Nov. 23, 2022

How2Exit Episode 72: Michael Frankel - Founder and Managing Partner of Trajectory Capital.

How2Exit Episode 72: Michael Frankel - Founder and Managing Partner of Trajectory Capital.

Michael Frankel has held c-level executive roles (corporate development, strategy/innovation, CFO, COO) at large and small growth companies. He is a Corporate Development, Innovation, Strategy and Corporate Venture leader who has driven disruptive...

Michael Frankel has held c-level executive roles (corporate development, strategy/innovation, CFO, COO) at large and small growth companies. He is a Corporate Development, Innovation, Strategy and Corporate Venture leader who has driven disruptive innovation and aggressive growth/expansion at global technology, information services and professional services companies including Deloitte, LexisNexis Group, IRI, GE Capital and VeriSign. Michael has a track record of executing growth strategies using:
- Acquisitions (110+ acquisitions and strategic transactions)
- New offering/product development and innovation
- Complex ecosystems (alliances, co-development, licensing, partnerships)
- Market and geographic expansion
- Corporate venture investments (18+ CVC investments)

Michael has extensive experience supporting the integration of acquired businesses and operational improvement and scaling of existing business units. Michael has served as a growth operator in CFO/COO and GM roles for high-growth technology businesses and units as well as leading a portfolio operations team that builds operating capabilities in portfolio businesses including product development and management, pricing, sales and sales enablement, marketing and back-office operations.
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Ronald Skelton  0:06  
Hello and welcome to the how to exit podcast where we introduce you to a world of small to medium business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors and other influencers with the sole intent to share with you what it looks like to buy or sell a business. Let's get rolling.

And now a moment for our sponsors, I want to highly recommend you get acquisition Aficionado magazine. Every month acquisition Aficionado magazine brings you tactics for business buying and selling you won't find anywhere else learn firsthand from industry leaders who share their success stories featuring in depth interviews and stories from leading figures in the business acquisition industry. This multi platform mobile magazine speaks to acquisition entrepreneurs wherever they are in the journey. And I want you to visit acquisition today. Hello, and welcome to the how to exit podcast today. I'm here with Michael Frankel, he is the co founder and Managing Partner of trajectory capital. Thank you for being on the show today, Michael.

Michael Frankel  1:14  
Yeah, thanks for having me.

Ronald Skelton  1:16  
That's cool. I always like to start off with kind of like, where did you get like, how did you get into this space? I always jokingly say, Hey, you were born? And then you ended up on a podcast about buying and selling companies? Could you fill out the gap in between? What's your origin story guy?

Michael Frankel  1:29  
Sure. So, you know, I, I started my career as a lawyer and a banker and all these tools. And I, I figured out pretty early in my life that I like to make things grow. I, I, I like radical change. And I figured out that m&a is this amazing way to create radical change. You, you know, you, you instantly buy or sell a business and transform it and move capital around. And I just found m&a to be really, really exciting. And the other thing I liked about m&a is you get to play with every part of the toy, right? You get to dig into tech, and people and customers and finance and legal and HR. And you get to do all of that stuff. And so that's sort of attracted me to m&a. It's a, it's a way to be a big change agent, and just sort of dabble in every part. You know, it's like you get to eat every part of the animal. And so I, I started my career, and I've done m&a from sort of every different angle imaginable law of finance buyer, seller investor, done about 110 deals in my career and, and I just find that fascinating. There's no matter how many I do, every single one is different. And every single one scares, surprises sort of delights me. You know, which I, I, I think it's rare that you find a career where you can have that much diversity, you know, other than if you choose to be an artist and you can sort of make your own way. So for, for me that's, that's the fun thing about m&a is it's, it's infinitely interesting no matter how long

I do it. 

Ronald Skelton  3:08  
Now lawyer are you practicing or recovering? 

Michael Frankel  3:10  

God, no, I, I was, I was a lawyer for three years in the 90s. I, I, I like to say I am the world's best clients, because I, I, I can issue spot. And then I turned to my lawyer and go, I'm not a lawyer, you're a lawyer, you do this. So yeah, I was a lawyer for a few years. But it was great bootcamp. Because the nice thing about being an m&a lawyer is you have to document everything. So you get a chance to like dig into and ask your clients about every part of the exercise. So that it was, it was good experience. But now I'm, I'm  definitely on the business side. And you know, banking was, was fun for me, but I think I found while I liked doing the deal, I was much more interested in the why are we doing it at the front end? And how do we actually make the money at the back end. So the, the transaction negotiation is super fun, but I'm much I, I like, I like to have the whole thing. So I like to be the principal who's deciding why we're doing this and then wrenching on the business after we buy it to make it the best it can be.

Ronald Skelton  4:12  
So we were talking just a little bit before we click the Go Live button, about the economy where we're going in this huge opportunity of corporate divestitures. I can't even say the word corporates divesting companies I don't know I couldn't say the other one. But uh, anyway, corporates, corporate companies getting rid of their pet projects and companies they acquired and no longer needed so let's talk about that a little bit because that's there, there's an opportunity there to pick up some real for us small to medium business owners and acquisition entrepreneurs, what would be life changing businesses for us, but on their radar just doesn't even make a bump on the in, in the income

