March 10, 2023

E104: Marc Morgenstern, Author, Mentor and Capitalist: Leveraging 45+ Years Of M&A Experience - How2Exit

E104: Marc Morgenstern, Author, Mentor and Capitalist: Leveraging 45+ Years Of M&A Experience - How2Exit

Marc's new book is "The Soul of the Deal-creative frameworks for buying, selling, and investing in any business". He's the Mentor-at-Large for UC Berkeley's $100MM seed fund and $50MM Opportunity Fund and their portfolio companies, and taught...

Marc's new book is "The Soul of the Deal-creative frameworks for buying, selling, and investing in any business". He's the Mentor-at-Large for UC Berkeley's $100MM seed fund and $50MM Opportunity Fund and their portfolio companies, and taught Berkeley's "Street Smart Startups" course.

He Co-Founded software company Within3 which was sold to global PE powerhouse Insight Partners. As Founder and Managing Partner of Blue Mesa Partners, he was the first outside investor in OfficeMax, CadenceCounsel, Capstone Partners, LoungeBuddy, and Divergent3D.

Marc has done 100's of M&A and venture capital deals as a seller, buyer, investor, C-Suite, Managing Partner, deal lawyer, Director, or investment banker.

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[00:00:00] Ron Skelton: Hello and welcome to the How2Exit Podcast. Today I'm here with Mark Morgenstern. He is the author and mentor capitalist. And, I'm looking forward to really learning a lot from you today. You've been in this space for quite a while. Thank you for being on the show, Mark. 

[00:00:13] Marc Morgenstern: Thank you. It's great to be here. And by quite a while, you mean 45 plus years? Yes. It's been quite a while. 

[00:00:20] Ron Skelton: I turned 51 yesterday. So, you've been in this space, for probably all my, most of my, teenage and adult life, right. So, that's incredible. There's a lot of value there. I really respect that you've been in this space that long and I'm looking forward to learning some stuff. You recently, had a book out, and we're gonna talk a lot about that, but I think we should just start off with, like, I do everybody else, the origin story. How did you get into this space? We were talking earlier, it's not like you were in a lawyer for a while. Like you're involved around the universities, that type of stuff. Tell me, how did you get into this space and how did you end up in m and a?

[00:00:51] Marc Morgenstern: I would tell you, I got into the m and a space when I started selling encyclopedias door to door, which probably isn't most people's [00:01:00] answer, but you'll understand that. So what's fascinating about selling door to door is it's almost every skillset you use in any transaction, anywhere, how does an m and a deal start? Somebody has to have initiated a conversation. That means somebody has to have been talking with somebody. Selling encyclopedias door to door, the first thing is, can you get someone to open the door? Then can you get in the house? Then can you start listening? Then can you start looking around and seeing, they have this kind of a picture.

[00:01:30] They have a Yankees Pennant. All the things you do in m and a, which are sort of explore and illuminate. So you can figure out who is this potential customer? Who is this potential counterparty? And you learn a lot of the lessons of the value of what, what motivates people to either buy or sell things. And to be clear, I don't endorse these, I just have observed them. But most people make decisions out of ego, fear, [00:02:00] time, pressure, greed, perceived self-interest. And so you learn those things. You can use them like a Machiavelli for pretty bad reasons. You can use them like Dale Carnegie for how to influence people, which is what you're trying to do.

[00:02:17] And then just progressively scooting through a lot of stuff very quickly. Cuz as my wife said, I describe myself as eclectic. My wife describes me as unfocused. 

[00:02:29] Ron Skelton: I get that. Yeah. 

[00:02:32] Marc Morgenstern: In a fast forward, part of the reason that I'm pretty comfortable in an m and a circle is I've been the buyer. I've been the seller. I've been the investor. I've been the CEO. I've been a director. I've been the lawyer for the buyer, seller, CEO, director. I've been the investment banker. I find it very easy to look through the eyes of everybody at the table because I've been there and I know what hurts and I know what goes easily and I know what words make you go. [00:03:00] So I actually started doing real estate syndications as a lawyer, and part of the reason I loved real estate syndications was they were developers. And developers, sort of like entrepreneurs are very emotionally lopsided people. They're not in the middle of the bell shaped curve, strong personalities.

[00:03:23] They may be wrong, they may be right, but they have faith in their conviction or they couldn't be developing it. By the way, that's also the same. I love musicians. It's the same. So an insurance company buys a finished real estate building. They know what they're buying. They can see that there are leases, they can see that people go there, the parking lot works. But the developer who developed that building saw a blank piece of ground, or maybe there was something on it and they had to get rid of the blank piece of ground. So they're sort of dreamers who have to believe their own dream [00:04:00] and then sell their own dream to all the places you need capital. Bank, equity, your own partners.

[00:04:08] That's what musicians have to do too. They believe in the strength of their song. They believe in the strength of their voice, but you can't logic your way to it. You have to believe when there's no reason to have faith other than your own conviction. And those sort of characteristics to me are the same reason I like both of those groups. Is why I also love entrepreneurs, right? Because I can never tell you if the business is going to work. I'm usually investing when there's a person with an idea. And my daughter's a VC in DC and she's a later stage vc. And she said, well, daddy, how do you possibly decide? And I say, well, I evaluate the person, and then I'm betting on the person.

[00:04:53] There's no stats, there's no trend, there's no graph. When you do that, and it's successful, [00:05:00] every investment you make, the goal is to exit it. And while in theory, you might exit with a public offering, that is such a minuscule chance, so those markets are so fragile that I always assume it will be a sale to a strategic buyer. In today's world, it's just as likely to be a PE buyer. But for my mental sanity, the second I'm starting it, I'm mentally selling it to a strategic buyer. And that's very hard for the CEO, who they're desperately trying to build something and I'm already mentally selling it for them. 

[00:05:36] Ron Skelton: When I create something, I do that. I start looking, okay, I'm gonna build this, and if I build it, who would buy it? And then I start looking to build something that would be worthy of their purchase. And my thought process is if I build something worthy of that that company's purchase, then it's usually one of the top guys like, oh, well I expect Google to buy the software company. Probably not gonna be them, but if I build something worthy of them [00:06:00] purchasing, it'll be valuable to other people in the space that are lesser, lesser companies.

