and understanding what type of Industries are they active in how many deals do they work on in a year what is their deal calendar uh do they like to run auctions do they want to run limited processes are they multi-stage in their approach we want to learn this about them so that when we call them we know what to talk about and they're more likely to take our phone call right and that we know when they're bringing a deal to Market and when we can be most helpful for them M A advisory firms as you can see up on the screen are are typically only doing chain of control transactions and are just smaller organizations so they have less people usually under invest in technology and because of that uh it's a largely fragmented right Dave and I can go and start an m a advisory firm tomorrow and we might pick up a good deal and that could deal is a good fit for you you'd like to be included in that process but it can be more challenging and so given that there's so many M A advisors out there we take an email approach um we use mixmax we set up different campaigns that are fully focused on adding value to them right so they're less likely to have pitch books subscriptions they're less likely to use Capital IQ so we send them data sets we send them the names of new buyers we send them industry articles that we write and we always say when you have a deal let us know and we can be helpful uh and so it's a large email approach combined with periodic check-ins and calls and value-added content business brokers are their own animal uh because they work on a wide range of transactions as I'm sure many of you know they they love Main Street Deals they love larger deals you know Main Street in terms of like single car washes beauty salons um but they're also largely Regional and so if you're the top business broker in Raleigh and you work on a lot of car washes and you know different small businesses if your neighbor with a 3 million EB dot company wants to sell he's likely going to call you to help them do that and so every once in a while you get your hands on a really good deal and we want to be top of mind for them when they have those transactions and so a lot of them affiliate with franchises most of them do because they don't have a back office staff they don't have a distribution channel so they'll partner and affiliate with firms like generational Equity Transworld Sunbelt that I'm sure many of you are familiar with so what we've done is we've go after those shops right we we think about relationships with the senior people at GE trans World Sunbelt Etc and we've developed Enterprise programs with them where with TransWorld and generational equity and sunbel we actually have well with transformed we have API Integrations where we pull all of their deal flow directly from their CRM we put it up on axio but we filter It Out by what our buyers want to see and we distribute it for them with GE it's a similar process but it's largely spreadsheet driven we just don't have an API with them yet and then the rest of the Brokers it's all about reducing the friction right they're they're publicly posting their deals they're blasting them out oftentimes and newsletter and you know different email servers that they have and so what we want to do is we want to make it as easy as possible for the right deals that for our buyers to get up on axial and we do that through automation so they can send a teaser in and we have a team that will process that get it up on axial and send it to the right folks that we recommend Enterprise focused relationships there with one dedicated person that manages those for us the private company category um is one where you know we've done a lot of different things here to develop relationships with business owners what we found works the best and what we've spent the most of our time over the last you know four years at least is an educational content driven strategy so you would be shocked every single year the assets on our website that perform the best in terms of viewers and clicks and downloads are simple things like what is ebitda how do you calculate ebitda what are the typical processes in a sell side transaction um how do I think about employee retention uh after a transaction those are the things that business owners Google and that they want to know when they're considering selling their business uh and if you we take an SEO approach we want to be the first result when you Google those things and we only do inbound requests from from business owners every year we see on average about 150 private companies above a million ebitda that they end up using actual either to find a banker which we have a program for or to contact buyers directly the other category we don't spend too much time on uh these are your you know your lawyers your accountants friends and family that you know pick up these deals uh as favors oftentimes for business owners um they tend to be the self side the South Side firms that are least prepared when they're bringing their transactions to Market and so we don't spend too much time there but it does make up about seven percent uh of our Market so in addition to customized strategies by deal Channel um content and events is also a major part of how we establish ourselves as thought leaders and how we stay top of mind when people have transactions on the content marketing side we've done a couple things that have worked well which I've highlighted in the top the top of this slide first is all based on reputation and behavior so we want to make sure that the bankers that are taking on the best deals that are closing the most deals that are getting the most Lois and running the best processes that we help them Market themselves to the broader to the broader Market that we serve so we do a top 50 top 25 Investment Banking League table every quarter what we really love about it one is we get to reward our active members with with publicity and marketing but also it helps them win new business which then they come and bring back on the platform and our buyers can then participate in and so it creates a nice flywheel effect for us we do similar things by industry vertical so who are the top investment bankers who are the top buyers investors in software in the industrial space and Manufacturing and then data we have we operate in a market that is largely underserved there's not a lot of data