statement. So 

Michael Frankel  4:50  
absolutely. I think there's in my mind, there's two parts to it. First is what's driving it. And as a gentleman, there are always exceptions to every rule, but as a general matter, big corporates will When the market is hot, they let off strategy sort of, you know, orphan businesses just sit on the sidelines, because they're not desperate for money, everything's going great. We just have to focus on growth. As soon as the market starts to turn down, everyone sharpens their pencils. And they say, number one, what's not making us as much money or as much growth as we'd like? Or be? Or number two, what, what just is off strategy, and we've we're trying to clean up the balance sheet. And so generally speaking at the beginning of any downmarket, right, you know, you see it in 2009, 2010, you can see it in 2000, 2001 2002, you generally see this like lift in the volume of divestitures in general, but oftentimes in the sort of isolated businesses that have been left alone and not really focused on and, and what appeals to me about these businesses is usually sometimes they're just bad businesses, and no one should have them or they should be shut down. But I would say more often than not, they are fundamentally sound businesses. In other words, they have a thing that does something well, that customers actually want. But because they are off strategy for the parent company, they sort of get starved for attention, so they don't get investment capital, if they're profitable, the profits get sucked out. The strongest managers don't want to work there. Because it's sort of an unwritten rule in the organization. That's not where you go to build your career. So they lose the strongest managers, they don't get the attention of the Salesforce in the organization, they don't get sort of any attention, and so they languish, but they usually have this core of goodness inside of them, that if you apply basic business blocking and tackling to, you can build something really exciting, right? You know, it's not rocket science, it's a stand up a sales, Team fixed pricing, figure out how to, you know, modernize the product, maybe they haven't changed the you, the user experience in, in, in 10 years, got you get go partner with ecosystem partners that you wouldn't have been able to, because parent co had its policies about, about those, you know, change, pricing do, do all kinds of stuff, that sort of what a real operator does with these businesses, and you can extract a lot of value. The other thing I like about these opportunities is, generally speaking, there's this amazing arbitrage, because the big corporates are not as focused on purchase price, especially for the small ones, right? If you're a $20 billion company, a $30 billion company, and you have a $5 million $10 million asset. Yeah, sure, you know, more money is better than less money. But on my priority list as a corporate development guy and selling it, my first priority is never purchase price. My first priority is, let's get this done fast. Maybe by the end of the year, let's not have any liabilities. I don't want crazy reps and warranties on this thing. When it's gone, it's gone. I want the employees treated well, because you know, they're going to talk to their former colleagues, I want the customers treated well, because maybe the customers are also still customers of mine, right? So maybe it's a $50,000 customer of this business, and a $27 million customer of mine. I don't want that customer mad, even though I'll say, Oh, well, we divested that business, I don't care, you sold me the thing. So I'm holding you accountable if it's not delivered well, so they're all these others things that I'm much more concerned with and purchase price. And if you come along as an operator and go, I get you, I'm going to make this easy, I'm going to make it fast, I'm not going to require reps out of you, I'm going to take care of your employees, your customers, maybe even throw in a transition services agreement so that you know you make a little bit of money off of, off of me that goes through your income statement, which you care about more than your balance sheet, you'll, you'll win the deal over, over other buyers, often non competitively, right. The other thing about these businesses is if they're that small, they may not even hire a banker. Right? So it's, you know, for them, it's just get it, get it gone.

Ronald Skelton  9:16  
Let's take a step back. Because like, my audience is comprised of a lot of small to medium business buyers. And we know how to source deals, you know how to cold, you know, send cold emails and letters and postcards, whatever, right

Michael Frankel  9:31  

Ronald Skelton  9:31  
 like that. How do you reach inside of a major corporation? How do you reach inside of a Cisco or Google or Adobe or one of those guys and say, Hey, you got my eyes on this little thing over here. You don't seem to be doing too much with what do you up to? I mean, what's the

Michael Frankel  9:45  
Yeah, so I, I think in a perfect world, Well, number one, if, if you actually know the asset that you want, that's a huge leg up. If you actually know the asset that you want. My advice is go to the general manager who is one or two steps above that asset, but not four or five steps above. So and, and there's a reason for this, if it's a $5 million revenue business, let's say, leader who owns it, and owns a total of $100 million, that's a relevant part of their world, they care about it, it's a distraction to their team, it maybe is dragging down their personal numbers for the year, they're going to take an interest in trying to resolve this, if you go too high up in the organization, you let's say, you know, the CEO of Oracle, you go to the CEO of Oracle and go, Hey, and I want to buy this little $5 million dollar thing. It, it just hasn't mattered right? Now, if you know them well enough, maybe they will call down, you know, 17, phone calls down in the organization gets you to the right guy and say, hey, please pay attention. But for the most part, they just don't care. And if you go to the business owner who owns the $5 million business, they're terrified, the last thing they want to do is be sold to someone. So there's sort of a sweet spot at the person who has the power to sell the business. And but it's still low enough in the organization that it matters to them what happens, however, that assumes you know exactly what business you want to buy. If you don't know what business you want to buy, I would either start with people like that and sort of say, hey, is there anything within your 100 million that you don't want, or you can go to the corporate, the corporate development people in the business, the challenge with corporate development people is, as a general matter, they want to run a rigorous process, they're wired, your 100 million dollar, GM doesn't care about the purchase price, because it doesn't go to him, it goes to the motherships balance sheet. They care about getting this out of their business, because it's the distraction, the corporate development, people are a little more likely to care about purchase price. Because you know, if you have a hammer, everything's a nail. So they're there thinking I've got to sell something, when you sell something, want to get the biggest price. But and this is what I think will be really true over the next couple of years. That's only if they don't have anything else on their plate. So the perfect situation is if you can get to the corporate development person, at a big company, in a space where you have some expertise, right? You're not just some random person coming out of the woodwork, but you're like, Look, I've run a bunch of businesses that are the same as some of your businesses, I'm credible, right? I can, here's, here's the money I have. So you can take me seriously. If they're working on 10 deals, they may just want to dump the smallest one. So maybe they're so distracted by other stuff that they go, Oh, this is an easy way to get rid of the littlest one. And that's the point at which they'll go, I'm not gonna bother to hire banker, I'm not going to run some big m&a process. I'm doing that for the $500 million business unit that I'm selling. But for this $4 million business unit that I'm selling, you know, you, you seem, you seem to know what you're doing. You seem credible, let's run a super quick process. Don't make me do a whole bunch of diligence and, you know, provide a whole bunch of diligence. And I'll just let it go. So I, I, I think those are sort of the entry points. The other thing I would say is, if it's an industry sector, you know, well, gossip is a wonderful thing. And my experience is generally speaking, these little businesses, everyone knows they are unloved within the organization. They know they're unloved within the organization. This is not a mystery. So if you hang out at a industry conference, and I've, I've always said the best market intelligence and due diligence, is found at the bar at industry conferences, when you're the guy who's buying the drinks, because no one's going to give you anything that's strictly you know, they're not going to be like, Oh, well, here are the financials for that business. But they're certainly going to go Yeah, it's a great product, but it's just not what we're focused on right now. And I feel bad for those guys, because they're not getting any, they're not getting any capital, you'll hear stories like that. And so if you know a space well, and you can sort of hang around, you'll, you'll learn who the ugly ducklings are. And then I would do my 100 million dollar GM or corporate development to go after the ugly documents,

Ronald Skelton  14:07  
kind of know your space know that at least the industry and the type of product you're looking for. Get in connection with those guys in the industry conferences and the places they hang out. Maybe even on the social I mean, I, I can see where you're in the right circles on the social, social networks. And you say hey, if you're, if your company doesn't love you, right?

