The art of not f*cking up the deal | M&A with Ben, Joshua Hinton, and Adam Laidlaw

Ben Williamson
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[00:00:00] Ben Williamson: Thank you everyone for comingon this lovely, warm, "dry" Melbourne evening. Welcome to FreshHeadquarters, sometimes called the Fresh Rooftop. Thanks for joining us tonightfor our first masterclass on "The Art of Not Fucking Up the Deal",which is a very important topic to go through.

[00:00:21] Ben Williamson: So, introductions, I'll jumpin first. Ben Williamson, from Fresh. Before starting Fresh I worked on about adozen private equity-style transactions, for about a quarter of a billiondollars. So, a lot of sell-side M&A work. And since Fresh, we've worked onmore than 2000 ASX-listed transactions. So, a lot of deal flow, a lot of deals,and a lot of lessons and learnings.

[00:00:46] Joshua Hinton: Josh from CTO Labs. Originallyworked in product engineering and just building software products, and thenmoved into M&A around assisting customers try to really understand what wasgoing on under the covers. We've done about 80 transactions in the last twoyears, and largely focused on asset performance as opposed to traditional riskmindset around compliance.

[00:01:05] Adam Laidlaw: Hi, Adam Laidlaw partner atBecketts Lawyers. We're a startup corporate specialist M&A firm. We startedin February last year. Our specialist areas are mid-market M&A and, Ireckon, probably 80% of my deals are either working for founders or involve afounder element to them.

[00:01:22] Ben Williamson: Adam and I have actually knowneach other for a few years, and I've already given him a bit of flack forcoming dressed in a tie, which he's taken off to make him feel a lot morecomfortable.

[00:01:32] Adam Laidlaw: And the jacket.

[00:01:33] Ben Williamson: And the jacket. So, we'regoing to talk about deal flow from really three different points of view. Andsomething I like to do is keep alliteration in there when we can, so we're goingto talk about people, perspectives, and projections, and how that flows throughinto deals.

[00:01:50] Ben Williamson: So thinking of perspectives,it's really interesting, deals can be quite dry, they can be quitequantitative, and document-heavy, and those sorts of things, but it's reallyimportant to know that any deal has got people on both sides of it, and the waythat they interact and the way that they view the information is reallyinteresting.

[00:02:10] Ben Williamson: You guys obviously worked on alot of transactions. Is there comes to mind when thinking about the impact ofperspective in a transaction?

[00:02:18] Adam Laidlaw: Oh, absolutely. I viewtransactions from a legal perspective and in any M&A transaction I thinkit's mainly about trying to balance a risk allocation where there is an extremeimbalance of information. From a seller's perspective or a founder'sperspective, they'll have an innate knowledge of the business, which isfundamental. The buyer doesn't have that. And being able to actually marry upthose two perspectives and then balance the risk between them is reallyimportant.

[00:02:48] Ben Williamson: I remember a transaction thatI worked on; it was actually my first ever transaction. There's a companycalled True Value Solar, and we were selling it to a Austrian billionaire, andwe're sitting in the tallest floor of the largest building in Vienna doing thisdeal. And our side of the table, as Adam said, knew a lot about the businessand we were talking about the business from a very knowledgeable point of view.

[00:03:12] Ben Williamson: The other side had no idea, sowhen we would say things and when we would give numbers and facts, as we sawthem, they were then asking for supporting information. And it was a reallyinteresting comparison, where, when you start to dive through that and ask forthat support, there's a line as well where trust really comes into it. Andthat's a really interesting balance to go through. We ended up saving the dealand got the transaction through, but it was touch and go and it was really fromthat people aspect, that perspective aspect.

[00:03:44] Joshua Hinton: I think empathy comes down withboth sides. The mindset of an investor looking at the deal, and then atechnologist and a technology team, we've got highly introverted mindsets onthe technology side who take a while to open up and share. And it's impossiblefor us to get to the bottom of what's occurring inside an asset and thenprovide that back to an investor to understand.

[00:04:04] Joshua Hinton: So, I see our role as partlyabout opening up and allowing the technologists to share what they've createdover a period of time, and then translating that back to an investor so theycan understand what they're going into.

[00:04:15] Ben Williamson: So, when you take thatinformation, I guess through the, say, the legal side... So, you are goingthrough the tech stack you're finding information that's quite relevant, etcetera, you're feeding that back to the lawyers as well. Adam, how do you thinkabout like, when that information comes through, how do you ingrain things likethat in clauses, to try and protect either side?

[00:04:34] Adam Laidlaw: I think that, from myperspective, being able to build the trust is quite important in anytransaction. The best way to build a trust in a transaction, I think is a levelof transparency, particularly from the sell side. If you're a buyer and youfeel like something has been held back or you've got uncertainty about someassurance that's been made, it's pretty easy to erode that trust.

[00:04:55] Adam Laidlaw: But likewise, you need to befairly careful, and it's a bit of a balancing act, particularly if you're sellingto a competitor or something like that; working out exactly what level ofinformation you can actually disclose, without it actually being a commercialrisk if the deal falls over.

