Gaming M&A is no longer just a story about strategics buying obvious hits. In this episode, Alexandra Takei, VP of Platform Revenue at Medal, sits down with Brogan Keane, Managing Partner at Double Black Capital, to unpack what actually happens when a game studio reaches the end of its company lifecycle: sale, exit, or recapitalization. The conversation breaks down who is buying game companies today, from private equity firms and Korean strategics to non-gaming entertainment companies looking for transmedia exposure. Brogan explains why PE buyers care most about profitability and risk mitigation, while strategics may pay more aggressively for IP, portfolio gaps, genre expertise, or future revenue replacement.
The episode also gets practical for founders. Alexandra and Brogan discuss what makes a studio acquirable, why the “million units sold” threshold matters, and why founders should focus on one valuable IP rather than distracting side projects. They also walk through deal structure, including upfront cash, retention-based earnouts, performance earnouts, and why headline deal values are often misleading.
We’d also like to thank Medal.tv for making this episode possible. If you're a PC gamer and want to clip your moments or a studio, publisher, or marketer looking to reach a high-quality gaming audience and get your game in front of the right players, check out all Medal has to offer at https://grow.medal.tv.
This transcript is machine-generated, and we apologize for any errors.
Alexandra: What's up, everyone, and welcome to the Naavik Gaming Podcast. I'm your host Alex, and this is the Interview and Insight segment. Today, we're gonna talk about the end of the life cycle for a games company, M&A, selling the studio, the exit.
And the reason we don't talk about it that often is, frankly, most studios don't get there. We spend a lot of airtime on venture, on seed rounds, on Series A, on the funding story, on the venture market because that's the part of the journey most people are actively living. But statistically, for studios and entrepreneurs that actually do go the distance, M&A is the most likely end, not an IPO.
A generational, maybe a generational private company, but most likely a sale to a strategic, to a sponsor, to a media company, to somebody. And for something so common at the end of the road, founders walk into it with shockingly little practical context on how it actually works. So, before I get into the conversation, let me ground us in sort of where we are in the actual cycle.
I want to credit Aream and Co.'s Q1 2026 video game market update, which I pulled most of my numbers from. Twenty twenty-five year was a- actually a record year for gaming M&A, about a hundred and sixty-one billion in disclosed deal value headlined by the EA take private deal at fifty-five billion and the Moonton acquisition by Savvy at six billion.
Private equity actually overtook strategics as the dominant buyer class for the first time in roughly a decade, which is interesting. These sponsors accounted for somewhere around eighty-five percent of the global gaming M&A value last year. Twenty twenty-six Q1 alone saw 7.7 billion in deal value across tr- fifty-two transactions, which makes it the most active gaming content M&A quarter since the pandemic boom, with mobile leading most of those acquisitions, of course.
Uh, Moonton, Loom, Just Play, Blue Tile, and Budge. These are just a few examples, of course. But today we're gonna talk about how that window actually works, who's buying, what kind of studios do actually get bought, how the deal gets done, what to do and what not to do, and where all of this is kind of going.
We'll also talk through some real-life deals, anonymized of course, and get the lessons learned there. To help me unpack all of this, I'm bringing on the team at Double Black Capital. DBC is an independent M&A advisory firm focused on gaming. They sit on the sell side and advise studios and founders through the process, structure, and the negotiation buyers.
My guest today is Brogan Keane, a managing partner at Double Black. Brogan, welcome to the show.
Brogan: Thank you. Very happy to be here with you, Alex.
Alexandra: Yeah, excited to have you on as well. How are you?
Brogan: I'm doing awesome. Yeah, we're super busy. I think as, as we just referred to, the market has been picking up significantly after, a doldrum period post-COVID.
And so, I think it's more of an exciting time for companies to be thinking about M&A and how to optimize exits.
Alexandra: Awesome. Before we dive in, I actually just wanna ask, like, where does the name Double Black Capital come from? And give me the short kind of version of how... do you call it DBC? Is that a term?
Brogan: Yeah, we-
Alexandra: Okay. Okay.
Brogan: Yeah, we call it DBC internally.
Alexandra: Give me the short version of how DBC, came to be.
Brogan: Yeah. So, so Double Black comes from the metaphor, the skiing metaphor.
Alexandra: Okay.
Brogan: I would... I was a, a rabid skier when I was a kid, and I loved the idea of pushing myself as hard as possible on those huge ski runs until I got in an accident jumping a cornice on Siberia at Squaw Valley, which was a very memorable moment.