Michael Frankel  14:30  

Ronald Skelton  14:30  
 If you're, if you're, if you're a product inside of a company, and the, and the company doesn't love you, you don't get the capital (inaudible). You know, talk to your boss's boss to see if he was you know, once a chat with me I'm looking 

Michael Frankel  14:30  
oh yeah

Ronald Skelton  14:32  
for something like that. 

Michael Frankel  14:42  
I think that's especially true if you as the buyer are I don't know how to put this but senior enough that whoever is running that little tiny business would view you as a viable boss. Right.

Ronald Skelton  14:54  

Michael Frankel  14:54  
You know, if they, if they think that they're, you know, the big cheese they may not want wanna sell to you because they don't want to work for you, and you're gonna lean in, right? You're not, you're not going to be a hands on, you know, sort of chairman of the board. But in most cases, if you're an experienced entrepreneur, and credible, and they're a relatively junior person has been left holding the bag for this little product, absolutely, they may go, Oh my gosh, I love to imagine instead of being buried inside this giant bureaucracy, where I have no equity, and no upside, no one pays any attention to me, it's ruining my career, I can go work at the feet of this successful entrepreneurs gonna teach me stuff, and they're gonna give me a chunk of the company. Right?

Ronald Skelton  15:39  

Michael Frankel  15:39  
 I can, you know, they're gonna give me 3% of the company. And if we turn this into this amazing thing that I think we can, I'm going to make big bucks. So I, I, I think you got to be a little delicate about that, that approach. That's why I think friends or friends is a great way if you know somebody in the business in the company, because it's like I said, it's not a big secret who the ugly ducklings are.

Ronald Skelton  16:02  
We're talking a little bit about what you know what distracts, you know, valuation. Also, one of the things we were chatting about, like, what can you know, what I think is one of your pet peeves was, you see, see companies doing XY and Z and you're like, man, if they quit doing that their comp, I could pay more for their company.

Michael Frankel  16:18  

Ronald Skelton  16:18  
 what are those type of things that are, especially in the tech space? We were talking about? What are those things? And, you know, how can people avoid hurting themselves in, in a valuation process of selling their business?

Michael Frankel  16:30  
Yeah, this drives me absolutely bankers. Because that's what I, I mentioned to you before, listen, a negotiation, I understand, you're going to try to get more of what sitting in the middle of the table, I'm going to try to get more. Fair enough. What drives me nuts is when we you know, before starting negotiation, we'd like to dollars on fire and take it off the table. So you know, if you're selling to a big corporate, I think there's, there's a couple of different layers. The first one is sort of legal and compliance stuff, right? Just don't have bad stuff going on. Whether it's HR stuff, or it's, you know, you didn't have a license to, to content you're using a great example, in tech is open source code, if you're using open source code and the wrong way, any big buyer will not touch you. Or if they touch you, they will assume that they're going to trash all your code and rewrite it, because they'll you may not get sued, but they'll get sued. Or, you know, not having everything documented, right? Whether it's all your technical, you know, material, all your code, all your architectural design, or if it's your sales process, or if it's customer service process, or anything, have that all documented, right? Anything that is anything that only exists in your brain is a huge problem. Because number one, you may not want to stay. And even if you say you want to stay there my experiences, I, I, I like to say, if you give somebody plane money, or boat money, they're not staying right. You know, if you give me anything more your house money, if you give me anything more than car money, they're not staying, especially because you've just proven to them, they're a good entrepreneur. So if they're a good entrepreneur, the second they can walk away, they're gonna go do it again, which, by the way, good for them. But that means you need to be sure that if you walk out the door, not even at the end of your earn out, but maybe you know, three, four months after, after the sale, the, the company doesn't get catastrophically damaged. Because if that's the case, I'm going to find it out and diligence. And you know, what I'm going to do, I'm going to assume that that catastrophe happens, I'm going to drop my purchase price to allow me to recover from it. So along similar lines, succession planning, you know, a lot of smaller companies, all the wisdom and the expertise and a lot of the work resides at the top. The problem with that is you're gonna go so if the, if the man or woman who is behind you, responsible for sales or responsible for the product responsible for finance is an idiot, I'm going to figure that out too. And I'm gonna go Okay, so we're gonna go through a six month period of horrific performance while we fix that. Similarly, customer contracts, right? And actually, any contract, any contract should be on market terms that I'm going to find acceptable, right? Because I'm absorbing you. So as an example, if your customer contract, say, if my product doesn't work, you can sue me for Infinity dollars, it's gonna be a problem for me, the big buyer, and I'm gonna have to figure out what to do about that. And, and or, or similarly, if your contracts are really vague about what level of support you'll provide, right? If there's a problem, we'll solve it for you no matter what it is. All that kind of stuff. I just sit there as I go through diligence and trust me, I will find it and I go 1% off of purchase price 1% off of purchase price, and I just tick it off, though, all that kind of prep work, in a sense, all you have to do is put yourself in the, in the, in the shoes of a massive corporate buyer who's really risk averse. And they just want to know that they're getting what their deal says they're getting, they don't want surprises, they don't want bad news, they don't want to trauma, fix all of that, and then show them how you fix it. Because you are at a huge, I'm at a huge disadvantage to you, right, you've run the company, you've had your hands in everything. I've got two weeks after I sign an NDA with you to try to figure out what the heck is going on under the covers, because of course, your, your PowerPoint deck to me is all jazz hands, right? Your PowerPoint Jack is were fantastic, were beautiful, you know, like rocket to the stars. I've got like two or three weeks to try to dig through files that you put up on a SharePoint, and try to figure out what's actually going on with your company. And so anytime I don't see something, or you don't prove to me that something's there, I'm gonna assume it's problem. I'm just, it's, I gotta be risk averse, right? So you've got me a huge information disadvantage. So I would fix all of that stuff, and then show me how you fix it. And I, I, I like to say I, I would generally pay 10 to 30% more for a company, if all that stuff were fixed, you know, I always, it always breaks my heart to see an entrepreneur who spent 10 years building a business and loses 30% of the value their work, by not doing some relatively simple blocking and tackling over like the 18 months before they sell the business

Ronald Skelton  21:38  
side of

all the contracts. A lot of these companies, they have recurring contracts for 

Michael Frankel  21:43  

Ronald Skelton  21:43  
like software as a service and that tough. You know, one of the things that we're taught to look for is the assumable, or language like individual company, sells the contracts still in place.