[00:06:04] Marc Morgenstern: And the other tension there is, while you always have to be conscious of that, IT is a little different than any other space, like we didn't build Office Max knowing who we're gonna sell it to. So building a business that's a great business that if you never sold it, you still wanna own it. But mentally, particularly if you have outside investors, that's the difference. If Ron owns it by himself, he doesn't ever have to sell it. If he wants to own it forever, he owns it forever. The second you've taken other people's money, their expectation, unless they're your in-laws, is that they will get back their money plus a lot more at some time in the five to 10 year range.

[00:06:46] So they're your partner, but they're also part of the attention of, if you took their money, you're gonna sell the business and get 'em liquid. 

[00:06:55] Ron Skelton: Yep. So you took this knowledge, you put it together, and you wrote a book. [00:07:00] Tell us about the book. Give us kind of some of the key lessons inside of that and we will, see where that conversation takes us.

[00:07:07] Marc Morgenstern: I'll start with, two maxims, which to, well, maybe three maxims. It depends how long I talk here. The first one is, which is probably 40 years old and is the universally most, it's people respond to it almost immediately and intuitively cuz it applies across your whole life. So the maxim is an expectation unarticulated is a disappointment, guaranteed. Right Now that sounds kind of someplace between simple and simplistic, but it isn't because people tend to assume that somebody else knows exactly what I want. They heard the words the way I intended them. We've actually communicated, right? And we're going to a common goal.

[00:07:53] That's very rarely true and people are reluctant even to set their expectations. I want [00:08:00] this deal to be done by the end of September. I have a reason for doing it. If we get it done by September, great. If we don't, we don't. The second would be, and I don't know if we mentioned it, but I did run a law firm. I was a deal lawyer for many, many years. I work with lawyers every day. I love lawyers. So it's the following maxim is not intended to show, be disrespectful to anyone, but remembering that a huge part of my philosophy is from the Grateful Dead, and jam bands and people who are creating things in real time that are ephemeral and may work and may not work.

[00:08:36] Jam band musicians are listening to each other intently. Now think about how lawyers listen to things. Cuz you work with lawyers all the time too. They're training is to listen, to figure out why what you're saying is wrong. To distinguish it, to debate it, to conflate it, but they're listening with a set of ears that is closed as an [00:09:00] advocate. A jam band musician is listening to, wait, what is that rhythm guitarist doing? They just changed something slightly. Is that something I should respond to? Is that something I can build on? And by the way, if I do that, do the drum and the bass also do that? And are we sort of transforming and shape shifting what we're doing? So the maxim is deal makers, I call them deal jammers, right?

[00:09:27] Deal jammers need to learn to listen. Like jam band musicians, not like lawyers. And you're not gonna win a debate if you're the buyer. You're not gonna win a debate with the seller. . The seller's not gonna win a debate. You're trying to listen until, what does everybody really want? What does everybody really need? How much of it can I do and how much of it can't I do? But you're listening to build, you're not listening to tear down. So that's a, that seems to be less than people just don't, it's not comfortable for [00:10:00] them. And part of the genesis, even of that goes back to one of my literary heroes, George Bernard Shaw, who's not usually mentioned in a ideal context, but his quote was, the greatest delusion about human communication is that it has occurred.

[00:10:20] And all of us in our daily life, I can tell you how many times my wife has said something and she thinks the implications are obvious, and I should already be out the house doing whatever she wanted me to do. And I thought, she just mentioned that there was a grocery list on the counter. I didn't get what she was trying to send. And all of us don't get something other people are trying to send. We're not listening. We don't know the vocabulary. So if you listen to learn like a jam band musician, you're trying to make sure you understood what somebody said. And then if they've articulated an expectation, at least you know you're consciously trying to respond to it.

[00:10:58] Or you're consciously [00:11:00] regretting it. As opposed to they have an expectation, you don't know what it is and therefore you're not likely to satisfy it. So it's a pretty practical, some people hear this as altruism. I just hear this as practicality. It's like, you hit it, by aiming at it. 

[00:11:16] Ron Skelton: You and I see eye to eye on this. Every speech I gave, every, like, I did this thing for a big, online virtual summit type of thing. And part of my lead generation, like think how to source off market deals is talking about communication. And I didn't have time to go into what we, what I refer to as active listening. I had a big, the thing on there says, Google it, take courses on it, learn it. It's the most valuable skill you can get inside of this space. I hold meetups and other stuff I'm meeting and other acquisition entrepreneurs, and every time somebody goes, I just wanna know why this deal fell apart.

[00:11:46] Before they say anything, that's communication, unmet expectations. Like how do you know that? Because that's where they all fall apart, right? I joke often my favorite joke is, what's the number one cause for a divorce? And everybody's like, well, I don't know. Well, [00:12:00] marriage is the number one cause for a divorce, right? Because you can't get divorced unless you're married. The number two cause for divorce is unmet expectations. It's a felony in communication. Both of you went into the relationship or stayed, I've been married now for over 15, 16 years, but most of you went into the thing with a set of expectations in your own head.

[00:12:17] You didn't clearly articulate to the other person, and you're let down when it doesn't occur. Well, how can you be let down when something doesn't occur when you never truly communicated Well, and that happens in deals all the time. Each party goes into it or starts to develop their own, their own expectations of how this is gonna go. And if you don't learn how to articulate that, communicate it, and have them understand it and more importantly, understand where they're trying to get to and get them, then it's just not gonna get to the other end. 

[00:12:44] Marc Morgenstern: Yeah. So another maxim in the book, the Soul of a Deal, is people, not spreadsheets are the epicenter of every deal. And that isn't what in general investment bankers or [00:13:00] lawyers or accountants, they don't want to hear that because that's not objective. That's a question. Does two and two always equal four? The same deal presented with 22 people with apparently similar circumstances, you will not make half the deals because you didn't understand that the seller didn't really want to sell their business.

