Investing

Incredible interview with two founders in the thick of building their business.

1.       Put the Ugly up front.

Sellers often hide things. Perhaps not always with malice, but its hard to see “the dog” in your deal. That’s the "‘endowment effect’ in action, we all have a hard time viewing the things we own with objectivity.

But the market is brutal: it will tell you your baby is ugly with a straight face.

The problem with sugar-coating the deal is the skeletons almost always surface in due diligence. These cause fights, delays, occasional lawsuits and plenty of cancelled deals.

If that info was presented up-front the buyer might have been fine with it. Or perhaps their price would have been lower but acceptable.

Because in a competitive process, the market can “price” the impact of that skeleton and the animal spirits of an auction might have caused buyers to overlook it.

But say you’re in day 60 of a deal when a problem surfaces. The buyer tends to have a bit more leverage (you want to sell and would rather not start over). The problem is you now have no idea how the market would discount (price) your skeleton.

You’ll only know how your buyer feels about it - NOT GREAT - when they come back with a huge and perhaps vindictive price cut.

You’ll blame them for “re-trading” but it was probably your fault for not putting the ugly up front.

2.       Your Job = Herding Cats

This applies to the point person on both the buyer and seller side. There are a million tiny things that need to get a deal across the finish line. You don’t control a lot of them.

Getting vendors, lawyers, lenders, title agents, 3rd party consultants, etc. etc. all lined up and in the right sequence to close is a minor miracle. Every single time.

I just tried to avoid being the bottleneck on anything. Fire back quick responses and clear timeline communication to everyone early and often. Check in frequently so they don’t forget your deal. Don’t assume they care or are diligently working away on your precious deal.

People get busy. You’re not their only deal. Gentle check-ins and getting to know them personally (when you don’t need something from them) go a long way here.

3.       Time Kills Deals

The longer things drag on, the more shit (sorry) can go sideways.

• Interest rates move

• Better deals surface and distract buyers

• Life gets in the way - sometimes people get really sick, divorces happen

All sorts of things pop up with time. Deals have a momentum to them, keep pushing.

4.       Don’t Marry the Model

This is probably good relationship advice too.

Some buyers (including me when I started) over index on the financial model instead of getting out in the real world to diligence the deal, meet with vendors, sellers, lenders, etc.

The answer is almost certainly not in an Excel spreadsheet.

5.       The Broker is Your Buddy

I don’t care what side you’re on, the broker works for the deal. This is a good thing as that’s kind of the whole point. You need to treat these people well. They are absolutely essential to your success.

The pros and those with long-term mindsets have internalized this. If you want to do a lot of deals realize this is a multi-player, multi-level game. Those that treat the deal as a life or death, one-time game probably aren’t thinking clearly.

6.       Ditch the Pitch-book

The offering memo with the pretty pictures and fluff about the local economy and burgeoning craft brewery scene are nice. However, you’ll be far better off taking the broker out for one of those beers than pouring over every page of the marketing materials.

7.       Refrain from the Re-Trade

Sometimes it’s unavoidable (especially if the seller hides things or giant material capital items surfaces). But I think it’s best to go in with this thought as a default and only ask for credits on major surprises that kill the numbers.

8.       Don’t Get Cute on the Goal Line

Please don’t throw it on “the one”.

Give the ball to Beast Mode and PUNCH THAT THING THROUGH. Sorry, this will be the only sports metaphor.

The deal only counts when the wires hit.

Somebody flags a ticky-tack issue that might delay closing a day??

“No. Who cares. Pound sand, we’re closing.”

Fire off those wires, bombs away!

Tiny things can be cleaned up post closing.

I know this sounds like the rantings of an investment guy. But I’m biased as I cut my teeth on acquisitions not asset management. And I’ve seen two lenders back out of deals the last second due to random macro issues.

So don’t take lightly to someone with zero skin in the game saying, “Ummm, we’re getting pretty tight on timing, let’s just push closing two weeks”.

Push everyone to the agreed upon closing date for as long as you can. The second you say, “okay that sounds fine, I guess” is the second everyone take their foot off the gas and procrastinates until that next deadline.

Close that puppy.

9.       Leverage Your Edge

This is timely. Deals are hard to do right now.

I think they’re easier if you have some sort of secret sauce. The holy grail of acquisitions is when edge lets you buy market rate deals (or even those with a slight premium).

Having a unique advantage (whether it’s operating skill or a lower cost of capital) that helps you hit your numbers easier than everyone else is a super power that greases the wheels during deals.

If you have zero operational alpha, due diligence becomes life and death when the market is tight. If you’re a Beta Buyer praying for rent growth or cap rate compression to hit your hurdles, you have very little margin for error. That ends up killing a lot of deals.

Look at the best software roll-up firms for inspiration here (ex: Constellation Software). They are acquisition machines in large part because they can hit just about every “bid” knowing what their operations team is capable of post-closing.

If you have no discernible edge, patience and downturns are your friends.

10.  Keep a Tidy War Room

A small point, but file hygiene in the due diligence portal matters. You don’t want people relying on 10,000 emails flying around for the correct documents.

This cuts back on the “Can you send me….” requests.

You also don’t want to be searching for random things constantly. Get clear lists over to the buyer or seller at the start of diligence.

When in doubt, default to DropBox.

11.  Leash the Lawyers

I loved our lawyers. If you’re a lawyer, I’m sure you’re excellent. Please don’t sue me.

But maybe don’t let the lawyers run the deal until you’ve worked with them a long time.

Their incentives are drastically different than yours and they have a tendency to fight the wrong fights (if they don’t know you and what you care about well).

12.  Diligence is Art & Science

The key to diligence is being detailed enough to catch everything, but then knowing what to ignore.

Diligence is about risk assessment.

You can’t get rid of all risk so decide what you can live with, then ask am I being compensated for that risk?

14.  Fight Small Battles, Win Small Prizes

Pretty self explanatory, pretty hard to remember.

15.  Cap-Ex is King

If you’ve gotten this far, you probably know I’m a bit obsessed about cap-ex when it comes to investing.

16.  Quality = Liquidity

The easiest deals to buy and sell are the highest quality assets. It’s the ones that are a bit shoddy that are a hassle and take a few attempts to sell. Anyone whose ever had a lender property tour go south knows what I’m taking about.

Life’s too short. Go for great.

Conclusion

If I had to pick a short-cut common thread to success here, I’d say:

Figure out what’s critical to move the deal forward and do it with urgency while ignoring the noise.

And the next time you’re in the throes of a deal that’s falling apart, I hope you keep your sanity and that something above is useful.