Michael Frankel  21:53  

Ronald Skelton  21:53  
 I, I understand that. I mean, how important is that? I see, it saves me a tough conversation with all my customers if it's already in place, right?

Michael Frankel  22:03  
Yeah, I think I would say generally, it's very attractive, right. And the last thing I want to do is have customers walk away. That said, I think it depends on the nature of the product. So if you have a product that's really sticky, I'm a little less worried, right? Like if you know, I'm, I'm you know, if, if, if you have a piece of technology that's buried in the guts of your infrastructure, and it would be incredibly painful for you to pull it out, then I'm a little less worried about that. Because I'm going to have time to go to those customers and say, Hey, we're the new owners where, you know, we're going to treat you well, blah, blah, blah, the easier it is for the customers to get out. The worse actually, I'll give you a worst story. That is the case study for this. I won't name the company. But a long time ago, early in my career, when I was still I was even more of an idiot, I acquired a little business, there were two characteristics of the business that are important. The first one is the talent market for the talent, especially the customer service reps was super hot at the time. And the second is that the customers had an automatic right to transfer to another vendor on no notice, for any reason. And we bought this company. And then I as the m&a guy and went Tada. I'm very proud of myself and I went on to do other stuff. And about a month later, I checked in with the GM who was supposed to be you acquired the business and was supposed to be integrating it said, what's going on? He goes, Oh, yeah, I should probably check on that. So we mean, you gotta check on that. Haven't, haven't you started to integrate haven't you because no, no, we sent out a mass email to all the employees and the customers telling them when we bought the business, and then we did nothing else. I said, Well, you should go check on that. And when we checked, what we discovered is two things that happened. The first one is all the employees got this email, with no information about whether they still had a job, how much they're gonna get paid, what their benefits were going to be. And it was a hot market. So they all up and left, we lost a third of the employee base, they just walked out. At the same time, all the all the customers got that email. And the first thing they thought is, let me check what the deal is with this. What does this mean for me, they call the customer service reps. Those people weren't at their desks, they were all gone. So the, the customers got no answer, and they got nervous. Half of them left 50% of the revenue just walked out the door. And so my running joke is but for one airplane ticket 50 polo shirts and 100 pizzas, we could have saved that business. So you know, I mean, that was just bad, bad execution. But I think the point is the customer contract thing. Totally depends on the nature of what your business is. But yeah, as a general matter, everything I don't have to do when I get your company is a adds value to me, right. So if I don't have to go Chasing customers, if I don't have to change contract terms, like that's the worst is if you've got contract terms that are really sketchy like unlimited liability, you know, I'm gonna have to go charging around the customers getting them to sign new contracts. And anytime you go to a customer and ask them, ask them for a favor, what generally happens, they get a discount. It's stuff like that, stuff like that is you're never gonna get it perfectly. Right? But just what I would argue is, anybody who owns a business should think to themselves, who am I likely to sell this thing to? And what are they likely to care about? What in my business right now would really scare the bejesus out of them? And whatever that is, start fixing that thing.

Ronald Skelton  25:44  
Where's the next area we should look at here? I mean, you're you. There's something you've been working on that I don't know anything about? And I'm really curious of, if you're willing to chat about it. Let's, let's go through that, that SPAC.

Michael Frankel  25:55  

Ronald Skelton  25:56  
 So you guys have a spec. So how does? How does that work? I kind of know, because I've done the research, and I've read the Wikipedia stuff and stuff like that, but I've never created one. And I see a lot of them, they they get funded, and then they don't have an acquisition. Right.

Michael Frankel  26:09  
Yeah, it's just specs, specs, I think are in there a lot of examples of this, I mean, venture capitals, and example. They're just an asset. They're just a mechanism for doing something. And like anything else, it's a hammer, right? You can use it to hammer a nail, you can use it to break glass. You know, the, the fundamental premise of the spec is that you have companies out there that are ready to be public companies, but aren't natural candidates for the very traditional IPO process. They are relatively small, so they're not going to get enough attention from the investment banks. They're sort of complicated. So the retail investor base won't understand them. The IPO market is shut down. Like right now the IPO market is basically shut down, there are zero IPOs happening. That doesn't mean you don't have a good company, right? You can have individual good companies, even when the IPO market is shut down. So for all those reasons, the SPAC is a mechanism to get those companies public. And it's a pretty simple mechanism the spac is just a public company, whose sole acid is big bag of money. Right?

Ronald Skelton  27:12  

Michael Frankel  27:12  
 So it's publicly listed, but it has no operations has no product has no, it's just a bag of money. And the premise of spac is it finds a non public company that is ready to be a public company, it's big enough, it's profitable enough, it's got the right management team, and you merge the two things together. And technically, from a legal perspective, this goes back to my little period as a lawyer, it's a it's a merger. But the resulting entity is largely the private entity, right? That's the management team, that's the board. And what they get from the spec is a public vehicle. So they become public, instantly, they changed the name. So the name becomes whatever the operating company is, and they get whatever portion of the bag of money is not redeemed, because the investors in the spac have the right to pull their money back. Because they, they don't know what the company is that's going to be merged yet. So once they find out which company is going to be merged with, they get to make a choice, they can either get their money back, or they can get shares in the new company. So it's a, it's a pretty straightforward mechanism. I think what you've seen over the past year is like, like venture in 2000, you had a lot of froth, and you had spec teams doing smart things. And it's spac teams doing crazy. And maybe you could even argue, in some cases, borderline fraudulent things. So there's a lot of noise around Spacs. And you saw this big wave up. And now you're seeing a big wave down, very few are coming out. My personal view is it's just another mechanism for accomplishing a financial goal. And, you know, it'll, it'll come back, it'll go through a dead period, just like venture did right after a whole bunch of fairly wacky stuff happened in venture and 99 into 2000, you had a period where a lot less venture investing was happening in 2001, 2002. but you know venture came back I think Spacs will as well. In my mind, the way to think of spac is if you set aside all the financial engineering, it's just a way of taking a company that is ready to be public and can benefit from being public, public. And then once it's public, it does what public companies do, right? It can sell shares, it can merge with other companies more easily, all that kind of stuff. But yeah, there's been a lot of like, weird noise. My, my one, my one recommendation would be look at the I, I. This is true of everything. It's not just facts. Look at the fundamentals. Right. It's all everything is all about fundamentals right. Financial Engineering is financial engineering, but I don't pretend to really understand it. At the end of the day, good companies with a good product that's differentiated will make money in, in, in a big addressable market. They will make money and eventually that will be representing the stock price. Bad companies. don't have a good product and don't make money that'll eventually be representing their stock price. Right? There may be some of this in the meantime, but I'm, I'm sort of I, I, I tend to think long term and fundamental on this stuff.

