Learning from the Trench Lines: Searching with Experience
1. Having the pandemic effect at the middle of your search was surely a tough pill to swallow; how did you manage to keep engagement and maximize your chances of acquiring a Company?
It certainly was, but I remain confident that opportunities will be created by this unfortunate situation. As a result of the pandemic, I changed my strategy in two important ways. Firstly, I cut back significantly on my search expenses, working from home and being very careful with my budget. The aim is to lengthen my runway as much as possible to "ride out" the pandemic. Secondly, I put more emphasis on brokered deals, since deal structures post pandemic become more complicated, with earn-outs and other similar structures becoming more prevalent. One of the benefits of having a sell-side advisor is that they help educate the seller on these structures when otherwise they may be viewed with suspicion.
2. Did you adjust your analysis of potential acquisition targets post-COVID? If so, how?
I haven't changed my analysis methodology significantly, although I would highlight two changes. Firstly, there are some companies where paradoxically COVID actually helped to improve their margins. This is because there were less travel and client-facing expenses, and in some cases marketing expenses were way down (e.g. companies that organized events and shows as part of their sales efforts switched to video/remote which helped save significantly on costs). In these cases I try and understand whether the margin uptick is sustainable or not. The other change is that I value digital/tech strategies and efforts even more than I did pre-COVID since I think the pandemic, certainly in Italy, will be an important accellerant of these trends going forward. Aside from that, the only other thing I feel I should mention is that (and this isn't so much a change in my analysis methodology, but rather a change in my criteria) I have to a certain extent reduced my target-size hurdles since one of the frustrating side-effects of the pandemic is that there are fewer companies for sale but the same amount of liquidity on the buy-side. So I've noticed that PE funds have started looking at smaller deals that they would otherwise not have considered pre-crisis.
3. What have you done differently in the second year of the search in comparison to the first one?
I start discussing price and structure much sooner than I did in my first year. After two years of searching I know how to analyze companies faster and require less time to understand the business model and pain points. As such, I can move to the price discussion much sooner.
4. Having experienced some deals failing for reasons beyond your control, how do you manage to keep your motivation and confidence in the process?
Every failed deal is an invaluable learning experience. You get further along in the process, therefore gaining more visibility on how more advanced stages of an acquisition work. Moreover, the causes for the failed deal help improve my search and negotiation tactics. As long as I still have cash runway, failed deals can only be a positive towards my eventual acquisition.
5. Any key learnings you wished to have known from the start?
When I first started searching I was almost exclusively focused on proprietary search. Now that, as mentioned above, I´ve shifted to a more balanced proprietary/brokered mix I realize that in retrospect I should have done this sooner. Brokered deals certainly have disadvantages, but they also have some obvious advantages (motivated seller, broker that wants to earn a commission) that I hadn't properly factored in at the start of my search.
About CS Investimenti
Founded by Toby Sacchi, is a private investment firm focused on the acquisition and active management of a middle-market company in Italy, with a focus on growth and long-term value creation.
As of the publishing of this note, CS Investimenti is currently on his second year of the search.