and information about the lower Middle Market and we're trying to do what we can with the platform data that we have to surface that to the industry uh the Pursuits report is something that we put out about a year ago and we refresh every quarter we also work with members that have done an exceptional job at their own content marketing strategies and we've listed them here permanent Equity with uh the book that they released to messy Marketplace John Wilson with his own and operated podcast and then our founder and CEO Peter Lerman recently launched a podcast as well Masters in small business that's starting to gain some steam and really effective way to to distinguish yourself as a thought leader events are also critical to us we attend events ACG events we were at SM bash we're here we do our own events and the most important thing that we've learned uh we have an excellent Director of Events uh that's been doing this for for seven years for us is you want to be unique in your approach right this is a great example uh Concord is is one of our Flagship events where it's uh we we require investment bankers to show up with deal sheets um and it's a one-on-one almost speed dating format where you're there to talk about live transactions that are in Market so you've put up a business development function you're able to search transactions how do you evaluate results how do you know what's your scorecard how do you know if you're bringing value to to your firm so in conversations with our members as well as you know through our own data um we've we've set up some benchmarks uh that we believe resemble success in terms of a good business development function the most important thing is is closed deals right you want to ultimately bring transactions to your firm that they can act on that they can close and they can contribute to the portfolio we estimate that about one to two percent of the total deals that you see will will ultimately close um however if you're only focus on closed deals it's really difficult to understand you know what you can do to to Pivot your strategy and so you need to start taking a couple steps back and looking at Lois ioi's and then actionable deal flow actionable deal flow is particularly important for us because it means that you're expressing to the market what is interesting right if if you get a thousand deals a year but you're actually only signing an NDA on 10 of them then no one knows what you're looking for right because they're sending you things that are irrelevant and so it's important that you drive that metric to ultimately you know get to the different benchmarks that we've Illustrated below it so what were our results as I mentioned uh in 2021 we sourced uh you know just under 8 000 transactions uh across 240 investment Banks uh over 580 M A advisory firms and just over 400 business brokerages on the buy side uh we worked with over 2 000 acquirers and we've Illustrated the per the total Pursuit so of all the deals that are getting pursued ndas that are getting signed uh how many of those are coming from each category of buyer that we work with we then take it a step further and start looking at you know some of the underlying data so which Industries have the most Supply where is the where is there the most opportunity for deal flow as you can see the top four uh make up nearly 70 percent of all of our deal flow why is that important because optionality is important right you can look at this data and understand how picky you can be in terms of you know what you're willing to put up with in a given business which Industries do our buyers prefer uh this is really important for me um as you know the leader of the South side at axial because we want to make sure that the industries that buyers are actively pursuing we're doing everything we can to bring more deal flow in those sectors um Fender Services Healthcare business services and Technology all have you know excellent Pursuit rates which buyers are more aggressively pursuing deals this is interesting particularly because of optionality right many of the search funds uh that we work with were one of you know a few channels of dealflow that they have access to you know they might spend time on on Biz by cell or like bizquest uh maybe doing cold Outreach but axial tends to be one of you know a few places where they can find Opportunities and so they're aggressively pursuing those deals whereas you know maybe a corporation that is you know only doing software most people know that if you have a great software business you want to send it to Microsoft or you want to send it to whatever strategic that you know is active in your space private Equity firms are similar they're able to effectively create their own inbound channels their own proprietary deal flow channels and allows them to be more selective uh on the axial platform so with that we reviewed just a bit about how big is the lower Middle Market how many participants are you dealing with how do you think about operationalize a business development strategy what are the what's important there and then once you have that successful deal sourcing pipeline how do you evaluate your results The Next Step here uh which I'll hand over to Dave is how can you think about software to help you specifically with the deal sourcing aspect and where are we going from here oh thank you do you want to take your drink nicely done hi everybody I am Dave Krasinski as Alfredo said I am the head of product at axial um just a quick background about me I've spent 20 plus years in financial services technology that's been purely in an operating role I've had roles uh in in basically technology engineering and product development that background is probably quite different than many of you in the room that said I am I'm actually have a lot of experience with with M A so through that through that tenure I've um I've been through six Acquisitions two of which uh have been with s p Global I would uh I would welcome some conversations over you know some of the scars and uh you know and challenges of Integrations if anybody wants to talk about that um my role at axial is is to create and envision a uh you know a fantastic product that really drives and uh is ripe for deal sourcing and and deal creation uh and what I want to talk to you for you know for the next you know five or eight minutes is um you know