Ronald Skelton  30:11  
What particular I see your hashtag is disruptive innovation. What particular things are you guys looking at? Have you made an acquisition with a spec already? Are you

Michael Frankel  30:20  
we have not

Ronald Skelton  30:20  
 looking at what you're looking for?

Michael Frankel  30:22  
So and I would say, um, we were looking for this, not just in the spec, but it's our general investing philosophy is, we like companies that have built something that is that number one has proven, proven product market fit, right. You know, I understand there are people out there that like to invest in technologies that aren't proven yet, because they couldn't be the next big thing. It's just not what we do. So,

Ronald Skelton  30:47  
unicorn hunters?

Michael Frankel  30:49  
Yeah, exactly. 

Ronald Skelton  30:49  
I call them unicorn hunters.

Michael Frankel  30:50  
Yeah, yeah they, they want that thing that could turn out to be gigantic. I can't get my head around that. I like to say, I like to find something where the, the company says, look, here's the problem. It's a big problem, right? It's a billions of dollars a year problem. Here's our solution. It works. And customers like it. And for me, that's the basis of any decent business. So we look for companies that have already reached those milestones, and that are disrupting the market that they're in disrupting doesn't mean like teleportation, right? It doesn't have to mean, it just means a better mousetrap. Right? And, you know, the better mousetrap can just be, you know, we, we figured out, we're going to put this on the cloud, or we figured out a way to make it easier to use, right? You know, I mean, while I'm not advocating any particular technology, and this, this will definitely date me, the iPod was just a better experience than the Zune, right. And that's why one, it didn't do something, the iPad didn't do something that didn't already exist, right, there were little boxes where you could have your digital music, they just made it better. And that's sort of what we like is we'd like to find a company that, you know, finds a problem, they're probably already people solving the problem, they just solve it better. That's, that's what we mean by disruption. you know I'd say, lastly, strong management team. and strong means not just that they're great visionaries who come up with a new thing, but that they have both the skills and the willingness to do all the blocking and tackling and hard work associated with growing a business. Because growing a business is not all just fanfare and press releases with your cool new thing. It's work. It's, it's getting into the details around we pricing this right? What are our channel partners going to be like? Where, where's our supply chain coming from? All that kind of like, you know, I don't know, I don't find it boring. But some people find it boring stuff that, that is necessary to actually run a business. If you don't have a management team that wants to do that stuff, you know, you, you're not going to be successful.

Ronald Skelton  33:00  
Yeah, there's a lot of guys out there. They're in ventures, right? They're, they're entrepreneurs, they, they like to create the creation process, but they don't know, like, and, and it takes a different person to be able to say, Okay, I've got the skill set to invent this, and to get it to x. But then I have to adapt and overcome to you know to grow it. And so I and I'm a big believer, there's a huge difference between growing something and scaling it, right.

Michael Frankel  33:22  

Ronald Skelton  33:22  
 yeah. So

Michael Frankel  33:23  

Ronald Skelton  33:24  
 just so we're clear on that. Like, I'm, I'm the guy who can I can do this, I can grow it, I can prove pocket Mark product market fit, but am I the right guy to scale it to the next level. And

Michael Frankel  33:33  

Ronald Skelton  33:34  
 there's, if you watch the silicon, we talked about this a lot on the show, if you watch Silicon Valley, you watch venture capitalists, it's a great learning experience to watch. A lot of times that founder isn't the CEO, when it hits the billion dollar mark, right? They've been to three of them, the guy that could go out and create it was a different guy that could go out and raise the money, which is different guy that could take it from 10 million to 100 million, which is a different guy than you could ever get it to go public.

Michael Frankel  33:55  

Ronald Skelton  33:55  
 right? It takes humbleness and skill to be the guy that says I have to learn and grow. As, as this grows and changes. I mean, everything about who I am from the scrappy entrepreneur who came up with an idea to the assistance process and engineer, you know, engineer that it takes to take something and make it a public publicly traded entity.

Michael Frankel  34:15  
Yeah, absolutely. And I, I, I, you know, I, I, I the thing that most impresses me about Larry and Sergey, is not that they developed this revolutionary at the time search engine to scrape the web. That, that's actually I'm impressed by that. The thing that impresses me the most about those two humans is that at a moment in time, when they were rockstars, making massive amounts of money being hugely successful. No one was putting any pressure on them. They have their own accord, stepped back and said, We don't know how to run a company this big. We're going to bring in a pro who is not gonna let us dominate them right in fact, the opposite we're gonna, we're gonna learn from that Pro, we're going to cede control to him so that we can learn from him, and we're going to bring the best, right, we're not going to bring in somebody that we know we can intellectually dominate, we're going to bring in the best. And then they let him run their business for a long time, while they very purposefully learned what they didn't know, the, the level of like ego control necessary to do that, I think is, is frankly more impressive than the fact that they invented the thing in the first place.

Ronald Skelton  35:31  
Yeah, it's like a one in a million type of type of individual one and 1000, at least right, you'll

Michael Frankel  35:36  

Ronald Skelton  35:36  
 go through 1000 CEOs who will put their ego in front of them and not humble themselves to be able to move to the next level, before you'll ever come across the one guy that goes, you know, what, I'm probably not the guy to be, you know, to be the day to day operator of this company. Now, even though I found it and I started it, I need to step back, you know, sit on the board and let somebody else take it from here to the next level. Otherwise, it's going to take us longer, it's going to cost us more we have a higher risk of failing. That is that's just a skill or a personal development thing. You know, I didn't want to bring this up. I senior thing you said you, one of the things you mentioned, EST is that a warner Earhart,

Michael Frankel  35:46  
I'm sorry, what?