But it really relates to being elite and how we create our banking unit to be elite in the transactions- Hmm ... that we execute. And then also on the content creator side, we work with almost exclusively folks who are the best in class. Almost all of our clients are million unit plus franchise selling game companies.
So, it's part of the, part of the approach, and our approach is twofold. I, I think most banks really look at transactional work, so you're doing a fundraise, a debt raise, or you might be doing an M&A exit. We look at it as more of a two-step process. So, we think of it as being more... We call it bank plus at DBC, where you're first creating and curating value for a client, and then you're transacting at some point down the road.
That often can be years. So, we'll talk about a couple of the stories later, but some of those are clients we've had for three, four years before they ever transact. But the key is that you can engineer optimal exits, I think, but you have to start with the end in mind, and you have to have time to do it. So-
Alexandra: Okay ...
Brogan: We'll also talk about examples where we had no time. We had a matter of weeks to get things done. But ideally, you have time to really create value, optimize it, and then exit some point down the road.
Alexandra: Okay. And you guys kind of came together because you believe in that thesis and you believe in that for games specifically.
And so, I think how large is your firm and when did you guys start your firm?
Brogan: Yeah, so we're seven bankers. We worked together. The founders are Arnold Chung, Andrew Perrault, and then myself. They're more specific finance, transactional backgrounds, worked for other big banks and so on over time. Most of my career I've spent operating game studios, operating or helping operate divisions, working inside gaming, and in some cases outside of gaming in enterprise software machine learning.
So, I actually... My background is largely gaming, but quite a bit of it, about 10, 15 years, is outside gaming in traditional technology, enterprise software, and so on. So that's relevant because when we bring our expertise to the table, people are looking for people who've run companies, who understand how P&Ls are built and then how they're expanded and how value is created on top of the P&L.
And I think for our clients, we're looking at, a lot of them are trying to think about, hey, if I come in hot at an early access on PC, how do I get on console? How do... We have a big client base in Asia, maybe specifically China. How do we get, how do we get inroads made in China? We help our clients develop those relationships, and that's something a bank would not traditionally do.
So, it's definitely a two-step. We call it banking plus, but it's really kind of a, an operating perspective on, on different game studios.
Alexandra: Cool. All right. Before we dive into our first topic, which is gonna be who buys gaming companies and why just quickly define sell-side advisor in gaming for me. What does that actually mean day to day?
Who's your client? Who is paying you, and, like, where do you actually sit in the process?
Brogan: So, there are two different sides. They sit on, on o- on opposing kind of spectrums. One is sell side, to your point, and then buy side. So sell side is, is I'm a studio, I've developed a product, a great product, and I ultimately want to exit to either a private equity buyer, typically in this market, or it might be a strategic buyer, like an EA that, that you already mentioned, a Krafton and so on.
So, the buy side would be somebody representing, let's say, a Krafton buying 11th Hour Games, where we were on the sell side selling 11th Hour Games to Krafton.
Alexandra: Perfect.
Brogan: In that case, they, they didn't have a banking representative. They actually managed the, the corporate development group managed the transaction themselves.
So sometimes on the buy side, it's managed by a corporate development team, and then sometimes they either work with another banker, buy side banker, or in conjunction with a, with, or in partnership with a buy side. Usually, the sell side is just represented by a single banker, and that's most of what we do is sell side, working with developers, selling them to bigger companies, private equity, and so on.
Alexandra: Cool. All right. Thank you. Hopefully that gives, in case the audience wasn't aware of the, of the banking and the, and the financial terms for, for both of those. Okay, so but actually, I know we just talked about the sell side. We're gonna talk about, we're gonna actually start with the buyer side. And I think this is where the picture has, like, changed the most.
So, you know, if you went back 10 years ago and looked at the buyer side for any meaningful gaming a- asset, it was Activision, it was EA, it was Take-Two, Tencent, Netties, maybe Microsoft and Sony. It was a pretty narrow list of strategic acquirers. And today, looking at Q1, you know, I just rambled off that list, but you have Savvy buying Moonton, Scopely buying Loom, NCSOFT buying Just Play, Mattel, 163 going to Mattel, Nazara buying BlueTile, Haveli, you know, buying Budge, Silver Lake obviously taking, , and obviously PIF alongside Silver Lake taking EA private.
So that's a lot of sovereign wealth. It's a lot of private equity. It's traditional toy companies. Mobile pure plays and some old school strategics, like, all in one quarter, which is, I think that means that the buyer universe has, like, fundamentally widened. And so, I'd love for you to just tell us a little bit about, like, breaking it down into a couple of archetypes, because I think it will help our audience understand who they could be talking to.
