Tailoring Due Diligence: Working with Business Founders and Established Strategies
Strategic buyers often purchase Companies from the business founders who are looking for an exit plan for a variety of reasons, including:
Retirement
Selling to pursue other business interests
No family members present or capable of taking over operations
Financial hardships, including divorce or health issues
Alternatively, strategic buyers also purchase established Companies operated by an experienced executive team, that may or may not have a financial interest.
The diligence performed in each transaction is similar, although there are some distinct differences that should be considered. A business founder has been involved in the Company since its inception, or has been involved in the business for a period of time prior to ownership (i.e., son acquires business from father). These founders are often emotionally attached to their Companies, and the selling process, although most likely necessary depending on the situation, can be a daunting psychological exercise. For strategic Companies with an established executive team, the diligence process can be stressful, but the team is often not as emotionally attached to the business as a founder may be. It is extremely important to consider these dynamics when acquiring Companies and working with mergers and acquisitions consultants.
In this interview, Ryan McCaslin – Transaction Advisory Services Partner at EHTC – speaks with Brandt Kucharski – Former GrubHub Chief Accounting Officer and Current Ethos Life Chief Accounting Officer on the importance of tailoring diligence expectations depending on the seller dynamics.
RKM: Hi Brandt. Thanks for joining me today. Before we get started, I will give the audience a background of my career and then let you tell us a little about yourself and career history. I started my career as a financial statement auditor and after a few years I was looking for another role in the accounting industry. In 2004, I was able to work on several mergers and acquisitions transactions and have been working in this area ever since. I was previous a Partner at a large national accounting firm, and recently joined EHTC to lead its Financial Due Diligence practice.
BWK: It’s a pleasure to be here today. A little of background on myself as well, I started my career in public accounting like many of us in the profession. After a handful of years, I had the opportunity to join a startup with a few million in revenue and less than 50 employees by the name of Grubhub as its Chief Accounting Officer (CAO). While there I was able to scale Grubhub from less than 50 people to 4000 employees and $10 billion in gross sales, leading their IPO in 2014 as CAO and working on 15 + merger and acquisition transactions. I was part of the executive team that sold the company to Just Eat Takeaway for $7 billion in June 2020, and I left the Company a year later. I am now CAO of a $500M venture capital backed Company by the name of Ethos, disrupting the world of life insurance.
RKM: Tell us more about the mergers and acquisitions projects you worked on with GrubHub. When and why did GrubHub start doing acquisitions? Were these all acquisitions from Company founders or from established entities?
BWK: During my tenure at Grubhub we acquired 15+ companies. The journey of mergers and acquisitions really began in late 2014/early 2015 when Grubhub entered a brand new product offering, which was Grubhub Delivery. Prior to two acquisitions we did in early 2015, Grubhub didn’t offer third party delivery. We acquired two Companies, Restaurant on the Run and DiningIn, to spearhead our third party delivery product offering.
The two businesses we acquired were all founder led and were local businesses in Boston and California that were delivering for large restaurant chains on a local basis. We were able to leverage 15+ plus years of experience to rapidly launch Grubhub delivery using the expertise we acquired.
RKM: Thank you for that very informative background, Brandt. How did you handle the due diligence process for these acquisitions and did the process differ when buying from a Company founder compared to an established strategic Company?
BWK. Great question, Ryan! Grubhub partnered with yourself on 15+ deals. We wanted to know the asset we were buying was as consistent as reported, and didn’t have any hidden landmines. I think with founder led businesses, we had to spend extra time on the financial records given they either were not audited at all or were audited by a local firm that we didn’t have a good sense of their overall reputation.
As you mentioned, working with Company founders can be a different experience from working with an established Company with executives with no ownership interest. Having patience and empathy is important. Knowing that it is most likely very difficult for the founder to be selling the business they founded from scratch is an important aspect to keep in mind. Developing a good personal relationship with the other side, with the understanding that diligence needs to be performed to GrubHub’s satisfaction, was key.
RKM: I completely agree. Sometimes founders don’t fully understand the diligence process and it is important to be patient and help them feel comfortable during the process. With that said, what are your thoughts on choosing the right service providers for diligence?
BWK: It’s important to have a partner who understands your business and the unique risks that you are looking to mitigate with any mergers and acquisitions deal. I always like to find a partner who I know and trust, and they understand my working style and what we need to be comfortable to complete a transaction.
RKM: Thanks for that, Brandt. I always enjoyed working with you and the GrubHub team, and definitely learned a lot on how to work through the emotions with Company founders during diligence. In closing, do you have any other comments the audience should know?
BWK: I really want to reiterate how critical financial due diligence is when acquiring any meaningful business. Giving the audit committee and board comfort that the investment you are making is free of landmines is critical. No different than buying a house and getting an appraisal, any major deal needs diligence. I have really appreciated the 10+ years of our relationship working together, and you have really added a ton of value to both Grubhub and Ethos.
RKM: Thanks for speaking with me, Brandt, and EHTC looks forward to working with you in the future.
BWK: Likewise.
EHTC serves the needs of individuals and closely held businesses in the West Michigan area that share their core values, who are trustworthy, entrepreneurial, collaborative and aspire a long-term advisory relationship. With everything EHTC does, the firm strives to keep the correct balance of hard work and fun, while helping clients and team members achieve their full potential.