Ronald Skelton  36:15  
 I'd seen on one of your I think in your bio there you mentioned, let's see here, EST,  is that right? My messenger  (inaudible) mix you with somebody else?

Michael Frankel  36:26  
Maybe I, I haven't done EST, although I've done I, I, I do meditation and stuff like

that, and

Ronald Skelton  36:31  
 yeah I was reading it was on your blog, I was reading about your blog. And

Michael Frankel  36:35  
yeah, I think that, that. Oh, I know what you're talking about. Yeah, it's an, it's an article I wrote. Yeah, , I think that I'll, I'll make it even broader. I think self awareness is the most valuable tool you can have. Knowing what you do know, know what you don't know. And being okay with it is, is so massively important. Because otherwise you can't, you can't get out of your own way.

Ronald Skelton  36:59  
I mentioned it in your meditation, mindfulness and Business Innovation

Michael Frankel  37:02  

Ronald Skelton  37:02  
 blog about like yoga, organic gardening, and EST. And I'm thinking do you do ESG training.

Michael Frankel  37:08  
I didn't do EST training

But my Yeah, I know, I haven't done ESG training. But my view is you, you have to find the right mechanism. And so some for some people TST. For me, it's meditation, I couldn't do yoga to save my life. But whatever it is, you have to find that thing that number one allows you to be calm and be joyous. And number two, allows you to be sort of comfortable in your own skin, so that you can say this is something I don't know, right? This is something I gotta, I gotta get help from somebody else, because I don't know it. Those are the people that I think are the most successful. Because effectively, if, if you can rely on other people, you become superhero, right, you can do anything. Because you just fill in your own gaps with you know, other people around you. If you don't do that, then you're limited to whatever it is you can do.

Ronald Skelton  37:59  
Yeah I'm a big, I'm a big fan of both. I'm old enough that I didn't get to go I'm young enough, I didn't get to do the tst thing. But I did the predecessor what it turned into over time. And I'm a big fan of the meditation and century itself. And the reason I wanted to bring it in this show is that person that can move out of his own way is very well developed. You know, personally, he understands

Michael Frankel  38:20  

Ronald Skelton  38:20  
 that, like that ego control that does like not letting your ego get in your own way is, is something as a CEO, that is an incredible, incredible trait. Not, not getting frustrated under pressure, the best. The best guest I've had that you're really good at the two best guests I've ever had is Adam Coffey, who's done private equity and, and teaches does a lot of private equity. He has two or three books on it right now. He did a company sold the same company like five or six times the last time for a couple billion dollars, right. I mean, before the show, he had technical issues. We got his cleared up, I had technical, technical issues, the show was by almost an hour late starting, and he stayed calm. We were laughing the whole time. And I just, just thought about that like to run a company in the sea, everything kind of like his internet, you know, like he had to reboot his stuff. I mean, it was just, just one problem after another. And he never, he never got frustrated. He never like, you know, you know, did the extra sets the no curse words? No, nothing just like kind of smiled and nodded his head. That levelness is a well developed individual. And that's something I look for in a leader is how do you act under pressure? Right?

Michael Frankel  39:27  
I think it's really important. And also, it makes you a happier human. Right? Not, not being stressed out by this stuff makes you just a happier person as well as being better at everything.

Ronald Skelton  39:39  
So let's jump back to your you're out there you have the SPAC but you also have trajectory capital, or you got you said they're both kind of looking for the same type of thing, the same

Michael Frankel  39:49  

Ronald Skelton  39:49  
 type of acquisition. Let's talk about like, when you're looking at these companies. One of the biggest questions always is when people ask me, you know, like, how do you value companies? What, what's The offer look like how much time do you spend on valuation.

Michael Frankel  40:03  
So I, we spend a decent amount of time on valuation, because we tend to invest in companies that are mature enough that you should be able to assess valuation. Because we're not buying. We're not public investors, we're not buying companies that are trading. And we're not buying mega corporations. The reality is, valuation is an art not a science for two reasons. The first one is your for company, a relatively small company, most of the valuation is tied up in what it's going to do in the future, which is so hard to assess, right. So, you know, if I buy a $20 billion company is growing at 2% a year, yeah, I can pretty much assess its value, right? It's, it's almost a discounted cash flow kind of exercise. If you're buying a 3, 5, 7 million revenue company, it, it can fork in the road in two radically different directions. So, you know, in my mind, valuation is less a mathematical exercise. And it's more an exercise of really figuring out what you think is going to happen with the business, you can then reverse engineering to math, but it's really, is this a business that can grow 50, 100% a year? Can it capture a decent amount of this market? Can it expand into you know, Europe, whatever, it's, it's those sort of qualitative decisions about what you think's going to happen with this business. Then the other thing I would say is, we can all pretend to the valuation as a math exercise, but the reality is, valuation is a meeting of the minds, right? Its valuation is the what's the least you're able you're willing to accept for it, and the most, I'm willing to pay for it. And if there's an overlap between those two numbers, the area in the middle is the negotiation. But, you know, I, I try to spend a lot of time trying to figure out when I'm buying something, what is the other person want for it, and, and I want to expand from just financial valuation on that point. Because I think that's where we often miss an opportunity. Oftentimes, people want something other than purchase price. And if you can identify what they want, you can actually craft a deal that's better for both sides. Right. So we talked about that with corporate divestitures. I want my customers to be treated well, I'll take a hit on purchase price for that. If you're talking about buying from a founder, they want their employees to be taken care of, I've, I've met founders who, you know whether they can actually explain it. In words, they're willing to take a lower price to have their brand remain out there, they built this brand, it's their, it's their family name, it's whatever, or they want to stay around, and they're willing to take a lower purchase price, if they can have a role where they don't want to stay around. We, we bought a company last year, and the founder explicitly did not want to stay around and was willing to take a lower purchase price. You know, he were It wasn't even that he wasn't going to sell if he was required to stay for a year or two. So I, I, I think in addition to doing the mathematical valuation exercise, and I do all the traditional stuff, right, you look at transaction comps to try to figure out what other people are paying for those businesses, you do financial analysis and discounted cash flow and trading comps, if, if it's big enough to be relevant to a public company to sort of figure out what's, what's the reasonable cash flow. But the reality is, the biggest variables in valuation have to do with the likely outcomes in the future. Because if you if I can get comfortable, this company is going to go from growing 20% a year to growing 100% a year, I can pay, you know, 5, 10 times as much for the company. So all that funky math based on last year's p&l is probably less important than what's my level of confidence that the tech is really differentiated, no one else is going to be able to come up with something or you know, the management team are actually good at what they do. And I'm not gonna have to replace them all that stuff is, you know, I people like to do the math, because it's sort of easy, and then they can be really proud of the fact that they know that company is worth $7.2356 million. But I, I usually find for any company other than maybe a gold mine. It's much more about guesstimating. What's going to happen in the future, and what the other guy's willing to take. You know, and, and, and is there an overlap between those two?

