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November 7 2019 - San Francisco, CA

Startup Mergers & Acquisitions: Scott Orn & Michael Tannenbaum

Chris R:
Hi, welcome to another episode of Brex in the Black. We've got Scott Orn, the COO of Kruze Consulting here, joining us a talk about mergers and acquisitions. Scott, thanks so much for being here
Scott Orn:
Hey Chris, thanks for having me. I appreciate it.
Chris R:
And of course we always have Michael, our CFO here at Brex.
Michael Tannenbaum:
Hey, thanks Scott, and I do appreciate that Kruze has been a great partner to Brex. So thank you.
Scott Orn:
Thank you. This is actually like a pretty cool format here. I haven't had the three people sitting around the table with one mic thing.
Chris R:
Hey, there you go
Scott Orn:
This is awesome.
Michael Tannenbaum:
At Brex, we like to disrupt format.
Chris R:
This is like a Jeff Bezos, how many people can be on a podcast, like the pizza thing.
Scott Orn:
The pizza thing.
Michael Tannenbaum:
Yes, exactly.
Scott Orn:
That's the podcast equivalent.
Michael Tannenbaum:
Exactly.
Chris R:
So I can just get us a little background on who you are and what it is you do?
Scott Orn:
Yeah, so I'm the COO of Kruze Consulting. We are an accounting firm that specializes in startups, so only venture backed startups. We have about 180 monthly recurring clients. Firm was started by Vanessa Kruze who was my girlfriend when she got the firm going. Now as my wife and mother of our daughter, and I joined... Vanessa started the company eight years ago. She was a Deloitte Tax CPA, then a controller in a start up.
Scott Orn:
I joined four and a half years ago. I was the third employee. We're up to 50 people now. I had been a partner at a venture lending firm, grown up from analyst to partner. Did about a hundred million dollars in the deal. So like you might have heard of like Angie's list or Upwork or Impossible Foods, those companies. But I had never actually built a company, and when you're working in venture capital, you kind of live vicariously through other people.
Scott Orn:
And so when I saw what Vanessa is doing, she was at like 60 or 70 clients by herself. I was like, Holy cow, this is A, an entrepreneur who's amazing, and B, this is kind of my opportunity to build something. And so I jumped in, and it's been a wild ride. It's an awesome ride. But I really recommend people take that leap someday. But that's me. That's what I do.
Chris R:
So you deal with a lot of mergers and acquisitions as part of this?
Scott Orn:
We do, yeah. So I have an M&A background. So before I worked in venture capital, I did M&A for three years at Hambrecht & Quist, which was kind of like... It was acquired by Chase and JP Morgan, but H&Q took Apple and Genentech and Netscape public. It was like the one of the OGs of Silicon Valley. And so I did that for three years. I lived a crazy tech, 1999, 2000. I worked on one of the biggest tech acquisitions ever VeriSign, Network Solutions. And then I got smart and got out of that M&A, working for a bank.
Michael Tannenbaum:
I worked in M&A too.
Scott Orn:
Did you really? Oh I did. Did we put that together before?
Michael Tannenbaum:
I don't know. But-
Scott Orn:
What year was that?
Michael Tannenbaum:
All these deal toys that I have on my desk that I like to brag about are reflective of that.
Scott Orn:
Yes, those are a lot of late nights. I can see.
Michael Tannenbaum:
Yeah, 2010 to 12.
Scott Orn:
Nice.
Michael Tannenbaum:
So cool. So tell-
Scott Orn:
So you did that.
Michael Tannenbaum:
Yes.
Scott Orn:
And do you find like, do you like that experience pop in your brain all the time? You're like-
Michael Tannenbaum:
Yeah, I really love it. I was right out of school, but I know that it's intense.
Scott Orn:
Yeah it is. I had the same experience. So yeah. So we at Kruze are basically selling two companies a month right now.
Scott Orn:
So it's crazy, right? Like in our last company-
Michael Tannenbaum:
Advising them on their sales?