[00:05:10] Ben Williamson: Have you seen that play out?Have you seen deals fall over because of that? Because they don't want to givethat level of information that could then be an issue?

[00:05:17] Adam Laidlaw: I've seen, actually, a fairlyrecent deal, not just the deal falling over, but probably the balance wasn'tquite right in terms of sharing and they potentially overshared information.And then the competitor pulled out of the deal and then tried to use thatinformation to undercut the business. So, there is a real balancing act, andthe trust works on both sides of that sharing transaction.

[00:05:40] Ben Williamson: As you were talking aboutthat, one of my shareholders is in the room and quite often riles me up aboutoversharing, as an overly trustful person. So just sh, let's not talk about itin front of him. I think that's a really important point. Josh, you've seenthat come through in tech, especially from a code-based point of view, that'sreally deep level of information.

[00:05:59] Joshua Hinton: We see it more in theacquisition of customer onto a platform. So, you'll have one business that's acompeting business, trying to acquire another one. They've got their own uniqueway to acquire customers through their Google AdWords, and so on and so forth.They'll compete, and when they know each other's word patterns, they'll be ableto steal or what have you. We ended up sitting in a deal where all theinformation was in escrow, and we got to statistically provide it back to thebuyer without any context of actually what was going on. So, we sat in this middlemansection. That was how it was handled in that one.

[00:06:28] Adam Laidlaw: We've had fairly similartransactions, particularly in the biotech space, where we've had to set up anessentially locked room database where only specific members of the legal teamor the biotech DD team are allowed to enter that data room. They're not allowedto take any photos, they're not allowed to download anything, they're onlyallowed to take handwritten notes, as a way of trying to protect that supersensitive commercial information.

[00:06:57] Joshua Hinton: Probably, also, like at a codequality level, and the ability for that asset to scale, we'll get in and lookat statistically what's happening in the code, as opposed to actually lookingat the code. So, we get no access to the IP, but we're going to look at thecomplexity, how that's going to affect maintainability, scalability, and then,ultimately, how that affects the thesis, moving forward.

[00:07:13] Ben Williamson: Let's talk from a buy sidepoint of view, for one second. I'm a company looking to acquire another one.What are some tips to move the deal a bit further and build that momentum intoa transaction?

[00:07:25] Adam Laidlaw: There's no secret that timekills deals. If you lose the momentum, the deal falls over pretty quickly. Andso being able to maintain that momentum is pretty important. The key stickingpoints are typically around purchase price. They're the most sought-afterwarranties and indemnities and limitations, I think, from any transaction perspective,though, it comes down, not just to what you are trying to achieve from the dealbut trying to understand what the other side wants to achieve from the deal.

[00:07:55] Adam Laidlaw: It's a very differentdiscussion, talking to a founder who wants to exit the business entirely, andyou want to maintain that founder in the business to try and transfer theirinnate knowledge and actually make a smooth integration than it is to a founderwho actually is really keen to continue to grow the business and actually makeit something better and wants to have a continuing role in the business.

[00:08:19] Adam Laidlaw: And so, from that perspective,your focus as an acquirer probably shifts, and in the perspective of a founderwho wants to continue in the business, it becomes more of a rolled equity play,where you could offer them equity in the company that they're selling into. Ifthey wanted to actually exit the business entirely, it's probably more likely goingto be an earn-out-type arrangement.

[00:08:38] Ben Williamson: From the other side, gettingready for some of these transactions, too. I think one of the things aboutperspectives is setting the tone and making sure you can control the narrative.So, if we switch from the buy side to the sell side of it, so now I'm a sellside, maybe I've got something like Ansarada, set up for my financial DD andthose sorts of things. What can I do from a technical DD preparation point ofview? I'm throwing this one absolutely curveball to you. What can I do fromthat DD point of view to get ready for the technical analysis?

[00:09:08] Joshua Hinton: We see maybe 20 to 30 techteams and in the last three to six months, I'd say that none of them areactually ready. None of them are really ready to answer questions that areprobing into the things that they've created, so they're protective of that. So,there's an element of teaching them to be a little bit open, to share a littlebit. There's an element of publishing the technology stack out around what thecomponents are. There's a lot that can be learned from the outside, and I thinkthat for us, going in, if people are open and willing, it allows us to shareand give comfort on the buy side a lot quicker.

[00:09:39] Adam Laidlaw: There is a lot to be said forgetting your house in order before you actually proceed to a sale. So, a lot ofbusinesses have this high ideal that they'd like to have an exit, andeverything like that, but spending a little bit of extra time either gettingfinancial advisors, tech advisors, legal advisors, to come in and assist withgiving a health check to the business and how it would present, goes a long wayto, actually, presenting the business in a much more profitable way.

[00:10:07] Ben Williamson: And as you say, time killsdeals, time kills momentum. I guess, transitioning to the people, and probablystill that link between perspectives and people, Adam, you touched on foundersat the start. As a founder, I know the difference that I have in this businessversus other businesses that I've been part of, and the way that I think aboutit, the way I internalise it, et cetera. Quick off the cuff of both of you,who's better to deal with in a deal? A founder CEO, or a non-founder CEO?