Ronald Skelton  44:27  
Yeah, I've had a lot of people on the show and they've all conferred or, or agreed that the majority of the deals they've seen, the highest bidder wasn't necessarily the highest the offer that was accepted on multiple offer situations. A lot

Michael Frankel  44:43  

Ronald Skelton  44:43  
 of times veterans matter of fact, as close as I can tell, like 70, 75% of the time. It's not the highest offer it's very often it's their officers are closed offers are closed. Don't get me wrong, but very often it's who's got to take care of the safe pair of hands, right? Who's gonna take care

Michael Frankel  44:48  
exactly yeah

Ronald Skelton  44:52  
 of the blow customers.

Michael Frankel  45:01  
Yeah, especially when you've got a founder, because, you know, I mean, listen, money is nice. But at the end of the day, especially if you're already wealthy money isn't everything. I once looked at a company, we didn't end up buying them for, for reasons that have to do with us, not them. But it was a company located in a relatively small town, this company represented, I'm gonna say 15, or 20% of the jobs in the town, the owner who was already very wealthy, right, this, you know, this was a relatively small town. You know, he had by far the biggest house in the town, you know, he had he had everything you'd ever want. And he said explicitly, to me, a big part of what he was going to consider my offer was that I needed to tell him what my plan was for the employees, because he was not going to be able to walk around his town or go to his golf club, if he sold the company, and we fired all the employees. So he a big part of what he wanted was a commitment that we were not going to leave the town. Right, we were going to keep

Ronald Skelton  46:01  

Michael Frankel  46:01  
 the you know, and he would take even take a lower purchase price for that, because it would destroy it. If he was viewed as the guy who got everyone fired, it was going to destroy his life, his kids were going to get made fun of that school. That was way more important to him than an extra $5 million in purchase price. So I, I think sussing that out figuring out, what does the other person really want? And then if you go a layer deeper, like we talked about ego, like how do they want to feel right, but a good example is some people want to feel like they win. So you offer them a lower price, knowing that you want them to feel like they beat you up and got to a higher price. Or they want to feel like this is a friendship, they don't like to do business with people who are mean. So you don't want to be aggressive. Or they the opposite scenario, they want to feel like they beat somebody who was tough. And if you're too easy on them, that means they must have left something on the table. So you got to fight them really hard. Like figuring out that psychology can translate into dollars of value.

Ronald Skelton  47:03  
You have any pointers or, or tips on questions, you would ask an entrepreneur to figure out where they stand mentally?

Michael Frankel  47:09  
Oh, yeah. Number one, and I'm the antithesis of it. But I learned to rein myself in, let them talk. Let them talk and talk and talk, try to go out to dinner with them. Ask and, and, and you'll find stuff out about them by asking questions that have nothing to do with their business. What do they do for fun? Where do they go for trips? Tell, tell me about your family, get to know them personally, and you'll start to dissect what makes them tick. The other thing is, they may be hesitant to say what they want. So you, you may have to guess at it or talk to people around them. Right? And again, it's not that I'm saying that their number two or their CFO is going to, like breach their confidence. But they might be willing to say, you know, listen, I'm the brand is really important to Susan, Susan really cares about the brand, you should keep that in mind. Right?

Ronald Skelton  48:05  

Michael Frankel  48:05  
 So I, I think asking a lot of questions and, and, and asking a lot of questions that aren't traditional due diligence questions like, Well, how did you get started in this business? Why did you build that? Why'd you choose this product? Why did you choose this location? You know, What's your philosophy around how you run your business? You know, what, how would you describe your culture, stuff like that will sort of, you'll start to extract little nuggets.

Ronald Skelton  48:30  
Least I'm on the right track. That's where I always started. I love it. I love starting like, what? Tell me how you built this, like, you know, tell me the origin story?

Michael Frankel  48:35  

Ronald Skelton  48:36  
And then you know, it, didn't I, you know, I have a knack for people to open it up to me, you know, I used to not like it much because I, I within 20 minutes, I know everything about anybody around me, then it got to where I'd like you know, that's actually a not a bad skill to have. And so that I always start there always start with like, so tell me how you built this, you know how to do you got family? Are they involved in the business? You know, I asked that one a lot, because I, I found a few times where husbands leaving and we found out later and towards the end of the due diligence that why probably won't want to stay around either. And she's been doing all the books for years. Right? Or she's a you know, she's like the glue that holds everything together. She's, you know, they call her the office assistant, but she does pretty much everything and he's just a figurehead. You'll be surprised on how many times in the older businesses were like the owners in their 70s You know, in their generation. It wasn't common, especially in manufacturing stuff for women to start those type of businesses.

Michael Frankel  49:31  

Ronald Skelton  49:31  
 When you really look at it. My dad worked this entire life at one and Emerson and wanted to rent it. They're both gone now. What is the right one to run that business from day one Emerson new paint was a paint manufacturing company. He knew how to like you know how to do that. He was He came from that industry, want to run their business. She ran the sales guys, you know, he walked around and you know, Many stuff I remember as a kid he would buy like, they used to love taking stuff there to sell to him because he's like, Oh, you're selling candy case I'll buy one for everybody in the factory and he you, you stopped by if you're the first one to sell chocolate bars, he buys 100 of them because he had almost 100 employees. Right? So, you know, I always made sure I had extra boxes in the back because I knew what he's gonna say. But she ran that company

Michael Frankel  49:31  

Ronald Skelton  49:35  
 and an early stages, she probably one of the biggest influences, I had to be an entrepreneur, because on Saturdays, my dad would take me to work. And she'd always had me come sit with her for a little while, and I would see her do she did accounting on the big green pads, like for

Michael Frankel  50:26  

Ronald Skelton  50:26  
 the wayne computers and stuff. And obviously, you're doing all this stuff. And I was like, what do you do it? And she's like, Oh, Brown here, she'd show me and why she's doing it and why it's important that, you know, yeah, so knowing who's in the company, who the key players are, what their motivations are, and, and getting to know who interactions is, is important. I get that.