[00:13:20] They really wanted to retire, and they didn't know how. The seller didn't really wanna sell their business, they wanted some liquidity, and they wanted to stay on and run it for 10 more times without being interfered with. They wanted to sell it because they wanted to see their name in the Wall Street Journal and have everybody realize how successful they were. So money is always necessary, but it's rarely sufficient. And so the spreadsheet analysis in both directions tend to focus on that piece of it, and that is just a piece of it. Always. People I also think are uncomfortable just saying to somebody, Hey, I do wanna sell you the business. I wanna [00:14:00] run it for five more years.

[00:14:01] Are you gonna interfere with me? Well, as opposed to, yeah, I'm sure it'll work out and the person will like me and I'll keep, why would you keep that quiet? First of all, it's not fair to you, but it's really not fair to the other party. And that person, I'll just say by way of vocabulary and now I'll identify what I regard as a genuine mistake. People call their counterparty the enemy or the other side. That's not what they are. They're their counterparty. And if the deal's successful, you're all gonna be in it together, right? So lawyers sort of think that the deal closes when the piece of paper is signed and money changes hands, great. Their job was done.

[00:14:45] Everybody else's job is just beginning. And that's why how you negotiate something and who you negotiate it with and what words you use and what inflection you use, they have ripple effects for forever. And I [00:15:00] really do believe that the half of m and a deals that fail, which is the number of people use pretty casually, half of that half is, the negotiations themselves were toxic and the toxicity just carried over. And nobody ever heard what anyone was saying at any moment in the process. And then everybody's like, I don't understand that. I look at this two plus two equals four. Why is it equaling three? It's people. It's always people. People have memories. People have feelings. 

[00:15:31] Ron Skelton: What do they say? We all make our decisions based off emotional. Just we offer emotions and justify it by logic. Right? Your decisions truly made by the emotional impact. The rapport. Did you like the guy? Did you not like the guy? Do you feel safe handing your business over to him if you're selling, and then it's only justified, you back it up with logic. The numbers do make sense and this happens in every area of life. People, I would say the majority of people anyways, it's not, nothing's true a hundred percent. The majority of people, they make emotional based decisions and they [00:16:00] justify them with the logic they can come up with.

[00:16:02] Marc Morgenstern: So I expressed the same thought. This was going back to encyclopedia selling. Lead with emotion, close with analysis. So if I translated that into a specific, I'm standing in a doorway and, extolling the virtues of an encyclopedia, or if it's the buyer extolling the virtues of their company. If I opened that encyclopedia and gave it to the person and said, what's your favorite thing to think about in the world? Well, now they're in possession of it, so it's now it's already theirs. Right? If I take it back, they've lost something. But more importantly, they always open it to a pretty picture of something they like.

[00:16:41] It's the Pacific Ocean, it's a rainforest, it's a giraffe, whatever it is. It brings them joy and emotionally they've like, oh, well if this thing, which you think of as a book, but to me it's a joy conveyor, I'd love to have this. Now, how can I [00:17:00] analytically justify it? But the sale was made with emotion. You go to a pet store, have you ever. Are you a pet person? Did you ever go to? 

[00:17:08] Ron Skelton: I am. We're actually on the market for another dog. We had our last dog for 19 years before moving here. We just, he was getting too old. He couldn't, couldn't even give up with, and move around at 19 years old. He was a little chihuahua beagle, mix without whining and stuff. He didn't make the trip here with us. So we're seriously into animals. We love it. My little daughter, I have a seven year old that you gotta warn her to, you can't just run up and hug every dog that walks by, like the German staffers or a pit bull, walks by and she wants to go hug it, and pet it. So, yeah, we're animal people. 

[00:17:37] Marc Morgenstern: Okay. So if the three of you went either an adoption league for animals or a pet store, cuz I'm not pushing one or the other, I'm just saying you're in a place where you can get a dog. A good seller of their business will hand that dog to your daughter. Confession is the, is nine tenths of any sale. [00:18:00] It is now in her head. She has named the dog. First of all, it's her dog. She loves it. The dog love it. Hand the owner says, I need to take the puppy back unless you're buying it. And your little girl says, oh daddy, daddy, you can't take away my puppy.

[00:18:17] Cause it's hard to become her puppy. And then whether you wanted that puppy or not, you're not gonna break your little girl's heart, you're gonna buy the puppy. Right. The owner lets you feel possession. The owner let you feel joy. The owner established a set of circumstances where if it's taken away, you've lost something. And you know, cause I know some of the things you've talked about and read, but whether it's thinking fast and slow or not, pretty much everybody agrees it takes, anywhere from two and a half to $5 of gain, to equate to $1 of loss. Takes way, way, way more gain. So if your daughter is [00:19:00] experiencing loss, you have to do five times that gain in order to even neutralize the set of circumstances.

[00:19:08] And that's what one of the, you used the term cat and mouse before. Well, all of buying and selling, you're on one side or the other. Someone's got leverage today. Someone's got leverage tomorrow. The circumstances have changed. Everybody should be evaluating who's got the leverage. Maybe I would've said no yesterday, but today I better say yes more quickly. Cause it's not going the way that I want to or it is going the way I want to. But it's, one of the things that's different between selling encyclopedias or, and I'm sure you've read Chris Voss really good book, Never Split The Difference. So in both, encyclopedia selling, or Chris Voss, FBI hostages, those are very short term encounters. Right. Encyclopedia is maybe an hour maximum. FBI hostage set of circumstances could be an hour to two days, but it's short. [00:20:00] And so I sort of, the term I created is, I think of the bonding and rapport that are established, those circumstances as, tactical empathy.

[00:20:09] Right. It doesn't have to be deep, it doesn't have to be super sincere. It's not gonna be challenged, it's kind of superficial. If you're in a deal with people or trying to get in a deal with people, that's days and weeks, if not months and sometimes years. And there are good days and there are bad days. So one of your goals, my term is to establish sustainable, genuine, deal empathy. It's gotta be sustainable and it's gotta be genuine. Cuz if it isn't genuine, people are gonna figure it out. The third time you, say, oh, you're like the best looking person I ever met. Okay. The third time you say that, they're gonna say, really not so much. And now I don't trust this lady at all if she's gonna, right. So it's a different kind of bonding and rapport, but when you get down to the building blocks [00:21:00] of it, it's the same building blocks, but m and a is just a much more sophisticated sales and influencing exercise. But you can trace it all the way through if you want to.