[00:10:33] Adam Laidlaw: Depends on the CEO.

[00:10:37] Ben Williamson: Answered like a lawyer. But howdo you think about the difference in the perspective that those people bringinto a transaction? Obviously, it's different if they're staying on or not, buthow do you work on processing those perspectives and dealing with those people?

[00:10:51] Adam Laidlaw: So, from a founder'sperspective, there's quite often a lot more emotion involved, and it depends onthe particular founder in the particular business. If this is not the firstbusiness that they've rolled out and they've been through the process, thenit's quite seamless to actually take them through the process. But if you'retalking to someone who founded the business 30 years ago, has built it up tosomething, has started to look for an exit, there's probably a lot moreeducation in the process and understanding it and trying to take a lot of theheat out of some of the emotion.

[00:11:24] Adam Laidlaw: I was in a negotiation earlierthis week where we're acting for a private equity buyer, and we werenegotiating with the lawyers. It was an all-parties call, we were negotiatingwith the lawyers on the other side, and it was very polite, and we made ourpoints about certain warranties and indemnities and, really interesting lawyerstuff.

[00:11:43] Adam Laidlaw: But the founder, who was anolder gentleman, got quite emotional, because we'd made a point of saying,"we want this indemnity because we just don't know if there's been anunderpayment of employees", for example, and the founder got reallyemotional that this was a personal affront on them rather than...

[00:12:04] Ben Williamson: Yeah, they could havedone that.

[00:12:05] Adam Laidlaw: It was us suggesting that theywould've tried to underpay their workers and things like that, and it involveda real change of tack on our part to try and make it clear that this is not aninference, this is just a commercial discussion.

[00:12:18] Ben Williamson: We've all been in those rooms,right? But maybe if people want to put their hand up, who's been on those sortsof calls, on those sorts of deals, where you are either an advisor or you'reacting like on the deal at that level.

[00:12:31] Ben Williamson: Cool, so probably about 30% ofpeople here. I guess my background with this is relatively interesting becauseI was only out of uni for two years before I was in a role and acting in thenumber two seat on a transaction like this. And still really the biggest dealI've ever been on, like a hundred-million-dollar transaction. It's a veryinteresting dynamic to be in the room.

[00:12:53] Ben Williamson: The sort of things that you gothrough, and the boxes to tick off are you know, 80% of the stuff, in abusiness you've probably never considered before. Things like, "oh give usan indemnity that you haven't underpaid your staff." Of course, I haven'tunderpaid my staff. Not knowingly, not actively, not anything like that. But togo through that process, it becomes an emotional response. We're all people,it's part of it. This is an emotional process.

[00:13:20] Ben Williamson: When you're doing atransaction of millions of dollars, that is, especially I think a buyout, likewhen it's an exit. The buyer will ask a hundred of these questions. This is oneexample of a hundred things and it's legal aspects, it's accounting aspects,it's technical aspects, and it's really important if you're going to do thattransaction, from a sale point view, to get people involved earlier and almostset it up, so that you've got someone who has been through it and they can runthrough those hundred items. First of all, you'll be more prepared. Secondly,it'll take the sting out. You'll be expecting that question. You're not caughtoff guard anymore. I guess that catching off guard is a really interestingaspect. I remember one of a deal that I was involved in, that the pitch wasreally good. It was a buyout of a business. We were on the sell side, andeverything was going really well, and then the last slide of the pitch deckcame up, and it was the price that they wanted. It was not my call, I wasn't inthe room for this, but the price was like five times what the business wasworth, and it just sucked all the energy out. I was outside and I went,"oh shit, something's just happened in there". You could see itphysically in everyone. The energy level just dropped, and it was dead. And ifthat had gone through a third party, there's no way that price would've been onthe table, it was not commercial, it was nothing. But it just killed the dealin an instant. Is there anything that comes up where you've seen a deal goingwell and then it's turned a corner and just dropped off?

[00:14:57] Joshua Hinton: There's a couple. We've beeninvolved doing mid-diligence, we have been asked to put tools down and ourmanagement sessions have been cancelled and we haven't really been providedmuch insight and we're just on hold. One of these ones is a ransomware attack,was midway through happening to the target at the same time. And so, they hadall their identity documents stolen, and what have you, and we got pivoted, andasked to look at and quantify what the risk was. It's quite interesting, atthat point, when documents are gone, it's very hard to understand, andultimately the buyer put their pens down and said, "it's too big a brandrisk here".

[00:15:28] Joshua Hinton: So that's an interesting one. Thereare other ones where the tech just will not function against a thesis, and thatbecomes quite apparent quickly, the threshold risk to resolve those issues istoo high.

[00:15:38] Adam Laidlaw: We had one transaction where Ithink in the middle of a DD call, someone, made a flippant remark about analleged sexual assault in the business, and immediately it was pens down. Itwas remarkable how quickly the deal died.