Michael Frankel  50:43  
absolutely yeah, yeah, yeah and, and it allows you, you know, yeah, it allows you to maximize value, but it also allows you to make everyone happy, right? Because I you know, I, I want the lowest purchase price possible. But if along the way I can give the founder something that will make them happy. That's great for me, and especially if it makes the employees happy, that comes back to me because you know, I that I, I need retention. So I think it's, it's actually interesting, a lot of m&a people, you know, your audience has a lot of people who actually run businesses, if you run a business, you need to focus on humans, right, you need to actually think about what humans want what's going to make them happy. But a lot of people who do just pure mergers and acquisitions aren't necessarily wired that way. They, they haven't necessarily run businesses, they haven't had to think about employee morale as much. And they tend to try to make it a purely financial transaction. And I feel like it's almost two ships passing in the night between them and the founders. Because the founders are like, Yeah, yeah, yeah, I understand you want to you know, it, it's, it's sort of the difference between buying the car that I have on my used car lot, and buying the car that I lovingly restored with my father over the last 20 years. Those are two totally different types of financial

Ronald Skelton  51:58  

Michael Frankel  51:58  
 line is right. And the second one, I'm, I'm Yeah, I want to get a price for it. But I'm also really concerned, what are you doing with this? Are you going to drive it carefully, you're gonna, you gonna maintain it, you can change the oil? I actually care about that stuff.

Ronald Skelton  52:10  
We're running out of time here. And I hate to do that. But so what if, if, if somebody can only pull two or three things out of the show? What would you want them to walk away? Like? What, what would be? What would, what would be the top takeaways you want people to have on the show?

Michael Frankel  52:26  
Sure, I'd say number one, especially over the next couple of years, but always, there are diamonds in the rough sitting in large corporations, if you can find them, there's a huge amount of value to be unlocked. Number two, if you're selling a business, prepare it for sale, the, the prep is as important as the thing that you built. And then number three, I'd say think about everyone around the tables motivations, what they want financial and nonfinancial. If you can figure that out, you can construct a deal that's better for everyone, but perhaps more, most importantly, better for you.

Ronald Skelton  53:04  
How do we reach out? How do we reach out to you if somebody wants to work with you or chat with you about something they heard on the show?

Michael Frankel  53:10  
Yeah, absolutely. So best way is there's contact information at my website, which is Michael And I also have a couple of books. You know, depending on what level of sophistication you have around m&a, I've written a book called m&a basics. And another one, called m&a deal makers. And I try to speak on things like this, because I love this topic. And then you can also you can find me on LinkedIn as well. I'm a little bit of a Luddite, so I'm not on Instagram, or Tiktok, or any of that stuff. But, but yeah, Michael and LinkedIn, always a good place to get me.

Ronald Skelton  53:43  
I'll put all those links inside of the show notes. I'll have my team also put the books on Amazon on there so people can get to that. I appreciate you being here today. And is there anything that myself or the audience can do for you if you got any? Any asks that you could, you know, say, Hey, have you got a company like this? Or? Or?

Michael Frankel  54:01  
Yeah, absolutely. I mean, I, I think if you, if you have a company you think fits the criteria. I'm always interested in hearing about them, and you can reach out to me. You know, I always love to speak to audiences. So if you ever getting a group together, and you want to talk about m&a, and then you know if you know people who could benefit from it, love love people to buy my books, not just because I make some tiny amount of money. But I'm a deep believer in m&a as this value creator. And so I love people learning more about how to do these things, right.

Ronald Skelton  54:32  
Lynn over an eficionado acquisition Aficionado magazines putting together an event here he asked me to be one of the speakers. But if you'd like to talk, it's gonna be a virtual event but a. He's got a magazine about buying and selling companies and he's putting together something that sounds like we'll get you on the radar for him to see if you guys want to have a chat about that.

Unknown Speaker  54:49  
Oh, that'd be great. Yeah, as you can tell, I, I, I am not very talkative and, and I'm very quiet.

Ronald Skelton  54:55  
Now. This works awesome. Well, I appreciate having you on the show. hang out for a second afterwards and we'll call that to show guys. 

Michael Frankel  55:00  

Ronald Skelton  55:01  
Hey, it's your host, Ronald Skelton, I want to thank you personally for watching the show today and invite you to call our new hotline 918-641-4150. That's 918-641-4150 Call us and tell us about our show, ask questions, suggested guests or even tell me about a business you have for sale and we'll reach back out to you. Again, that number is 918-641-4150. call our hotline leave us some information. Thank you. I don't want to announce our new channel partners the ITX marketplace since 1998 ITX has created 5 billion in value by selling more than 225 it businesses in 20 countries. IDX works exclusively with it enabled businesses generating between 5 million and 30 million who are ready to be sold in m&a to decision makers who are ready to buy for over 25 years ITX has developed industry knowledge that helps determine whether a seller is a good fit for their buyers before making the match ITX mergers and acquisition marketplace we are partnered with has a proprietary database of 50,000 plus global buyers seeking it service firms managed service providers Microsoft service providers software as a service platforms and channel partners with Microsoft Oracle Service now itself and the Salesforce space. If you have an IT enabled business you're ready to sell. I want you to visit the I T exchange How to exit that link will be in the show notes visit them now. The investors and entrepreneurs professional mastermind the investors and entrepreneurs professional mastermind combines that or traditional peer to peer mastermind introduce first in Napoleon Hill's famous book Thinking grow rich with accountability partnering, where your peers help you ensure that you set goals take action and get results. If you want to scale blow past roadblocks and achieve success faster than you might think is possible. I suggest you take a visit over to That's T i e. P And check out the investors and entrepreneurs professional mastermind