[00:21:11] I'm just saying I can trace it very comfortably. A thought process for being eight years old when I made pot holders by hand, talked my sister into selling them with me. We went door to door to sell them. I loved it. I thought it was great. She stayed on the sidewalk and just didn't wanna have, pretend she had anything to do with it. But that's all you do in life is influence, sell and negotiate. At least that's how I look at it. 

[00:21:36] Ron Skelton: So I love the difference between that short term rapport, that tactical empathy. As you talk in the Chris Voss' book and your like, this is a long term relationship. It can't be superficial. It has to be real. There's been, at least once in my mind in the last two years, probably twice, where I just walked away from something that might have been a decent deal, but I did not like and could not get along with the owner. I didn't like their [00:22:00] personality. I didn't like the way they treated and talked to people. And both those circumstances, the owner wasn't ready to leave right away. And be honest, I didn't wanna be the operator, any other one of those either. So whoever I brought on would have to work with him for months and I thought, who could I put to work with this guy?

[00:22:15] Right. It's funny if you looked and it was very obvious on one of the guys, if you looked at his hiring practices, the guys that work for him had been there for 15 or 20 years, but almost everybody he's hired either made it 15 or 20 years or two to three weeks, right? It was one of those, they didn't make it the long run, right? There was a lot of that. And I think it's just because he's very polarizing on that case. The long-term relationships are critical inside of these deals. My favorite thing to do on their first call or two is somebody is like, well, what are you trying to, if they ask me like, what am I trying to do?

[00:22:49] I said, this one, I'm just trying to figure out who you are or what you built, where you wanna get to and if I can help you get there. And if I happen to be the buyer, that's beautiful and if not, maybe I know one. I know a lot of people in this [00:23:00] space, so let's figure out what you're trying to accomplish, where you're trying to go, and, let's see what I can do to help you get there. And that's the whole mindset I walk into the whole, the concept with. 

[00:23:10] Marc Morgenstern: First of all, I agree with all of it. It's also why my first question to anybody is, please tell me your life story. I've always found that the fastest, most efficient way to get inside someone's head. And if they start with, well, I'm the vice president of something, I say, no, no, no, no, no, no. I can see that. I've read your LinkedIn profile. You grew up someplace, you had siblings, you didn't have siblings. You liked them. You didn't like them. You had parents. You did or you didn't. You did or didn't go into college, you did or didn't go into service.

[00:23:39] Talk me through the what's, but more to the point, talk me through the why's. Why did you do that? What did you choose from? Who did you talk to in your decision making process? If you can encourage somebody to tell you their life story, and I always preface it by saying, this isn't a test, this isn't an interrogation. Curate your [00:24:00] story any way you want to. Don't tell me something you don't wanna tell me. But you begin to get a sense of how somebody thinks and who they are. I did something because it was the best thing for my family. Okay. That tells me one thing. I did something cuz it was 12% more money than I was currently making.

[00:24:17] That tells me something else. Not necessarily good or bad, but it tells me something. And since people like, oh, I happen to hate talking about myself, which puts me in way off in the social deviant scale, but most people like to talk about themselves. It's one of their favorite topics. So while they're sharing their stories with you, they're also getting comfortable, they're also getting relaxed. They're also getting, feeling good about themselves cuz people don't tend to curate the part of their life they'd like to forget. Again, I go back to, people could look at this as Machiavellian, or you could look at it as Dale Carnegie, or you could look at it as I'm genuinely interested in who you [00:25:00] are.

[00:25:00] Because I'm trying to figure out if we could hang out for a long time together or we couldn't. So there are multiple things going on simultaneously, and the life story is just an easy tactic to elicit that kind of information. 

[00:25:16] Ron Skelton: That we we're circling in this same thing, it's that deep rapport, that human connection. A lot of the people that come through the, that I interact with and the meetings we hold and the other acquisition entrepreneurs, they just haven't got that yet, right? It is about the numbers. Like the first call, they go, well, can you gimme your balance statements, your, income statement? And when you ask, in the real estate world, I was often brought in to do, two people. I own the RIO for a little while, the Real Estate Investors Association. And one of the common things you have to do is be the parent, right? Two people are arguing and you want your members to stay and get along and work with each other.

[00:25:49] So you have to do the arbitration, like the, have the conversation. And more often than not, one of the person goes, he doesn't even know why I did this. Like, he doesn't even ask. Right. Same is happening, I'm seeing [00:26:00] in this space where new guys are trying to buy a business. They say, Hey, can you help me? This is going sour. Can you talk to this business owner with me? And then I have a call with myself, with the business owner, and it's like, the guy's never even asked me why I built this thing. He just jumped into my number. He just wanted to make money. He doesn't know why I want my employees not to, to have a, I think it's a misstep, such a big misstep for people new in this space to think this is a numbers game. Like you're looking at balance sheets and stuff. 

[00:26:24] Marc Morgenstern: I agree. And there's a reason that I called the Soul Of The Deal. Accidental words. Because it's also, to me, it's just discourteous to somebody to start with a financial statement like, you are nothing but your numbers. No, you're a person. You built this, you sweated it. You had to have horrible nights in the first couple years, cuz everybody does. Right? Your name's on the door, your blood's on the floor. It means something very different to the seller than it means to the buyer. And I think that inexperienced buyers can't appreciate that. [00:27:00] If you've never been a seller, it's very hard for a buyer to understand the, but you Miss, Mrs. Or Mrs. Buyer understand that if I sell this business, I don't know how to introduce myself to people the next day. Do I say I used to own such and such? I used to be the CEO. People used to return my calls because I hired people and I fired people and now I'm just me. So I used to be somebody, right?