There's obviously PE, the strategic buyer, and the third category, which is entertainment, but not natively, na- not natively gaming. Let's... I think I wanna kind of walk through the PE guys first, but what is a PE firm- Okay ... actually looking for when they buy a gaming asset, and how does that differ from the underwriting that a strategic does?
Brogan: So let me, I'm gonna quickly kind of take you back even further. So originally, there was not a lot of PE, if any, in the gaming space. Even going back- Yeah ... beyond five, seven years ago. Mm-hmm. VCs was an asset class that's been around a bit, little bit longer with the Griffins of the worlds and the BitCrafts, but really not that much longer, not 20, 15 years ago.
It was predominantly strategic acquisitions that were happening in the market. Then we kind of ran into the Griffins and the Big Crafts, some of the bigger names that you've, you've heard over the years. But that's really a strong 10 to 12, 13-year horizon in gaming. We've seen that model not really play out very well through COVID and post-COVID in terms of the style, the returns just weren't quite venture return or venture bankable.
We can talk about that i- if, if we want down the road. PE has really come into play in just since COVID, like really the last five or six years has been a strong play. And you're right, you see strategics ebbing, but part of that is there's not as many strategics-
Alexandra: Yeah ...
Brogan: You know, out because of being acquired by private equity.
The VCs are predominantly from a funding standpoint out of the game, and most of them are doing more project-based lending or funding, so more debt vehicles or hybrid debt vehicles. There's almost no fundraising being done on a pure equity basis today, and that's super unusual, right, for, for the market.
Private equity has come into the space to fill some of the void of the dearth of investment that happened post-COVID. But they've been no, you know, poking around the Haveli CVCs, the Blackstones, the TPGs have been around. But the challenge is figuring out how do I deal with concentration risk or platform risk in many cases.
Because a PE has a different set of incentives and, and the way to put it most simply is they can't lose money on an investment, right? And so, we can get into how diligence changes because of that with private equity, and it can be incredibly extensive. But it's because the safeguards around managing risk are extreme compared to a strategic, and in some cases even a VC who's placing five to 10 bets hoping one or two of them actually land.
PE, private equity, everyone has to land more or less in their model. So that's we've seen a lot of the challenges. They have to figure out the market. How do I... What assets can we bank on that are generally very profitable, profit forward, profit facing, that we can be pretty sure the risk is mitigated downstream on a creative product?
And products creatively we all know are challenging to predict how they're gonna perform over time. So now what you're seeing is you're seeing a lot more transactions because I think they figured it out.
Alexandra: Hmm.
Brogan: But the challenge was they came in a lot of times from other markets like Enterprise. So, Haveli came in from Vista, for example, and they saw subscription revenue and live ops revenue that looked consistent.
As we've learned over the years, they're not always consistent and a lot of them don't land at all in some cases. So how do you manage that risk and create a new infrastructure and a new model that works with that? So, I think companies like TPG and Blackstone and Haveli have all been figuring that out, CVC, and getting comfortable with the model where they built it from the ground up thinking of the gaming dynamic versus layering an enterprise on top of gaming.
That didn't work, so that got scrapped. Now they brought in let's build it from the ground up for how gaming works as a model, and that's why we've seen that click and we've seen a lot more deals getting done.
Alexandra: Okay. I mean, that obviously ostensibly makes sense. And obviously, again, we're talking about buying, right, not investing, right?
So obviously the VCs we're not even gonna talk about because they traditionally don't buy companies. They traditionally invest in them and then hope that they go public and get bought by somebody else. So, we're trying to focus on the idea that like for PE guys, right, they're very risk-averse.
They're not looking for some- they w- they want stable cash flows, and I think that's reliable. So, and I think fundamentally they're looking for... When they're looking at a gaming asset, they're thinking, "Hey, like, is this cash flow reliable? Or can I build it from the bottoms-up perspective of knowing that this, these games are launching every two years and they're consistently launching every two years? Is this something that I can expect?" And I sort of wanted to kind of compare that to the appetite of a strategic buyer, which is like sort of like what they are doing, right? Which is potentially are they buying for IP? Are they buying for team? Are they buying for genre expertise, for live service capabilities, or for geogra- geographic expansion?
You know, for example, Krafton and NCSoft and Savvy have in particular been pretty aggressive and a- active acquirers. Do you think that they have a fundamentally different thesis than the PE buyer who you, as you, as you mentioned, is basically looking to, for business that doesn't ever lose money?