Scott Orn:
Yeah, yeah, yeah. Yeah, we're not a banker. We are executing the transaction, and all the diligence, and helping them negotiate little things. So our last company was bought, I think a week ago Cisco acquired Voicea, which was, I think it was publicly disclosed, I won't say the number, but it was a large acquisition. Took six weeks to kind of fully bake.
Scott Orn:
But so everything is like super fresh in my head. Because when Cisco acquired your company, you get like the full Cisco treatment and a full M&A corporate development team pouring over everything, which was a great experience.
Chris R:
Is that because the market is particularly good or you guys are just expanding?
Scott Orn:
I think it's probably both. I mean, look at your success at Brex, right? Like money is flowing, your evaluation's continually going up.
Scott Orn:
Plus there's tons of startups who need a credit card. And so you guys are expanding really quickly. We're in this huge kind of expansionary phase in Silicon Valley or the rest of the tech world. So we are growing with that.
Scott Orn:
But I also think we're very strong at this. You know, there's not many people, you guys, Michael Senet, Healy Jones, who's also a former investment banker and venture capitalist who works at Kruze. And our team just had so many reps, like so much of life is just going, getting repetitions, and having that experience. So we're just really good at it now.
Chris R:
So what is the normal from all the repetitions that you've seen? What is the normal process for a startup going through an M&A?
Scott Orn:
Yeah. So the first part of the process is... it's almost like dating or finding your significant other, you know, like someone's been looking at your profile... it's like, I don't know, the analogy of like Tinder. Someone's looking at your profile, they know who you are, you go on the first date, sometimes it's really informal, and all of a sudden you start getting an indication that this company wants to buy my company. Holy cow, this is amazing.
Scott Orn:
And usually it's very kind of informal, very verbal, but then it gets serious. And often when you get that letter of intent, it becomes a very serious thing. And, and the CEO and the whole management team's mind shifts from like, "Oh my God, this is a life changing moment for both me, it's a potentially career making moment for my venture capitalist because this is why they invested in the company, and I better not screw this up." And that's where like the lizard brain kicks in a little bit, and you have to be really careful not to mess things up. And you start going into, "What do I need to do to make this acquisition work?"
Chris R:
And so what would those things be?
Scott Orn:
Yeah. So my favorite moment at Kruze when we bring a company on, we actually do a full compliance and financial checkup, and make sure we go back and fix a lot of stuff.
Scott Orn:
So the company is always in compliance, their financials are always up to date. We have a data room always set up for our clients. So that when that unexpected phone call or letter of intent comes through, the company has already prepared.
Scott Orn:
So I can't tell you how many phone calls... Michael, you've probably experienced this in banking, the scramble to get everything put together. Our companies don't have to do that. And my favorite moment of working with a client often is when they call me and tell me they have a letter of intent, I say, "You're good. Everything's ready. You don't have to stress. It's going to be fine."
Michael Tannenbaum:
Yeah. I mean, when we were... Not for a merger, but when we had to do our first Series B here, Enrique told me, and I had to pull those... You know, I used to say in banking, "All nighters keep you fresh." They do. I like an all nighter every once in a while to keep me fresh. I do. And I was very fresh. I went all night working with Enrique and then we, and then it was kind of a quick story, but we put that together because, you know, capital raising or M&As is the only thing that really keeps you up.
Scott Orn:
And they're both super similar. It's the same thing.
Michael Tannenbaum:
We put it all together. Then we went down to Andreessen Horowitz the next morning, we ended up going a different route, but we went there, there was fresh coffee, pastries, everything was calm. And I was like, "Oh yeah I used to do this life, and now I'm living in this hell." Sorry.
Scott Orn:
Yeah. But the importance of like that scramble or having that nice presentation and the reason why you pull the all nighter was because from the moment the M&A process starts, you are on the clock, and you're being judged.
Scott Orn:
And so if you are disorganized, and a Michael Handon, pulled an all nighter and only had half the information that Andreessen Horowitz needed, that might've been at a lower valuation, that might've been... or a pass, right? So that's the really important part of this, it's really big stakes.
Chris R:
And it actually makes some sense to have it all prepared in advance because of this. So then what are the most of your work in preparing people? What does that look like?