[00:27:26] And everybody has that, what am I going to do the day after closing? And some sellers are just terrified. By that I mean, legitimately they've been doing their business for 25 years. They know how their life works. I get up, I go to work, I come home, I take two days off over the weekend. I play whatever it is I do, I've had a rhythm to my life. And a sale completely rips apart that rhythm. No matter how it pretend that the owner says, I've gotta do everything you want to adjust the way you want to, I'll give you all the money. [00:28:00] But in their head, they still have somebody else's that they've gotta take into consideration that was never there before.

[00:28:06] And if it's anything different than that, which is most of the time, not a lot of people are gonna say that to you, then it's very, very, very different. And one of the things that I think just tears people apart is I told Janie that if she did this job right, she'd be here for forever. Except now it's owned by somebody else. And I can't deliver on my promises. I can't guarantee my people that they'll be treated the way I've always treated them. And that's why they've been loyal and that's why they're here. And that's really hard for people that I think of as sort of the best and best hearted sellers. It starts with their concern for their folks.

[00:28:46] Ron Skelton: You look at it and that's why a lot of times you see these acquisition entrepreneurs, especially in the software space, and so for the exit early. I'm picking on software cuz I know there's a lot of early exits. You'll see a private equity firm buy a software company and then two or three years later, the guy that sold it, buys it [00:29:00] back. They're more pennies on the dollar. And you asked, I've interviewed a couple of guys, I said, well, why did you buy it back? And they're like, well, it's a beautiful idea. They were destroying it. And I put a lot of time and energy into it and I know I can fix it, put it back where it should have went.

[00:29:13] I was like, but you sold it cuz you were done with it. Right? Well, I was at the time and I thought they were gonna carry it on and grow it and, take it to, it's their child. I thought they were gonna develop it into what it should be and then they didn't. Now I want to develop it back to where it should be. And it happens often, right? So every seller has that thought process going their head and what are they gonna do with this and where's it gonna be in five years? 

[00:29:35] Marc Morgenstern: So you may ask yourself, why don't they articulate their expectation so they're not disappointed and ask the pretty simple question, what are the plans for the business? It's a pretty easy question to ask. I think a lot of sellers either think it's rude or it's none of my business. I mean, it's gonna be theirs, or they're uncomfortable or worse, they just assume, well, they're gonna [00:30:00] run it just the way I expect them to run it. I can't see any positive that comes out of not stating your expectation or asking it. I don't know what to expect. What do you think is gonna happen here if I sold it to you tomorrow? Let's play a what if game, right? I'm not telling you, you're buying my company tomorrow. I'm just saying if you bought it tomorrow, talk me through the first 90 days. What would you be doing? Who would be involved?

[00:30:27] How have you handled it before? Have you done this before? Have your lawyers done this before? Have your accountants done this before? Am I dealing with a counterparty who if they tell me something, I have some reason to believe what they're saying, as opposed to it's a first time buyer with a first time buying lawyer, with an accountant who has been pretty much a slip and fall accountant, they're not gonna tell you something untrue on purpose. They're gonna tell you something untrue. Cuz they don't know, and they don't know enough to know that they don't [00:31:00] know. If it's somebody who is a good buyer, they're gonna say, Hey, well before the closing, two weeks before it starts, I'm talking to your HR people.

[00:31:09] I'm trying to find out if there are any problems and sensitivities. They're talking to my people. My operations people are talking to your operations people. So when we get to a closing date, we determine, yeah, there really is interoperability. We're not surprised when there isn't. That integrative process starts for so many buyers only after the closing. And that's just, I think one of the worst mistakes buyers can make. The seller's mistake is not asking the question, cuz if there's not a good answer, then you sort of think to yourself, well, if they can't answer that question off the top of their head, either, they're not as deep into my business as I think, or they don't know how to integrate a business and they're operating on their own expectations and I don't know what [00:32:00] they are.

[00:32:01] And so the all you do is just say why, for what? I mean these are not complex questions, Ron, but people don't ask them. And I have a friend who tends to say he's puzzled. So I'm puzzled by why people don't ask questions in a set of circumstances, which may be the most consequential of their life, other than getting either married or divorced. This is their life. So you should be asking more questions than you'd ever ask any place. And by the way, if a buyer finds that intrusive or off-putting, then that also tells you something. Well then maybe, if you can't tell me, then maybe you're just not the right buyer. It isn't that I don't wanna sell, it's that you've helped me figure out that you're not the type of person I want to sell my business to. That's very useful. 

[00:32:51] Ron Skelton: I get it. So we've talked a lot about the human element of this, that, it's a transaction, it's a business transaction, but it's a human interaction. And one of the things I [00:33:00] do want to touch bases on is like, where we're moving to in the future. Where we're at right now even. When you meet somebody in person, you get that warm handshake. You get to figure out whether or not they have a firm handshake. Was it sweaty? Was it limp? All the different, their posture, their mannerisms. Right now we're in a world of whatever referred to as talking heads, right? Like we're doing right here.

[00:33:20] You see me from the, second button up, and I get to see you from the second button up. There's no indication you can't, like I talk with my hands a lot. On this particular camera setup you don't get to see that, I tend to, wave around and talk. What's lost in this world of proximity, being in the same space as some other, another human being in these deals. Do you believe, and I see mergers and acquisitions deals go to where they're almost at the closing table before they're physically in the same room. Right. How do you see technology impact in this space? 

[00:33:51] Marc Morgenstern: Yeah. A couple of thoughts, which may take me a minute or two to answer your question, but there's a reason I'm saying in this order. So going [00:34:00] back to selling encyclopedias, one of my maxims is, propinquity counts. This is just what you said. I'm with somebody, I can engage all five of my senses. I can see 'em, hear 'em, touch 'em. I can smell, if there's something going in the kitchen. I listening to television or radio, they listening to rock or jazz or hip hop. I'm getting a more 360 degree view of the human being. Right now, what you and I are experiences is what I call people as pixels. And I'm pretty sure people aren't pixels. Now, you and I both know that. Pretend you're 22 and then the next 10 years of that generation, they actually don't know that pixels aren't people.