[00:15:58] Ben Williamson: Yeah, that'll do it. Yeah.It's actually good that it did it, right?

[00:16:03] Adam Laidlaw: Absolutely, it is.

[00:16:04] Ben Williamson: Obviously, there's a coupleof, types of transactions, right? As a growing tech stock, we've got to raisemoney and that's more about a journey as you go through. Definitely, if you arelooking at multiple rounds of that sort of thing, hitting projections is reallyimportant, and making sure that you're putting out accurate numbers, as a lotof the businesses that are really exiting, right? We see projections comingvery strongly. We see clauses abound, hitting them, like earn outs or ratchetsor things like this factor in. Adam, as you said before, like, that level ofknowledge is asymmetrical.

[00:16:39] Ben Williamson: And. that factors in quite abit. Where have you seen projections come in and impact transactions, eitherslow them down, really, impacted, the outcome of the deal?

[00:16:51] Adam Laidlaw: I think that, typically you'dsee them in an earn-out context. An example that comes to mind is probably abit of a flip on a projection in that the business was doing too well and theywanted to try and incentivise the founders to stick around for the full earnoutperiod. And so it ended up being the case that, not that there was an argumentabout whether they'd hit the targets and get their earn out, but once they'vehit their targets halfway through, the earn-out period, how do you actuallyincentivise them and recut the deal to keep them on board? Because they wereobviously so successful at what they're doing.

[00:17:27] Ben Williamson: I actually heard, it's apublic example, so I can talk about it, there was Oculus. When Facebook boughtOculus, they had certain projections to hit, both from a deal point of view andthe employment contract point of view. And they had four years to hit thesevery high stretch targets. It was like quality of the product, number of users,number of hours spent on product, and they actually hit all of the top end.There was a scale, and the Oculus team hit all of the top end of theprojections in two years of four. And they had this issue, because one of thethings about Oculus, Facebook paid a lot of money for it, all of theshareholders, because they didn't have many investors, all the employees had alot of stock. And so, they had this issue where, not only did they all get paidtheir maximum, they all got paid their massive bonuses, as a result of hittingthese two years early. And then they had the same issue.

[00:18:17] Adam Laidlaw: And at that point as well, it'sa question of not just incentivising them to stick around, but I know, if I had$20 million, my work ethic might drop off a little bit.

[00:18:30] Ben Williamson: Yeah. And I think some of themwere like "add another zero" type thing too.

[00:18:33] Adam Laidlaw: Yeah.

[00:18:34] Ben Williamson: Yeah. One of the, I remember atransaction that we worked on that had a, like a ratchet clause. And theratchet was around a revenue number. The projection was hit more than 20 mil inrevenue. And this happens, like there's no sort of extra dilution, hit below 20mil and there's extra dilution to the original sellers. That was all fine. Butwhat ended up happening is the operational side of the business hit 19.5million, so below, but from an accounting treatment, the R&D refund that wegot, when you are below 20 million, the accounting refund moves from the, saythe t, the tax line in EBIT, all the way up to revenue. So now, of a suddenwe've got a profit and loss that says we did over 20 mil in revenue. And it's areally interesting thing, because it's not something that anyone foresaw, it’snot something that sort of went into the legals, it was $20 million of revenue,not, and it was 20 million of revenue as per the Australian accountingstandards, which this was.

[00:19:36] Ben Williamson: But both sides have got areally valid opinion, and the sellers are, like, we did it. The buyers are,like, no, you didn't. Everyone's got reasons, everyone's got stakeholders, andit was a very contentious period of time, shall we say. In those sorts ofsituations. Let's forget that it's financial, right? Let's imagine it'ssomething else. So, what would you say, from a technical point of view, from alegal point of view, what are the next steps?

[00:20:03] Adam Laidlaw: Call your lawyer. No. I'd beinterested to hear how this one ended, actually. Typically, in a well draftedearn-out provision, you'd have a specific set of accounting principles on howyou'd assess revenue. And if it was tied to generally accepted accountingprinciples, then they would govern it. And to the extent that there was adispute, then, quite often you'd have a dispute resolution clause in there,which would refer it to an expert. And that's a way of trying to shortcut thefact that if that wasn't there, you'd end up having to go to court or toactually commence proceedings and the wheels of justice are both slow andexpensive. So, to being able to refer it to someone who's professionallyqualified and typically it's referred to a partner of a major accounting firm,one of the big four or something like that, but also immediately available to apine on it, then it's a way of trying to shortcut that dispute, and actuallygive a resolution to it. But ultimately, it's the terms of the document that's goingto do it.

[00:21:07] Ben Williamson: I think it's one of those oneswhere we met in the middle. And I think in something like that, especially whenboth parties have got a very strong opinion on it and there's a lot of moneyinvolved, it was one that I think both people walked away, not entirely happy,but not entirely pissed off or annoyed, which is probably a decent result, inthe end.