Scott Orn:
Yeah, and by the way, I'm glad you agree with me. Not everyone in the accounting profession agrees with that or is the organized-
Chris R:
What's the standard-
Scott Orn:
... or some, and also sometimes founders, please, if you're listening founders, please prep this. Like do this in advance. You don't want to be scrambling. We get phone calls of like the old, "I got an acquisition offer yesterday, I need to hire you."
Scott Orn:
At that point, it's really difficult for us to come in and really fix all the stuff well.
Chris R:
To do it quick enough?
Scott Orn:
Yeah. So please plan ahead. That's probably the most important thing. And your diligence materials will kind of go in three different buckets: financial, legal, and then you also have kind of like the negotiate... Like those are I guess the two big buckets. And then you're going to have like the whole negotiation around the actual deal now. Does that makes sense?
Scott Orn:
So in terms of like things to prepare. It sounds so basic, but your income statement, balance sheet, cash flows, same in. So your financial being up to date. Ideally you're working in something like QuickBooks where you have an accounting system of record, and it's easy to pull reports, and it's also easy to see that all the bank accounts and credit cards and the Brex counts have been reconciled, and that everything is tied down. Does that make sense?
Chris R:
Yeah-
Scott Orn:
Go ahead.
Chris R:
Oh no, I was going to say that I would assume that most startups are growing fast and working on... They don't have most of this stuff.
Scott Orn:
And that's why they work with someone like us. So our job is to keep them organized, and keep them disciplined to actually do this on a monthly basis. But there's also a lot of other things like revenue recognition schedules, prepaid schedules, accrued expense schedule, all these like little schedules that sit behind QuickBooks, and the way the accounting has been treated.
Scott Orn:
That stuff is actually stuff that the M&A bankers or the acquirers or even venture capitalists want to see. They want to really like get in there. And then, I think we were talking about this before I turned the mics on, but like the kind of ultimate moment when the deal starts progressing on the financial diligence, a big acquirer or a late stage... Michael, this might have happened in one of your late stage deals.
Scott Orn:
They might have hired like E&Y or Deloitte or Pricewaterhouse diligence team to actually come in and check the financials, and one of the best ways of checking the financials is to recreate the financials from the general ledger in QuickBooks. So they're kind of saying like, "That's cute. It's great that you have your accounting all set up. We're going to actually do it from scratch, and do it industrial strength to make sure that what you've done is actually the truth." Have you gone through that?
Michael Tannenbaum:
Oh, totally. And I think honestly that's the... Sometimes when I think about this is going to get crazy, but blockchain as an opportunity for financial ledger because there's so many people constantly questioning financial ledgers. And if that was an opportunity... If there was a way to sort of in the future, make it so that everybody universally, like all the ways that we interacted in commerce were verified by all parties, then it would be-
Chris R:
So what are the takeaways for founders and CFOs and finance people listening on a call or on the podcast, what should they know about in terms of M&A in your opinion? What can they do to get themselves ready if they want to sell? What can they do just to be aware of the market?
Scott Orn:
Yes, we have a really awesome M&A due diligence checklist on our website, so just type in Kruze Consulting M&A diligence. And so that'll spell everything out for you.
Chris R:
Okay.
Scott Orn:
But the big things are get your financial house in order ahead of time, like we talked about. Hire preferably us, but hire a good accounting firm that can actually do that for you, and support you through the transaction. And then on the legal side, it's really important to have, it sounds again very basic, but all your stock purchase agreements, EIN letters, your cap table, all of that legal stuff that supports the actual capitalization of the company. Have that handy too. It's stuff that's going to be want to be in your data room.
Scott Orn:
And then all the important material contracts that you have. That stuff's going to get looked at in a big deal. Got it?
Chris R:
So it sounds like just the straightforward basics that most people actually don't have together.
Scott Orn:
Yeah.
Chris R:
And that's what differentiates you from-
Scott Orn:
Yeah, well I would say getting all that stuff set up and then there's going to be like a massive amount of data requests or moving numbers. So one example of this is networking capital calculations. So when a company buys you, they buy chris.com. They're going to say like, "Chris, we're willing to pay $100 million and you got like $5 million in cash, but you owe a lot of people a bunch of money too. So we're going to do a working capital calculation, and net out that $5 million of cash and other assets against whatever the liabilities are."