[00:34:49] They think that they are. They think that texts and emails are actual dialogue. And you and I both know that texts and emails are sequential [00:35:00] monologue. No one's listening. No one's really hearing how are you gonna get to any position other than what everybody said they started with. I think that all businesses, every business, every industry is gonna have to learn how to teach all those people skills. Because the sort of informal apprenticeship that you and I had by just walking around and being with people is less likely to happen. I'll also say, since I distrust that kind of digital communication completely. I have still many times said to people, well, we should get on a plane and we should fly to Atlanta, and we're not gonna tell 'em we're coming cuz they might they know, and we're gonna show up. And we're gonna stay there until we're done. If I ask permission that they're gonna say, what are you talking about? This is one of those, I'd rather you know, beg forgiveness than ask for permission. You go there, and now they've become people and you use the word proximity. I said propinquity. It's the [00:36:00] same word right? 

[00:36:01] People will say things in an email that are nastier and harsher than they would ever say on a telephone. People will say things on a telephone that are nastier and harsher than they would say on a zoom where you can see them. People say things in a zoom that are nastier and harsher than they would say in person, where they're still gonna keep seeing you for six hours. So there's like a negotiating effectiveness hierarchy, for lack of a better word. And the most ineffective is the quick moving digital and the most effective remains. You and me sitting in a room talking together, cuz that also promotes talking and talking permits listening. So it requires a completely different approach to training. Let's go back to where you started. You said, what do I see happening?

[00:36:49] To me it's getting people to be comfortable by saying, because they send us a text, doesn't mean we can't pick up a telephone to call 'em. Their chosen modality doesn't have to be my chosen [00:37:00] modality. There are no rules. You get to think about, when do I wanna respond? How do I wanna respond? If Janie sends something to Julie, Julie doesn't have to be the one responding to Janie. I might be responding to Ron. That might be a better way to have a communication. You have to think about that fact. And I don't think people think about it. It's like autonomic reflex. We chat, rechat, email, emails, zoom, zoom, Ron, Mark.

[00:37:28] There's a lot more freedom, but you have to, it'll strike that. The freedom is there. You have to announce it and seek it. And I will also say that going back to your expectations, I tell people very early on, I hate emails, I hate text more. If you've got something in your mind, the least you're gonna do is pick up the phone and call me. It's really pretty easy. You punch a button, I pick it up and we're talking real time. Don't send me little digital things cause I don't know what they mean and I'm just [00:38:00] not gonna respond to 'em. And you're used to people who are, and I'm not. 

[00:38:04] Ron Skelton: So I tell people all the time, I look, I'm hyper logical. And if you ask me a short question, I'm gonna give you a short answer. It doesn't mean I'm planning to be short or rude or hateful or I'm really busy. If you send me a text message or a question, I'll answer it. But don't expect a story and don't expect that, that you'll want to really talk to me and like, have a conversation, call me, zoom me, whatever. I get accused on a regular basis of being a, an a-hole or something. It's not because I intended, you asked a very logical question and it was like, Hey, can we do X, Y, and Z? And my response was, no. And I just went on like, no, I don't want you doing that.

[00:38:33] There was more meaning like, especially in my team, like, well, we really wanted to do that X, y well then you should have called me and we talked about it, and you explained more than may I have permission to change your strategy. There's no tonality, there's no real conversation that happens. I tell 'em all the time. Text messages, emails, even my Slack channel, that's for exchanges of data. It's logic. Yes or no questions, this or that. If you want to have a conversation, if you want to have meaningful, like show me your vision of why you [00:39:00] want to do something that needs to be at least a zoom, right?

[00:39:02] Marc Morgenstern: So another thing that comes out of it from the way you characterized it, people who ask close ended questions get close ended answers. Very few people asking the question are really thinking about, well, here's what I'm really trying to say. They shorthanded. To engage with you, they should have said, Hey Ron, we're thinking about doing this. There are a lot of ways we could approach this. This is one, is it the one you want or should we exploring something else? That's the same question. Use space, you may say, that's a really good question, I need to call 'em. Or you may rate, six paragraphs cuz they're in Hong Kong and it's 12 hours off and it's some level of asymmetrical communication is okay. But the concept, asking closed ended questions is also a bad way to negotiate. You wanna give people space to tell 'em, tell you what's really on their mind, not guess. 

[00:39:56] All of this to me is like a big ball of spaghetti and communication and [00:40:00] people, it all synthesizes, it's all linked, it's all the same thing. It manifests itself in many different ways, but it still comes back to people, are the epicenter of every deal and you can't really say it too many times. 

[00:40:16] Ron Skelton: So through the entire process, I'm big on this. Like, I had somebody go just submit. The LOI was signed on this deal. We were really looking like moving forward. He said, just send me a list of stuff you need for your due diligence process and I'll start gathering it up. I was like, you know what? Why don't we have a zoom call at least? And he didn't get why, like, just send me the list. I was like, why don't we have a zoom call? And here's the reason why I do this, and I just want your feedback cuz I, I really value this.

[00:40:42] My thing is, as I'm going through this, I'm watching their visual cues. I can tell when somebody doesn't have something or they don't understand something, it's gonna be on my list. So if I ask you for your three years financials, balance statements, income statements, and tax returns, and I see you cringe on the tax returns, I can say, wait a second. It [00:41:00] seems like either you don't have those or something's concerning you with that. What's in your space when I ask for that stuff? And I just, I'm pretty straightforward with it, but I can pick up on the visual cues that, well, I've been running this, my CPA might have that stuff, but I don't do balance sheets and stuff.

[00:41:12] Most of these guys under 5 million a year revenue businesses, they don't have everything. You don't have to have everything on the list. Send me what you have, send me what your accountant has. I can have a conversation with them. If you have QuickBooks and stuff that, some of the stuff I'm asking for, they can click a button and create a report for me that you've never asked for. But, I would've never known that. And then if it was just an email, like, here's 21 things I'd like to see that's very impersonal and very, it disrupts it. Right? This whole process from start to finish is a conversation and sending a list of needs and wants and, hey, this should be in your deal room or your data room or whatever.

