Nicholas Spezio is a Managing Director of Exbo Group’s Transaction Advisory Services (TAS). He has played a key role in expanding the practice and strengthening its capabilities in recent years. Prior to leading the financial due diligence (FDD) practice at Exbo, Nicholas was a senior manager in PwC’s audit practice. He is also a member of Private Equity Primer’s Training Advisory Committee, where he provides insights on the most valuable learning and development opportunities for up-and-coming FDD professionals. His colleagues describe him as hardworking, passionate about mentoring and leadership, and highly outgoing. We sat down with Nick to learn from his experience in M&A.

Deal Guide: You started off working in audit at PWC. How did you go about making the transition from audit to Financial Due Diligence (FDD)?  Any suggestions for someone looking to make that transition?

Nick: In audit—especially working in the private equity and hedge fund space—you learn to look for potential issues or trends that could have a significant impact on the financial reporting. I think having those years of experience of doing audits—across several clients and industries—you learn that fundamental skill of what to look for. You learn how to look at a business and think about a business in numbers.

Knowing what to look for is not enough.

Just as important is how to interact with clients. You learn that in audit too. You learn to ask things and present things in a way that is not overbearing, intimidating, or offensive. You do that typically with just one audience.  When you get to Transaction Advisory Services (TAS), the number of parties you interact with increases.  You have your client.  You have the Target.  Speaking to them at their level and communicating the right information in the right way, to each audience is its own skill.  A skill I got my early reps on in audit.

I had a bunch of different mentors who were managers, senior managers, directors, and partners all throughout my career. They helped me articulate and craft emails to be at the right level. Not too detailed, not too high level, not too much fluff. Right to the point in a way that clients and now Targets can understand quickly: what I’m asking for, what I’m looking for, and in what format do  I need it. But that took a lot of wrangling and that’s a lot of what I do with our analysts here at Exbo. For instance, I really don’t let them send emails without me looking at them. We work together to restructure them and try figure out the right way to say things. Getting to the point quickly, not sending emails that are 17 paragraphs, etc. The first question I ask them is what do we need from the client or the Target?  Is this easier with a call, rather than a long email?

If you are not clear, the email won’t be clear, and your client won’t be clear about what they are being asked to do.

Like I said before, in mergers and acquisitions (M&A) you have two parties that you are juggling. You have your client who is acquiring a business if you’re on the buyside and then you have a Target selling their business.  You have to run the Target through the process.  In the lower middle market, the owner operator likely has not run through the M&A process before. On the client side you tend to have a more sophisticated deal professional. They expect updates about progress and the numbers themselves.  They want to know early and often if there is an issue with process that will impact timing. Or if there is an even bigger unforeseen issue with the adjusted EBITDA figures. Maybe we’ve identified or uncovered some sort of complexities that we didn’t anticipate or none of us could have foreseen. That is an immediate update to a private equity group.

If I had to give one lesson on communication from audit to live by it would be to communicate timing and expectations, inside and out.  Manage the process up and out is what I tell my team.  True in audit. True in FDD.

I tell my analysts to treat our work like a game.  When it comes to communicating, if a client has to ask for an update, we lost points. You have to always make sure they understand what the status is. Anticipate!  Make it clear to the Target and client what is happening when.  Then communicate up internally and out toward the client. Don’t let anyone wondering about the status of anything.

Deal Guide: You clearly spend a lot of time mentoring your team. Exbo’s TAS practice has grown from 1 to 15 in a few years. Congrats! When mentoring your team who join from audit, I imagine the part of the job that is fairly clear to them is the technical piece. In our experience the project management and the soft skills is the surprise. Have you found the new hires to be surprised by the emphasis on the softer skills and project management?

Nick: Like I mentioned before, in audit you have to know how to communicate and manage the client.  What I think surprises them (new FDD hires) is how dynamic and different the client facing conversations are. In audit you are regularly communicating with back office controllers, fund accountants, and CFOs.  Someone in the back office accounting function is very knowledgeable in terms of the technical aspects of debits and credits.  They care about the accounting procedures and getting the entries right.  A finance focused private equity professional is focused on financial results.  They care less about the technical accounting aspects of things and more about how the business works and what profitability looks like.  You guys at Private Equity Primer have a great framework to getting at this using Foundational Questions©  to help people achieve this.

Exbo does a lot of work in the lower middle market. The Targets often do not have a large back-office accounting function. Many of the owners and executives of the Targets built a successful blue collar business or they scaled a software business. Both instances did it over 20 or 30 years on a budget. Often times they are no Harvard, Yale MBAs, like you commonly find in M&A. The owner / operator’s personality ranges more than what you might get when you are talking to the back-office accounting function at large public company. The range of personalities varies greatly in a single transaction. Very different than what an auditor may be accustomed to.  That tends to be a big shock and part of the transition from audit to doing QofE work.