Scott Orn:
So there's a bunch of moving parts on that kind of stuff. There's also questions around like PTO policies, PTO balances. There's just a million nitty-gritty little questions that pop up during this. So having like a trusted advisor is actually pretty helpful.
Chris R:
Are kind of requests that you get pretty standardized across M&A deals? Or does it depend on the potential-
Scott Orn:
They are when you have experience doing them. Because when you go through our checklist, you'll see it like we've kind of ironed everything out, and know exactly what people are going to ask. But when I first started doing this on the accounting side, it was a lot of new stuff or a lot of new requests, right?
Scott Orn:
I mean for the founders often it's their first rodeo. So the Voicea, Cisco deal was Omar's third company he sold, and he sold his last one to Oracle, and this one's getting sold to Cisco. So like having an experienced CEO makes it a lot easier. But when it's your first rodeo, and everyone has to go through their first rodeo once, it's actually is more important to have a good advisor, and someone who can answer and give you some context on some of this stuff.
Scott Orn:
Also, having a good lawyer is super important. Like sometimes you find startups want to go a little bit cheap on their lawyers, but actually finding a good lawyer who has a lot of deal experience, and can be there for you in these kind of times, actually it's cheaper. You don't mess stuff up, and you also don't unintentionally cost yourself on the valuation. You get the best deal possible.
Chris R:
And what would be just a quick example of that?
Scott Orn:
Great lawyers in the Valley? I mean you got Goodwin, you got Wilson.
Chris R:
Oh no. But I mean like what a great lawyer would do?
Scott Orn:
Oh, a great lawyer is actually going to A, negotiate the purchase agreement for you, and make sure you don't get screwed out of some of your working capital, or make sure that Michael isn't tied up for four years when he could only be tied up for two years.
Scott Orn:
There's a ton of stuff. There's just so many nitty-gritty things that a good lawyer is going to do. And they'll also go to bat for you. The opposing counsel often is representing a big acquirer over and over again. So they're always trying to demonstrate their value and make sure they don't lose that client. So they're sometimes like a pit bull. They really come after you. So having a good lawyer to kind of fend that off, look out for your best interests. Also looking out for your best interest as a founder. Sometimes you know the venture capitalists care about the economic return, which is what is their job so they should, but like a founder cares about like what they're going to be working on after. How long is their lock up, all that kind of stuff. A good lawyer will talk you through that.
Chris R:
Are most people, when they're looking at getting acquired, aiming to leave within two years in almost all cases or-
Scott Orn:
It really depends. I think generally speaking, it helps just to have optionality. Like a founder, if you don't need to be tied down, why would you want to be? But most founders, they're getting bought by someone they're actually usually excited to be bought by because that kind of helps the acquirer pay up a little bit more.
Scott Orn:
And they're usually kind of implicitly or explicitly signing on to like lead a division or lead a growth opportunity. So usually they're excited, but also stuff happens after a merger. Like people get fired. The senior vice president who may have underwritten the deal might leave, and all of a sudden you're stranded at this large fortune 500 company without your champion, and you want to be there for four years or do you want to be there for two years? Right? So this is the kind of stuff that you really have to worry about if you're a founder selling your company.
Chris R:
And for the size of these M&A deals, are they all over the board?
Scott Orn:
Yeah, the stuff that we work on, just by nature of representing a lot of startups, they're usually 20, 25 million all the way until 100, 200 million, something like that. If they're getting much larger, like a company like Brex, you're going to have your CFO team doing all this stuff, and so it's going to be... And you probably brought your accounting and finance in house. We still support some really big companies like Comm is one of our clients. So we are doing Comm's accounting, right? You wouldn't think that Kruze Consulting could still be supporting a huge company, but we actually do.
Chris R:
And how big is Comm?
Scott Orn:
I can't publicly disclose their revenue, but they're extremely large, and their a unicorn just like Brex. Right? But most super large companies are going to have a full finance staff that's actually going to be able to handle that. So what the founders out there... This, this podcast is really directed towards the founders who are selling their company from like 20 million to maybe $200 million in valuation.