[00:41:46] If you're not going over it and watching their facial and their body language. I think for a lot of these small businesses, it's overwhelming for 'em. Especially if it's an off market deal where they don't have an intermediary or helping 'em if it's they don't have a broker and somebody explaining and, Hey, this is normal. I'll [00:42:00] help you pull it together. You'll just lose it. A lot of times like they just won't wanna deal with it. 

[00:42:05] Marc Morgenstern: This is sort of Yes, and it's not just what you said, it's also that live and in person, even the Zoom. You can explain, here's why I'm asking for this. Here's the sort of information I'm looking for. If I'm gonna find out that your receivables average 150 days outstanding, I'd really rather have you tell me now and explain it than have me look at your financial statement, run a calculation and say, oh my goodness gracious, there's a real cash flow problem with this business. So you give somebody an opportunity to explain, I do have it. I don't have it. Here's the limitation. My financial statements aren't audited. My bank was okay with compiled. So all the things that make them more comfortable and get you the information you want, including that my CPA is my sister-in-law.

[00:42:55] Well, that tells you some level of concern and also tells you a good thing about family. [00:43:00] But it tells you something more than just, here it is. And by the way, this person's name is Stone and the other person's name is, Umbrella and you don't know that they're related. But the information gets volunteered that way. Or somebody says, well, what form do you need it in? Cuz I could give you this information a couple different ways. What's the most helpful to you? Which also forces you to think about why am I asking for this? Do I really need this? I frequently, when doing deals, sit down with the whole deal circle on day one.

[00:43:36] My part of the deal circle. What are the five things we're trying to accomplish here? What do we think are the, okay, now you're negotiating. Now you've learned a lot more. Sit down again. What are the five things the most important? Are they still the same as they were before? They're almost never the same. Like we've figured out that the EVP of sales is like the whole business. The CEO is okay. The COO is okay, but [00:44:00] we have to have that VP of sales. And then you get pretty close to closing, you ask the same question and then you look at the documents and say, this is our real need. Is it in this document? So clearly that we know for sure we're getting what we need.

[00:44:17] You can only do that with everybody talking in real time, expressing their opinion. And sometimes you get something like a very experienced buyer will say, I don't care about the receivables. I've got the same customers. If I see the name of the customer and the amount outstanding, I can tell you if the receivables good or bad. Cuz I have the same, I've got a 20 year history with that person. So don't waste four inches in the document on the receivables. Just let me see a list of 'em. Or I've worked with, in manufacturing context, people who I regard as just absolute. They would walk into the warehouse in the back and if we were three feet of inventory, they would turn right around and say, that's the right amount of inventory. If it were two feet, [00:45:00] they'd say, we need to beef up manufacturing. That is not enough. And it was four feet, I have enough, slow it down. 

[00:45:05] They didn't need to see a system, they didn't need to see a number, they didn't need to see anything. They knew their business at a granular level. And depending on who the buyer is and what the nature of the business is, you may actually know does, there's three things I really need to see. Does the code work? Does it violate open source. I mean, you would look at that business differently than I would cuz you know that stuff more deeply and you don't need to do a document or a deal. That's a sort of universal covers all deal. You need to focus on what do you need to know.

[00:45:39] Ron Skelton: I got it. We're about 40, 55 minutes into here. Let's talk a little bit about, before we get too much further. What are some of the things out there that you, that exist today that you just wish would go away? What are some of the common misconceptions, about buy-in and selling and, growing businesses that are just totally wrong?

[00:45:59] Marc Morgenstern: Well, I very [00:46:00] rarely say things like totally wrong.

[00:46:02] Ron Skelton: Okay. In your opinion, people need to change.

[00:46:05] Marc Morgenstern: What are things I'm concerned about. 

[00:46:07] Ron Skelton: Yes. There we go. 

[00:46:08] Marc Morgenstern: I think that a lot of folks right now are looking at tough economics and tight and expensive money. And they're saying, I've gotta abandon organic growth cuz it's too hard and it's too slow. And if I want to do something, I have to do it by buying something. That's a sequence of thinking. They don't have any experience, they don't know what it means. I don't think it ends well. I think that many of those same businesses, if I'm involved with 'em, the answer is, yeah, the last thing we're gonna do is cut our sales and marketing expense, cuz we need to sell and market.

[00:46:43] So let's figure out how the money we have is gonna last longer in a different environment, but we don't need to buy a business. In buying a business, right now, there's a sort of prevailing thought that, well, the sellers weak, they need to [00:47:00] sell. They need me more than I need them. I have all the leverage. I'm gonna push, push, push, bang, bang, bang. And it's gonna be a very unpleasant conversation. And on the sell side, if somebody is engaged in selling, I'm perfectly willing to sell my business at what was worth a year ago, which was $10. How can you tell me it's only worth $5 today? And then you have that very harsh discussion, which some adult, going back to your earlier point has to say to them, read my lips.

[00:47:33] That was then, this is now. And in the capital marketplaces, they go on a dime. Businesses are selling it 10 times. Forward Revenues last year are selling it three times. Trailing revenues this year. It's just, it's different. And that's so hard, I think, for either seller or buyer to comprehend. Everybody's gotta be real here. You can't be doing these things in a, here's how I wish the [00:48:00] world were working. The world is working the way it's working. And by the way, this isn't the last covid thing we'll have, or the last Ukraine, Russia, or the last 9/11 or the last 2008. People keep acting as if black swans are a once in a hundred year phenomenon.

[00:48:17] You should have figured out by now. Black swans probably even really aren't black swans. We don't know exactly what it will be, but we know there will be one. And so on all sides you have to say, I had a line which I won't repeat on your show and my projections, and when I was running a law firm, it was 15% of everything above it and it was basically my, I don't know why a bad thing is gonna happen, but I'm sure a bad thing is gonna happen and it's gonna cost me a lot of money. So I put it in my budget, even though I don't know what it is, where it is, when it is, how it is, that ability to retain capital so you have flexibility to respond.