what our roadmap looks like what are we investing our time in to create an environment like that um if you think about the stages of a deal you know axial is focused on steps one and two right we want to get the best deal based on your profile based on your mandate in front of you we think we do that pretty well Alfredo I think did a really good job of talking about all the different motions all the different activities and processes that we put in place to do that it's hard work The Next Step is the information gathering aspect right so you have this deal you want to pursue it you do pursue it now you want to get all the confidential information you want to get the SIM and everything else so that you can do your magic right which is really in step three which is is this deal right for my platform right does this deal fit do I want to spend the time do I want to spend the effort and so we we want to leave number three to you and we want to help you with number one and number two it's interesting we gave out a survey before the conference and asked you know what are the challenges that you're having you know in your deal sourcing process 95 percent were in the one and two range right not finding the right deal and not being a match and as well as not getting a Sim signed I mean I'm sorry not getting an NDA sign not getting the Sim the Sim delivered as you would expect in another and the difficulty in getting that information that's the area that we want to focus on right so we are in we're in the business of creating a Marketplace that reduces friction and and efficiency um so let's talk about reducing friction um on the right hand side here these are the high level steps that happens from the discovery of a deal to the point where you want to you you want to submit an ioi or you feel comfortable submitting an ioi or putting in a competitive bid on the uh for an Loi so that two-sided Marketplace um so a deal comes to Market that seller uh publishes that deal all of the basic information um that that we expect and and that you would need to decide if you want to uh pursue that deal we present the seller a list of buyers that we recommend to them that recommendation list is based on your profile that you would set up in axial the seller now is in control to decide who they are going to share that deal with many of the sellers on axial will share to all they trust our recommendation list they've been they they appreciate it you know it's not too broad it really targets what they're looking for they will share to all many of them will also be more selective sellers right and they will or selective sharers and they will share to a subset of that list which is one of the friction points that you know I you know as the product leaders trying to figure out how we can how we can do how we can get through that friction point and so getting into that what do we want to do there so if we recommend a buyer and that buyer isn't welcomed into a deal that buyer you know may be missing an opportunity that is really a good fit for them and for some reason the seller is just not you know at that moment not not wanting to share that we are executing the capability for a buyer who is on that recommendation list to do what we call an inbound inquiry right based on the characteristics of that deal they can see those characteristics they can say you know what this does really fit my mandate perfectly I'm going to make a pitch I'm going to make a compelling pitch to the seller to let me in that deal right you can see those deals that also ignore them yes yeah geographic location is required is is always on axial deals am I saying that that's right yeah a number of employees is one of those things that we are um we're looking to add as well as other characteristics of the deal and I'll talk about that on the next slide as we talk about incentives um to get better deal information you know to buyers okay great so after you put an inbound inquiry if again if you weren't initially you know shared the deal or you you decided to pursue a deal that was shared with you then you get to the point of getting the NDA signed which actually is another area of friction where we have some some Fallout and it really shouldn't be right this is something that we should be doing better software should be able to help with and we think axial is really well positioned to help with that number one we have a standard NDA right and we are working hard to get adoption of that standard NDA by by all the sellers on the platform and if they're not going to use the standard NDA they we want to make sure that they're using an integrated NDA into our workflow process right so it's an it's an esignable NDA as well as the redlining capability all happens on the platform so we're not setting red lines back and forth and extending a process that shouldn't be shouldn't be that lengthy so we think it's a big opportunity for improvement there after that NDA is signed right then it's okay now I can share the confidential information I can I could you know and I want to get all of the other details that I need to properly evaluate the deal again it's an area that we believe we can help out with software technology should be able to help help in automatically sending that information out once that NDA is signed why should there be any delay in that so we want to encourage sellers to upload that information let us securely share that with with all the sellers that they have signed that all the buyers they've signed that NDA with NDA with and we can move the process along so you can all move and decide how much you want to engage uh on that deal going forward so that's reducing friction the second major theme that we think about investing in our product and it's one that I'm hugely excited about is is around how do we create a Marketplace that incentivizes constructive behaviors right that creates an environment where buyers and sellers have really strong interactions and and and and you believe that uh you know those behaviors are are really constructive and we think about two ways that we can enable that to happen number one is we can reward members for reducing friction in the marketplace so if if they are going to add more data to their teaser than than just the minimum right we can give them preferential treatment about how we market and display their deal if they um use our standard