Chris R:
Also on the more like nitty-gritty financial side of things, does anything come to mind that has blown up M&A deals that should've been preventable?
Scott Orn:
Yeah, well there's sneaky stuff that I've seen in my career in M&A where things like revenue wasn't real revenue because it was one company buying stuff from another company and vice versa, which is actually illegal. So that's revenue that gets disallowed. And that's also just a proxy for a shadiness and something you don't want to buy. But that's why people due diligence, right?
Scott Orn:
There's also times when companies are not great at actually like recognizing their revenue on a gap basis. And so this is a smaller thing. It's not going to blow up a deal, but it could affect the valuation. Sometimes ARR, annual recurring revenue, can be misquoted based on revenue recognition principles.
Scott Orn:
So sometimes companies get a couple of big deals in one month, and the next thing you know, they're quoting that as ARR. But really that revenue should have been recognized over a year, not in just one month. Like the classic 12 months times one month ARR, excuse me... 12 times one month, MRR equals ARR doesn't always hold..
Scott Orn:
And so in that letter of intent stage, maybe I'm sitting across from you, Chris, and then like my company is doing $10 million in ARR, $10 million in revenue. Where really that person multiplied a one big month times 12, right? And then the next month is back down to half that. So those are the kinds of things that blow up. Now that's again why people due diligence. That's why having your financials is so important.
Scott Orn:
But that's the kind of thing where if you're getting into an M&A conversation as a founder, you always want to be super honest because getting ahead of those... They generally want to buy the company, and they usually want to buy a tech company because the technology and the people, they're not usually buying startups just for financial performance. But if you start hiding the ball on financial performance, that's indication that you're not trustworthy enough, and they don't want to bet on you. Because again, whoever's buying you at that company is underwriting this transaction and putting their name on the line. They don't want to take that risk if you're going to
Michael Tannenbaum:
But you do have to balance it with giving out too much information. There's a Portuguese saying that we say here, which is "Don't ask me to take off all my clothes just to tell me you don't like my nose."
Scott Orn:
Very true. Very true. Very true. The other thing you have to do, this is like my age-old one-
Michael Tannenbaum:
Do you like my Portuguese expressions? I've learned this from a Brazilians.
Scott Orn:
Another little saying I like in M&A is, "Someone will always walk away from a deal at least once." There's a dance that happens. Kind of like you're alluding to. Sometimes they acquirer wants to test the target company, and see how bad they really want to sell. And so maybe they just walk away for a while. They walk away for two weeks just to see if you're calling them three days later, begging them for another offer. And sometimes the target maybe doesn't feel like they got enough money in the offer. And so they're going to walk away for a couple of weeks.
Scott Orn:
So there's this little dance that happens in literally every M&A deal I've ever seen, one person walks away for at least a couple of weeks, and then they come back.
Chris R:
Hmm. Interesting.
Michael Tannenbaum:
Interesting.
Scott Orn:
Has that happened in any of your fundraising rounds?
Michael Tannenbaum:
I think that's true. It does sort of happen. Yeah, it does. Yep. Well, thank you.
Chris R:
Yeah, thank you so much for you coming on.
Scott Orn:
My pleasure. How about a unsolicited, we love Brex. You guys are growing super fast and our client base and it's been awesome working with you. And I think sometimes people don't know this... You guys have a great product, great rewards, but we love you because it makes our accounting easier. And because Kruze is on a fixed fee with our clients, making us more efficient is really powerful.
Scott Orn:
And so one of the reasons we promote you guys is actually the... which the world doesn't know, but your engineers know... is that the technology is really good and so that makes us really fast.
Michael Tannenbaum:
Thank you for saying that.
Scott Orn:
So kudos to the engineers at Brex. Thank you.
Michael Tannenbaum:
Yeah, for sure. I do the payroll so kudos for sure. They deserve it.
Scott Orn:
They're earning it.
Michael Tannenbaum:
But cool. No seriously. Thank you for saying that.
Chris R:
Yeah, thanks so much.
Scott Orn:
Awesome.
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