I do think the relationships can be far more contentious in financial due diligence than in audit.  Sometimes things get contentious right off the back.  The seller is not used to someone asking detailed questions about their business.  That is not always the case.  Where things typically heat up tend to be around the net working capital (NWC) mechanism. To be honest this tends to be the most eye opening for my analysts.

Deal Guide: How do you manage knowing that at the end of the day you’re looking for an outcome? You’re looking to derive a set of insights your client will take action on. How do you ultimately handle Those difficult conversations?

Nick: What I have always done is start by focusing on the numbers. Everything has to be based off of good integrity, good morals, good principles.  The easiest way to get there is to have good data.  Good data is your foundation in the transaction process. And it must be fair on both sides.

That is ultimately our job in FDD. To get together a good set of accrual financial statements that could be used for networking capital purposes. We don’t ever want there to be any surprises. I think that’s the biggest value we add in due diligence is when we’re doing our work, making sure that the Target is aware of what we’re trying to achieve.  We want them to agree with our adjustments, and want there to be agreement on our ending balances. This takes a lot of questions off the table when we are putting together the NWC peg.  The numbers that are being used and reviewed in negotiation, should simply be a stated fact. You want all your work to that point to be a shining example of work done in good faith. Maybe then what gets moved around is what goes into debt and debt-like, and indebtedness or what’s working capital or what they’re going to do in terms of re-trading. Unfortunately, if that happens, that’s separate from making sure that the numbers are fully correct.

In Financial Due Diligence we’re just trying to do the best job that we can do to ensure that the numbers are correct. Having those potential disagreements are always the hardest part. But we do our best to ensure that the information that we solicit from the Target is correct. From there, we apply the data to making our adjustments. Having the right numbers to starts sort of dilutes any sort of contentiousness towards us.

Deal Guide: I believe your team uses offshore resources to work around the clock on transactions. Do you have any advice as to how to best work offshore resources?

Nick: When I joined Exbo Group, I knew that we needed to be able to move quickly through deals and work around the clock, and the best way to do that was to leverage a team offshore. So, it’s a critically important factor in our business. Our offshore resources are from India. They are an incredible team that we have. But it’s just like anything else. You must be able to train them. You must be able to get into the weeds with them. You have to have playbooks, you have to have templates, you have to have structures, you have to have constant forms of communication. You have to have transparency. There has to be that level of communication and you have to have someone who’s really leading the team there.  We work very closely with them. Last year some folks went over and led trainings to our team in India and we are going back this year.

Everyone, regardless of geography makes mistakes.  That is why we have templates, checklists, and rely heavily on training. They help limit them. We also spend a lot of time on group calls reviewing the work and giving training on the fly. Templates, training, and coaching.  They all work together.

Deal Guide: When you were transitioning over from audit to financial due diligence for the first time. What were some of the areas that you really had to dig in and learn, and how did you close those gaps?

Nick: Net Working Capital normalization was certainly one of the biggest components of my FDD education. I definitely was trying to conceptualize traditional, “net working capital,” which includes cash and all your current assets and current liabilities. NWC means something different for M&A purposes. Going back to the idea of negotiations and potentially contentious conversations, what are you including in NWC and what are you putting into debt, debt-like items?

I think the other piece that truly took me a long time to really get my mind around was getting past the black and white thinking encouraged and needed in audit. In audit you can test a procedure and sign off on it based on a set of rules.  In M&A, it’s a lot more gray because so much of it is what two parties—a buyer and a seller—agree to.  It’s all negotiated. That is another hard part of shifting from audit to TAS. Once you get the hang of that, it is what makes each deal unique and interesting.  The nuance of each sector and the negotiation is where there is continual learning after years on the job.

Deal Guide: Last question, what did you wish you knew earlier in your career?

Nick: There is one thing I want the younger people on the job to know and embrace. Knowing the technical is just part of the job.  If you want to have a vibrant career in M&A then you need to build your network.  You need to build your personal brand, have a great name and reputation with those you work with.  And here is the part I wish more young people knew. Your network, who you are as a person, your personal brand, your name, your reputation, all those things are really, really important. And I think too many young people don’t realize that and try to play catch up because they focus on the technical and ignore the networking aspect of things. When they’re my age, when they’re like 35, 36, they’re trying to build a network and attempting to build a book of business. Building that book starts when you’re 23 or 24. Build those connections, build your network. I tell the analysts on my team that are in their early and mid-20s to be keeping up with the analysts and associates at the investment banks we do work with.  That is who their peers are and who will feed them business ten and fifteen years from now. They are your friend and the person you want to network with for the next decade.