[00:48:59] [00:49:00] My maxim for that is cash is a proxy for time. Time is a proxy for opportunity, and that's what buyers and sellers have to think. Nothing happens like that except bad things, by the way.

[00:49:16] Ron Skelton: It's interesting how, human psychology comes into everything. Every aspect of this, especially here in America, every problem we have, the natural human instinct, as far as I can tell, is what can I buy to fix it? Right. I catch myself, my wife and Hey, this isn't working. Okay, we need to go buy this. Like, no, we don't really need to buy anything. We just need to change the way we're doing things because it's not working. But it's our natural instinct is we just buy something to fix everything.

[00:49:42] So I get what you were saying about like the, buy-in to grow. It's a good business model to acquire for growth. And there's some skill and it's not right for every situation. And, a lot of people are missing out the concept of it's pretty easy to buy a company to grow. It's really hard to integrate it in and make it work [00:50:00] well. You're mixing two different, you could be mixing saltwater and I live right by the ocean saltwater and freshwater, and there's this rack thing situation where they don't mix well and it takes some work for the two to interact. And, not everything can swim from one to the other, right? So those human beings that do well in the saltwater environment can't swim up into the freshwater. You'll have a few of the bull sharks and stuff that can just go anywhere they want, but most of the time you gotta really look at that and go, how well is this gonna blend?

[00:50:26] How do I help this conversation? And they miss that part. I'm a big believer in acquisition for growth, but I'm also very aware that not, it's not done as well. So it was one of the toughest things in the industry. If you watch out why things fail, why mergers fail, why companies they buy things and don't continue running them is they weren't able to integrate it right. 

[00:50:51] Marc Morgenstern: Yeah. And a similar thought from what you just said is most people are comfortable believing that the last six months is the best [00:51:00] indicator of the next six months. And I don't think we live in a world in which that was true. 

[00:51:05] Ron Skelton: Oh, I don't think our parents lived in a world where that true. A little, maybe even a little slower pace back then. But, the one thing that's constant in life and in the world is change. And, how you plan for that is, It is critical in a business, and it's also, it's that artist thing you were talking about. There's some logic to it, setting aside, rainy day funds and set aside certain things, but there's also some of that artist that, just getting the feel, getting that, that gut feeling that, I refer to it as entrepreneurial spirit.

[00:51:34] You can look at things and go, yeah, this last few years is rough. And I don't think we're through that yet, so we probably had a plan to be able to weather another storm. We talked earlier a little bit about the, what I call refer to as confident. I refer to it as confident ignorance. I think AI has this a lot, right? I know exactly this, you're really confident that you know it, but it's not quite right. A lot of these AI tools were using today. I did some research, we were talking about both of this. I did some I research on your [00:52:00] book, and it was all wrong.

[00:52:01] Every bit of it, it was like it was given case studies you didn't do in there. And, this was a pretty popular AI tool. It wasn't the ChatGPT, but it was a popular one and it was way wrong. And I call that confident ignorance. It knew it was absolutely right about what it said, but it just happened to be wrong. And as entrepreneurs, we can do that too. So it's a cautionary tale that, our gut feels, our gut feel. We will head down a path. Now, the real tale of an entrepreneur or a business owner is how fast you need to adjust when you realize you're wrong. Right. 

[00:52:28] Marc Morgenstern: Yes. And in, in both the deal world and in the just business world a maxim that I have is exploration is not commitment. I'm always willing to explore something, that doesn't mean I'm gonna do it. I reserve the right to change my line right up until I do it. I know it's a world in which I have to explore and I embrace exploration. By the way, I articulate that expectation to people in a deal when I'm negotiating. Hey, what you're saying doesn't really immediately sing to me, so I'm happy to have you [00:53:00] spell it out for me. How would the deal would look, why it would look, why it's good for you, how it's bad for me, but the fact that I'm willing to have this discussion, don't interpret that as it may be a way that we really go.

[00:53:12] What I'm saying to you is, I respect you enough to hear what you have to say and say it out. Maybe I'm wrong. Maybe I'm not seeing something you're seeing. We'll explore it, but I'm not committed to that as a pathway. And I say that as clearly and directly as I know how to do it and have them say, please repeat back to me what I just said. So I know you really heard it. Mark, I heard it. No, no. I want you to say the words, exploration is not commitment. I want to hear the words from your mouth, not my mouth. Little things like that, that create a greater deal of responsibility to a counterparty. Okay. If they said it out loud later on, they can't say, but Mark, you said we could explore it. I said, and then what was the next word that you said? But it's not commitment. [00:54:00] 

[00:54:00] Ron Skelton: Right. I love that one. I'll use that. So, how do people get your book? We're right at the hour now, so let's make sure we, know how do people reach out to you? How do they, if they wanna ask you questions about this, they want to work with you on a deal or something like that, how does that work? What's your best way for people to contact you? How do they get your book? That type of stuff. 

[00:54:18] Marc Morgenstern: Okay. So let's start with how do you get the book? And remember, the title of the book is The Soul of the Deal: Creative Frameworks are buying, selling, or investing in any business. You can get it on any of the online, Amazon, target, Barnes and Noble. Put in Marc with a C, Morgenstern with an E, you'll get to the Soul of the deal. In terms of contacting me, if people want to ask a question, the best way to do it is probably just to send me an email. Just Blue, like the color, mesa, like Spanish for table partners with an s, blue mesa Yeah, it's pretty easy. 

[00:54:55] Ron Skelton: Okay. And then, I guess the way we'll finish this off is one of my favorite [00:55:00] ways to do it. If somebody can only remember two or three things for today's show, what would you want 'em to remember? 

[00:55:05] Marc Morgenstern: An expectation unarticulated is a disappointment guaranteed. People are the epicenter of every deal. And learn to listen like a jam band musician, not a lawyer. If that's all you captured from this discussion, I'm a very happy person. 

[00:55:25] Ron Skelton: Awesome. Well, thank you for being here today. I'm gonna end the show and call that a show. I appreciate your time today. Hang on for just a second when we're done.