[00:21:25] Adam Laidlaw: Yeah. The other thing toconsider as well is that, quite often that's the way it will work. Quite oftenthere's a deal done to actually resolve it, when it does get referred to theexpert, that's one revenue. But the thing to keep in mind, from both a buy sideand a sell side in that circumstance is, is there actually an ongoingrelationship that needs to be preserved in this dispute? Because if you're abuyer, there's not a lot of sense in trying to sue one of your substantialshareholders, or if you're a substantial shareholder, there may not be a lot ofincentive to try and sue the company that you're a shareholder in.

[00:22:03] Ben Williamson: This was like a private equitybuyer of a majority shareholding, but all the management with the othershareholders, right? So just a really awkward situation to go with.

[00:22:13] Ben Williamson: Josh, with projections in techbusinesses, right? So, you've got a financial projection that is just sounderwritten by the quality of the product, its ability to scale.

[00:22:26] Ben Williamson: How do you see your work inthat space and what kind of work do you do to help feedback to buyers on whatthey need to be aware of that might feed into documentation or feed into deals?

[00:22:38] Joshua Hinton: Yeah, I think it's important toreally understand the ongoing thesis on any of these transactions.

[00:22:43] Joshua Hinton: One of the things that we lookat is really sit down and work through what they're looking to achieve out ofthe transaction and then map some scale points back into the tech. So, we'll belooking at scalability, not just on will the technology scale more users, butwill the technology team be able to support the development required to scalethose users onto the platform? And then the financial metrics of that.

[00:23:04] Joshua Hinton: I think that's the kind of thekey feeds. And then depending on the revenue profile around, say, key featuresthat they're prioritising, is there a way to increase revenue or to releasefeatures quicker? Which is more kind of value creation line around how we getthere quicker.


[00:23:18] Ben Williamson: Cool. So, we're about to takequestions from the audience. If you've got questions, get ready. I guess tothat point, with people in projections, like, how important is it to be asubject matter expert in that area as a buyer? If you're buying a techbusiness, you need to have people on the buy side that are deep tech. Can youstep in? How adjacent do you need to be?

[00:23:41] Joshua Hinton: I think it depends how familiaryou are with bringing in consultants as required. Our recommendation isobviously to look after the commercial diligence and the target market and how you'readdressing that target market. Actually, going down into the tech, you canbring specialists in, but the closer you are to the business, the more likelythere's going to be successful. I still think it comes down to the interactionof the people before the technology.

[00:24:02] Ben Williamson: Questions? I might borrow amic.

[00:24:06] Adam Laidlaw: Don't get up.

[00:24:09] Attendee #1: I've got your mic and thequestions aimed at yourself. So, you touched on trust and that's one of thebiggest issues, I believe, between the parties. We've had quite a fewacquisitions fall over, trying to get everyone to agree on the warranties andindemnities. So, what advice can you give in how you manage that between theparties on making sure that the warranties that you're asking for...? Becausethey become very important, particularly from a technology perspective. How doyou manage that between the parties?

[00:24:41] Ben Williamson: And Jeff, just a bit ofcontext, most of the deals that you do, from my understanding, are withfounders selling their business, right?

[00:24:48] Attendee #1: Correct.

[00:24:49] Adam Laidlaw: Really good question. So, Ithink that the best way to build trust from a founder perspective is, actually,disclosure. And when it comes to a warranty regime under a contract, typicallythe way it will operate in an agreement is that anything that's disclosedthrough a data room, fairly disclosed, is typically the language that's used,will qualify those warranties. And so, from a founder perspective the processthat you have to go through and actually educate them on is that unlike in alot of situations, you actually want to share as much as you can, because thatinoculates you against the future risk of a warranty claim. Where that doesn'tprotect you is in the context of an indemnity. So, the difference between awarranty and indemnity in a business sale or an asset sale or a share sale isthat a warranty is typically for an unknown risk. And so, you make a number ofstatements that you say are true or you believe them to be true, and if they'renot true, then the buyer can go after you in a claim, unless you've disclosedagainst them.

[00:25:53] Adam Laidlaw: And indemnity, on the otherhand, is typically to safeguard against a known risk. So, for example, in yourdue diligence investigations, you've uncovered some environmental contaminationat one of their sites, then you would seek a specific and indemnity to protectyou against that risk because it's been disclosed to you.

[00:26:12] Adam Laidlaw: And so, a process, I think, interms of reaching that balance is taking a reasonable view that the more youshare, the more you're actually going to protect yourself. And, unless there issomething that is a specific risk that you're trying to guard against, or aknown risk that you're trying to guard against, you've got a reasonableargument to actually try and resist that. And if you can put the logic into theroom and take the heat out of the discussions, I think that actually goes a longway to actually meeting in the middle.

[00:26:42] Ben Williamson: Great.

[00:26:42] Attendee #1: Yeah, that's a good answer. And,again, that gets back to that trust. And I think if you can build that trust oneither side early, I think you've got a huge advantage.

[00:26:51] Attendee #2: The balancing point against thatis that my experience of some founders, perhaps not all, is that they can beincredibly protective of the intellectual property that's inside theirbusiness. How have you typically managed it, where a founder has been,particularly a first-time founder, which I think he referenced, has been veryunwilling to share the intellectual property, or has been, perhaps a littleuntrusting of the other party, when it comes to sharing intellectual property?