NDA or if they upload their Sim and and Leverage The workflow tools that we're putting together to create that better engagement and time to time to Value excellent we'll figure out how to reward you how to Market your deal better and position you best um you know based on embracing what we believe is the right way for the network to operate secondly we think a lot about benchmarking the activity and the behaviors that are happening on axial right we have thousands of members on each side we have thousands of deals that are going to Market each year we have a lot of information about each each of those participants in the marketplace right we know how responsive they are right when it's time to sign an NDA right how how quickly does it take you to do that how quickly does it take you to turn around to sending the Sim that is really interesting information that one we can reflect back to those people and say hey this is your responsiveness level based on your peers it's also information that we can share with counterparts so that people on the other side of the trick of the transaction can decide is this worthwhile me investing my time right am I going to get the right results um am I going to get the right juice for the squeeze and getting involved in this we could also track the percentage of Pursuits that happen for deal how many Lois get closed all really valuable We Believe valuable information that will drive transparency and really drive a more Merit oriented you know deal environment so last slide um you know this is a this is our product roadmap these are the things that we're investing in I talked about the first two frictionless workflows uh secondly is incentivizing good Network and Marketplace Behavior and the last is um you know look the we believe the lower Middle Market is is highly under invested in technology we are spending a lot of time and a lot of effort to build great software that makes deal sourcing really you know more efficient more enjoyable and we're trying to design and you know a great intuitive user experience that gets you uh you know through your deal process in a most efficient and effective way that's it any questions Dave sure the question was how do we deal with sellers that um you know are not ready to sell are you know maybe a low quality level of deal that um yeah that might not be a really good fit for the platform yeah that's a great question um so we we have a couple different means of of tackling that first of all any any intermediary or any seller that wants to use axial has to speak with the member of our team there's you you have to be vetted and have a discussion uh to to prove your validity right um we also have a minimum amount of information that we require on all of our transactions so you have to have a minimum company description of I think it's 300 characters you have to provide the state location last 12 months or end of fiscal year Revenue in ebitda the industries that you operate in uh and then you have to make selections about what your NDA and Sim distribution process are the last thing which is is a component of our platform is ratings and so if you interact with any buyer on the platform they can then issue a rating uh it's a five-star system as to what their experience was in terms of the deal process with you and so someone that you know provided a horrible experience and not have the right information misrepresented the deal we'll get poor ratings and then those buyers that experience that can report a concern to us which we then you know to the extent we can uh you know try to at least make known and and you know help in whatever we can but ultimately a Marketplace that is effective would weed some of those players out on its own yeah that's a good question the question is about valuation about pricing so we actually don't require sellers to include evaluation um because we think that you know that valuation can can vary over the process and as they learn more and so we let the historical we try to encourage and require that the historical financial information is included in order for both parties to arrive at what they think the valuation is and then ultimately discuss that um that being said you know valuation data I think is hard to come by in the lower Middle Market uh it's definitely a challenge and it's a request that we get you know constantly from from our members and it's something that you know we're trying to figure out the most effective means of surfacing that information that we do gather back to the market but no it's currently not a requirement or something that's in the platform yep yeah good question um so on the South Side axial is completely free to use it not only is it free but we we actually have a bunch of incentives to motivate you to bring the deal flow through through the platform and that's because ultimately the deal flow is you know our our blood right it's it's what's most important to the buyers they want to see those opportunities and so things like the the investment banking league tables are how we incentivize folks to bring all of their deal flow to axial um we as a business are monetized by the buy side so there's no upfront cost to join axial um it's a success based model and so if you are a buyer and you Source a deal through our platform and then you ultimately close in that transaction at closing you would pay axial a small success fee for helping you get in front of that deal it's self-reported again we we believe that ultimately the folks that are misrepresenting those deals that the market will take care of that right we we hope we have enough volume where the ratings and the feedback will you know dismotivate any seller to to misrepresent a transaction why why are we utilizing marketing automation platforms oh yeah that's that's a good question uh so we have traditionally used pardot uh as our you know marketing automation lead generation tool um and honestly it's it's customizability uh it's just the ability to uh you know work with the tool it's usability I don't mean to pitch you know HubSpot but uh it's one that we we've looked at and we just think you know gives us a better opportunity to grow all right well thank you very much uh we can wrap up a little early uh thank you very much all for being here and for listening to us and we look forward to uh to catching up through the rest of the evening thank you