A lot of M&A conversations talk about maintaining autonomy or keeping your culture as part of a newly-acquired team building together. But after dozens of acquisitions in both public and private companies, Jordan Gnat has a different perspective. Speaking with TechExit.io, Jordan shared his view as a buyer in M&A roll-up transactions.
Key takeaways:
- Diligence starts with financial and legal verification, but quickly steers to the people and culture of the business—and if they can mesh into the parent organization.
- Jordan tells his M&A team to always be willing to walk and never bring emotion to the table, something founders need to be aware of during conversations.
- It’s ok to cold reach out to potential acquirers, just be honest and upfront about building a relationship.
There is a lot of talk about exiting to strategic buyers, private equity, or even going public.
But many founders might find themselves in a roll-up M&A transaction, where a conglomerate or aggregator wants to bring your organization wholly into their own.
Jordan Gnat has been an acquirer in multiple roll-up transactions with his various companies in the gaming, sports, and media industries.
Speaking with TechExit.io, Jordan shared what he wants founders to know about how he approaches diligence.
Mind your sticks and beer
Here’s what a founder needs to know about what’s on Jordan’s mind when it comes to buyer diligence.
Step 1: The daily stuff
Jordan calls this the “breaking sticks” step—mostly legal and financial documentation. He does this first because anything wrong will all but kill the deal instantly.
“It’s core diligence to justify why this business is what they’ve said,” said Jordan.
Step 2: The social test
Jordan takes his own approach to the “beer test” — the idea that you don’t want to work with someone you wouldn’t have a beverage with socially.
First, he meets with the founder(s) to talk about shared vision and how the two companies might do greater things together. But second, he meets with as many members of the team as possible.
Meeting with additional team members serves two purposes: it helps assess the deal at a more granular level—particularly if the founder is looking to exit permanently—and it helps uncover any issues that wouldn’t show in financial or legal documentation.
“It’s hard to get everybody in an organization to fake it,” said Jordan.
Step 3: Operational sniff test
Buyers in roll-up M&A transactions typically have significant operational experience in an industry. This, said Jordan, is a second line of defense against a deal that looks good on paper but may have underlying problems.
“We knew from operational due diligence—we could sniff out things that were on-side or off-side,” said Jordan.
Step 4: Culture meshing
While having meetings and conducting regular diligence, Jordan also pays keen attention to a company’s culture—their values, ways of work, and general tone in the organization.
But unlike other M&A transactions, Jordan said it’s crucial that the acquired company merge completely into the culture of the parent organization. This is especially important in roll-ups transactions where, like Jordan’s previous company Playmaker, the parent company might be making a dozen or more acquisitions to build capabilities together as one brand.
“You have to sort of break it and get everybody to come into the one [parent culture],” said Jordan. “Sounds pretty draconian… But too often, if you have conflicting cultures, then it’s the intangibles that’ll break your business.”
A willingness to walk
Another belief Jordan has, after managing dozens of roll-up transactions across various companies and industries, is that emotion has no place at the bargaining table.
This is critical for founders to know, because attempting to bring emotion into the transaction will not get you very far—and could harm the deal.
“There’s no room for emotion in an M&A transaction, because emotion is a tool by the other side of the table to use against you,” said Jordan “If you’re emotional about something, they’ll smell it and they’ll take advantage of it.”
A willingness to walk also extends to after the deal is done, and that’s something founders need to be aware of.
Jordan shared one Playmaker acquisition as an example. Shortly after acquisition new legislation came into their region around gambling businesses and a competitor came into the space, killing revenue potential.
After some operational challenges, the decision was quickly made to sell the company and refocus managements’ efforts to the more profitable, high growth areas in the company.
“The real key is to be brave enough to make the hard decision,” said Jordan. “And it truly takes a lot of guts to make that call.”
How to get into a roll-up
Companies pursuing a roll-up M&A strategy typically have their own corporate development teams actively reaching out to potential acquisition targets.
But at the same time, you can be pretty bold in reaching out and asking to see if there’s an opportunity to be acquired. The issue isn’t about raising your hand; like many acquirers, it will be about mutual fit and keeping in touch to build a relationship.
That said, Jordan cautions against anyone building just to sell. He thinks that the reason to build a business is for its own sake—and the sake of its customers. It’s fine if the business evolves and an exit makes sense, but don’t build solely from that perspective.
Beyond his advice against building solely to sell, Jordan said there’s only one real risk when reaching out to potential acquirers.
“Someone being disingenuous is probably the only thing that turns me off,” said Jordan. “I don’t stand on ceremony [when it comes to how we connect for a potential M&A deal].”