[00:27:17] Joshua Hinton: Well, it's different in everycase. Often, where we have limited access to actually discuss with the companyaround getting underneath the covers of the actual asset, they'll share screenwith us on certain areas and we'll agree a frame of reference for things thatwe can look at.

[00:27:32] Joshua Hinton: And that frame of referencewill be then agreed with our private equity buyer. That's probably the mostconstrained that we've had to do, from a sharing perspective. And then thecolor of the information we get is probably at a lower fidelity, so the riskprofile with that's a little bit higher.

[00:27:46] Adam Laidlaw: I'd also add that there are sortof mechanics that you can implement to protect sensitive data along thejourney. I'm, I'm working on a transaction at the moment where there's a keysensitivity about customer relationships and key customers. And so, althoughand, essentially, what we are buying, acting for the buyer, is a revenue streambased on those customers, produced by a particular workforce. And so, what has,up until a final stage of due diligence process and the negotiation process,been disclosed to us is a redacted form of those documents. And so, there'sbeen a mapping exercise that's had to happen in sort of a black box typeperiod. And similarly, sort of, if there are particularly sensitive parts ofthe information that they don't want to share.

[00:28:36] Adam Laidlaw: They can have a staged diligenceprocess where they can have a general diligence exercise, which takes them to acertain point. And so, well, you need to be at the point where you're onlydoing confirmatory due diligence, once we disclose this final black box DD too.

[00:28:51] Ben Williamson: I think another thing withthat is probably also from a people point of view, almost the perspective ofwho initiated it.

[00:28:59] Ben Williamson: So, if you've got someonetrying to sell the business, definitely from what I've seen, if they're tryingto actively sell the business, they're definitely more open to beingtransparent, right? Because they're trying to take that step, whereas if you'vegot the acquirer has approached and he's going that way, then, "hey, I'dbe happy not selling, here's the information", or "here's the levelI'm willing to give". And I think that also feeds into how far people willtrust, how far people will go.

[00:29:25] Attendee #3: Hi. I've got a related question.You made a comment before, that you acted for a party where one party's frontedby a competitor and they've further than used that information to benefitthemselves. They obviously signed a nondisclosure, prior to that. Would thatnot kick in? And how did you deal with that transaction or, related to this,how do you deal [with] those sorts of transactions where one party is,concerned about their IP, and especially when they're dealing with acompetitor?

[00:29:54] Adam Laidlaw: Really good question, and it isa bit of a balancing act. You never really want to have to put your NDA to thetest in court. The much better outcome for you is actually to protect thesituation. Prevention is a lot better than the cure. So, if you can actuallymanage the information flow and actually limit the level of your exposure inthat sense, I think you're going to be in a much better situation than if youhad to actually take the NDA to court. It's not to say you can't do it, but, asI said, the wheels of justice are pretty slow and they're very expensive. Andby the time that. Your information has already been taken out the horse islikely to have bolted, at that point.

[00:30:31] Attendee #3: So, what do you do with thedamage that is obviously happening to your client or the other party?

[00:30:36] Adam Laidlaw: So, look you could do a numberof things, you'd have to go to court if you wanted to enforce your NDA. And typically,you could approach it in one of two ways. You could try and seek an injunction,to try and prevent them from using that information that was in breach of the NDA,but that's not a permanent solution. Typically, the fallback there would bethat you'd have to bring a claim for damages for the loss you'd actually sufferfrom the misuse of that information.

[00:31:01] Attendee #3: And I guess the second questionwas, if you're acting for one of those parties and you are wary that you wantto share limited information, how do you make a sound decision?

[00:31:10] Adam Laidlaw: I think it's a pretty involvedconversation with your advisors. I think in this circumstance, both legaladvisors, corporate advisors will have done this quite a bit and they can guideyou through the process of working out where the right balance is, and actuallystress test both where there enough disclosures being made and what exactlywhat should be held back.

[00:31:33] Ben Williamson: I think one of the otherthings with that is and probably a bit of a theme to pull through this, do thework up-front, do a lot of this early, work out what you want to discloseearly, get prepared early, do your due diligence on yourself before someoneelse does it. Get ready so that when a transaction happens, you're fullyprepared. And that is probably the best prevention you can do. I think thepoint of all of these documents is, you've said this to me before Adam, as wellwith transactions, you don't want to get to a point where you have to take itto court, down the path.

[00:32:04] Ben Williamson: I've seen that happen, I'veseen people end up in hospital because of stress as a result of transactionsthat have gone out of kilter, and then they've gone to court for years andspent millions of dollars. And even if they're successful in that, I think, afew years later if you give them the choice again, they would've just walkedaway.

[00:32:22] Ben Williamson: So, I think part of it as wellis doing your prep work and then if something happens, I think you really justneed to ask yourself, is it worth it, as well. Because the chances are that thedistraction that it'll cause, the stress that it'll cause, will be more valuedestructive than the alternative to.

[00:32:37] Attendee #4: I had a question just aboutvaluations. So, obviously, the market...

[00:32:41] Ben Williamson: They're very low at themoment.

[00:32:43] Attendee #4: And yeah, that was my point. I'minterested in your perspective on founders, and whether their expectations haveshifted, with the recent movements in valuations or whether you're still seeingfounders hold onto prices that were in market six months ago, eight months ago.

[00:32:58] Ben Williamson: I think the best way can thinkof framing this is as a house seller, right? Cause I think houses aredefinitely something that people in Australia resonate with a lot more.Everyone will own a house and then they'll watch other houses in the streetsell, and that'll sell for one and a half million dollars, and they'll be like,oh, mine's better, because it's got this, and it's got this. And you're reallylooking, its confirmation bias, right? Like you're looking for the things thatyours is better than the others. I think that's a bit like startup land, you'llsee someone raise money, you'll see evaluation, you'll see an exit and you'lljust start thinking about the bits that you've got, that sort of exceed this.So, when that happens, as any market drops in that situation, the vendors, inthis case founders, are always slower, they need more evidence to show them,and they'll be trailing and the same is true when it goes up. So as the marketgoes up, buyers will be the ones moving before founders, and you'll see thistime and again, where a company will sell, the founder will be like, yes, I gotthe best price, I can't believe they paid that, and then six months laterthey'll be like, oh, I can't believe I sold it so cheap, look at things now. So,I think on the whole, buyers always move first. Sellers always move second. Idon't know if that's just true for business and property, but I think it's avery close link. So definitely founder's expectations have come right down. Benfrom Archangel is in the audience. They've just raised a $30 million fund, soit's a very good time for them, to be investing at the moment, but definitelysomeone to talk to about that. It's, at least I hope, both from a private and apublic market point of view where we're at the lows, and I think there's a lotof room to, to move up. No advice. No financial advice.

[00:34:38] Ben Williamson: Any other?

[00:34:39] Attendee #1: Just from a share sale agreementperspective. When you're buying a company and locking the shareholders in, oneof the things, from a technology perspective, how do you make sure that you'vecovered off on everything on intellectual property transfer and ownership ofcode, from individuals within the business, rather than the shareholders andthe company itself?

[00:35:04] Adam Laidlaw: That's a diligence question, Ithink, in terms of as, as part of a company that develops quite a bit of itsown intellectual property and it's developed by employees, a real focus of yourdiligence is going to be looking at the employment contracts with thoseemployees, or if there was no employment contract, whether there was a valid IPassignment deed that actually assigned over all of that IP to the company. So,it becomes a diligence question, and a particular focus in a company of thattype.

[00:35:34] Attendee #1: So it's interesting and notwithin the company I'm with now, but in the past, it came back and halted this,because we didn't tie all those agreements up, really, intellectual propertytransfer from some of the individuals, and one of the staff members came backand claimed that they own the code, so...

[00:35:51] Adam Laidlaw: I've worked on a similartransaction actually, where it was a sale of a fast-moving consumer good, wherethe main intellectual property was the brand, and in diligence, they discoveredthat there was no IP assignment with the brand designer. And so, it got to thepoint where that was a conditioned precedent. And the brand designer said, Iactually own this brand.

[00:36:14] Adam Laidlaw: And he ended up greenmailingthem for about, I think, $2 million, to sign over the IP rights.

[00:36:21] Ben Williamson: So just a condition precedentfor people who got away?

[00:36:24] Adam Laidlaw: Correct. So, similar to when yousettle your house in a share sale agreement, you've got, essentially, threeparts to it. You have the negotiation of the terms, and then you sign thecontract, and then you have a period between signing and completion. Completionis the settlement date, and that's the date when legal ownership of thoseshares or the assets transfer. And in that period, between signing andcompletion, you can have certain conditions, which, unless they're satisfied inthe period between signing and completion, completion will never happen. So,they're those fundamental things that need to be satisfied before you takeownership and agree to pay your money over.

[00:36:59] Attendee #1: Yeah, it's just a real importantthing for everyone to be aware of, if they're ever buying a company, because itcan come back and haunt you and it can undo the deal on the way through.

[00:37:09] Ben Williamson: Josh, have you seen this aswell? So, when you are looking at code, is this, part of what you look at? Doyou go through, repositories of code and have people signed in with their Gmailversus their work address? Does that factor in? Is it when they spend theirtime, do these things actually flow through or...?

[00:37:23] Joshua Hinton: I'd probably think first aboutthe componentry. So, you got five different types of open-source softwarelicenses. One of them, the intellectual property is inherited into the actuallicense itself, so you don't own the IP, you create on top. That's the firstarea we look for.

[00:37:36] Joshua Hinton: And then we're also looking forany contributions to the actual repository, from people who are foreign to theorganization, and how they were contracted, so got third party arrangements.And then, obviously, the employment contracts. They're the kind of major areasthat we look at. Um, But the, the copy left open-source components we've seenin a couple of deals, where there had to be an indemnification around theownership of that code.

[00:37:58] Attendee #1: Is there an indemnification forinfringement on IP on third party rights?

[00:38:02] Joshua Hinton: Correct.

[00:38:03] Attendee #5: One more. There are a few querieson protecting the business, I guess it's a theme, you know, going through a duediligence phase and lifting up the skirt, some people say, showing everythingin the business that you've built up and the risk in sharing that information.When I first started M&A, there was data rooms, there were actual physicalrooms with folders lined up.

[00:38:21] Attendee #5: We'd go in there at the end ofthe day, after letting parties in, and there'd be pages torn out and, thingswould be missing. Those days are gone, you've secure online data rooms these days,that protect, PDF encryption and lots of things. So, that gives a bit ofcomfort. But also, the theme of, the ongoing obligations, warranties andindemnities, we're talking about black box and those things, Adam, that youwere talking about. You can protect the business, which is paramount, all theway until the settlement occurs. So, delaying, releasing certain commercialinformation, holding onto it, putting into a black box, which basically says tothe buyer, assume that that is all there the way you want it, but we're goingto let you see it until settlement occurs. That's essentially what the blackbox is. And if there is a problem right at the end, then you can pull out ofthe deal.

[00:39:06] Attendee #5: So that gives that comfort aswell, that, that proprietary information that you're trying to protect...Warranty and indemnity insurance. Can you give us a perspective? Beacuse it isa bit lawyer-led, in a lot of respects, because it's a diligence thing, and ittalks to warranties, indemnities that a vendor has to provide. How easy is it?How expensive is it, at the moment?

[00:39:25] Adam Laidlaw: Good question. I probably shouldstart with exactly what warranty and indemnity insurance is. So, there's acertain insurance product out there, which is tailored specifically. It's apolicy where you pay an amount up-front, and it essentially ensures against anypotential warranty and indemnity claim, under a particular document and aparticular set of warranties and indemnities. It is a useful way to actuallybreak a stalemate, because it actually shows that there's actually a thirdparty and it will be at a cost.

[00:40:03] Adam Laidlaw: It's typically about 1.5% of theinsured value, which isn't cheap, if you're insuring a warranty suite that's$30 million, or something like that, but it can actually take some of the heatout of those discussions, because it says the buyer will have protection, butthe seller won't necessarily be on the hook for that protection.

[00:40:23] Adam Laidlaw: There are a few caveats on howwell it works. First, it's relatively expensive, and the buyer may say, well, Idon't think there's ever going to be a claim that's going to be worth $300,000,so I don't really want to pay for the cost of getting warranty indemnityinsurance. Second, there is an innate responsibility, or an insurer won'tensure a set of warranties, unless there's been an adequate level of diligencedone. So, if the buyer hasn't undertaken sufficient, for example, tax duediligence or customer contract due diligence...

[00:41:01] Ben Williamson: Technical due diligence.

[00:41:01] Adam Laidlaw: Technical due diligence, theywon't ensure the warranty suite. Third, there are a number of specificexemptions that typically apply across all policies. Under payments is,typically, one that, sits outside of it. Asbestos or environmental damages,typically, one that sits outside of it. It can be taken out relatively quicklyand there's a number of operators out there who can do it in a sense that in atimeframe that makes it attractive, if you need to solve for that stalemate,but you actually need to get your ducks in a row. And because way that it's takenout is it's typically done on what's called a sell/buy flip, which is where theseller will go to the warranty indemnity insurer, negotiate a package ofcoverage, and then will flip that policy, so the buyer actually takes out thepolicy. And then it will sue against the insurer rather than the seller itself.But all of that is reliant on the fact that the buyer has done sufficient DD.And when you're in the position of a seller, you've got no real control overhow much DD has been undertaken. They may be making an assumption internally,that they just want to wear the risk and would prefer to rely on sort of arobust warranty suite and have the seller behind it, then spend the additionaldue diligence cash, and then potentially have to contribute to the premium.

[00:42:21] Ben Williamson: I think one thing that it doesdo is give people options. So, we talked about momentum in transactions,maintaining that momentum. If you are talking to a seller and you're like,great, here are the options, it's very big in private equity as well, thewarranty indemnity insurance. If you want to do it, here's your option. Youtake the risk, because you think the risk is low, or you ensure the risk forone and a half percent of the potential downside. There's an option on thetable and it gets the thing moving quite a bit. If you've got kids, and you'veever had to negotiate bedtime stories, eating food, all those sorts of things,the option of you can have this or this, and they're both wins for you, that'salmost exactly what it's like in a deal, giving those options. Making sure thatpeople have got choice is a really big thing. We all want optionality; we allwant choice in life. So having that is giving them a choice between these twooptions, rather than do the deal or not. And so, I think that's really key.We're going to wrap it up. Thank you everyone very much. Thank you, Adam andJosh, for joining us up here. If you want to stay, hang around.

[00:43:28] Ben Williamson: We'll be here for another houror so, having a drink, having the rest of the food. And if you've got anyquestions for the guys to come up and say hi. Thanks very much.

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