Brogan: Yes, exa-- I think so I would consider private equity to be traditionally very financially focused. So, we call it EBITDA, but just think of it as profit. They're looking for profitable companies. You're looking for a profitable company because you can then lever that profit, and you can borrow against it.
If you're a $30 million revenue mobile company with no prof- with very little profit, which is 80% of mobile companies in that category right now, it's very difficult to purchase. Which is why you're seeing these mega mobile deals but not mid-market, lower market deals because very few of them are, are profitable.
So, PE is not gonna participate particularly in that set. You see more strategics buying the bigger mobile. So strategics is a very different set. They'd love you to be profitable in many cases. But nine times out of 10, a strategic, usually from a board initiative, is looking for a very specific asset, and it's often to fill out a portfolio.
So, in Krafton's case with the, with 11th Hour Games last year, they didn't have a real strong player in ARPGs. 11th Hour Games creates a monster hit. They come in, say, "Hey, we can make Last Epoch 2 an absolute monster, huge hit." And then the relationship really built, worked, they gelled, and that deal got done.
But they were looking to fill that gap, right? And I think a lot of strategics are gonna fill spaces. There was a time about five years ago when they were looking for capacity, and they were looking for great teams, and they usually would take those teams and put them on an internal IP. So the challenge of doing those deals was that I'm, I built a game, it sold two million units, which has proven to the, to the strategic that it's of great value and it's a really strong team, but I want you to go work on PUBG if it were Krafton or something else.
Okay. Somebody to that respect. So, they're generally looking for that. There's been so many layoffs that the market, the, the market on the labor side is so soft that that kind of concept is gone, that thesis of we need to, we need to go purchase teams. We've seen that very little. I don't think we've done a transaction in the last two years where it's for capacity for team.
Mm. If you go back to COVID, so we go back four or five years ago, we were stating as you have multiples of revenue and EBITDA is typically how companies are being valued. We had what was called an FTE multiple, so full-time employee multiple. And I literally would be in meetings and somebody from a major strategic you would know would say, "Brogan, are we looking about 600,000 per employee?"
And that would come out to, let's say, $80 million, $100 million. That was a thing back then. That's gone now because the labor market has softened so much and there's so much developer capacity. So- Mm. But if you have an IP, that's really important. The other component that I've seen a lot of for interest is if we have a revenue gap, which a lot of companies have because of the layoffs in 2027, 2028, those products to fill are predetermined if you're shipping Madden again.
So you need something new, and you need something bankable, and so you need a hit. And so tho- that's why from a standpoint of quality, it's a great market. If you've got a real strong quality IP, new IP, there's gonna be plenty of buyers out there.
Alexandra: Okay. Cool. And we'll move on to discussing who gets bought in a second and to the question around, you know, how do you get bought?
Is it, you know, IP seemingly, obviously in the today, not team, given the labor market dynamics. But there's a third category that I wanna talk about before moving on to that which is entertainment that's not natively gaming. You know, Netflix is building a gaming business, and Mattel and Hasbro are doing all these really interesting things.
Some of these companies, they have IP and they have distribution, they have an audience, but they're not native gaming operators. And so how do they evaluate gaming acquisitions differently? I think these are primarily... This is like the third bigger player right now today.
Brogan: Yeah, I would say they evaluate it, like you could look at a, a Skydance or Warner Brothers or Universal.
They tend to look at it from a pure transmedia lens where gaming is a complement, it's not the core. And typically, nine times out of 10 it might result in, in not as strong evaluations. Over the years we've seen whether it's Warners or whoever come in and out of gaming and predominantly been unsuccessful in that effort.
And so, they tend to be a little bit more tentative buyers. Like if I were to rank just buyers off the top of my head across the board, strategics are really, really the ones that you want because if they find an asset that they need and need badly, all bets are off on, on price and valuation. Private equity is very much limited.
They have a model like you're not gonna find a private equity company typically paying 20 times profit for a business. It's not their model. It's closer to 10 for platform. And I think for those non-gaming folks, it's really more inching their way into gaming, making a c- maybe a big buy like Warners did on, on TT Games many, many years ago.
But you don't see it in a consistent fashion. You see it ebb and flow, and I think that partly the political dynamics are very different with the, for two of the transmedia companies, but you've seen it with Netflix too. Netflix has gone in and out with different types of strategies and dramatically changed them.
They've bought companies and released those same companies within a matter of two or three years. So, it's different. Like those, that tier of buyers to us are, you know, some of the most difficult to really get engaged because they just don't feel comfortable with the gaming market, like a strategic mind.
And even private equity, I would say now has learned the market so well that they feel very comfortable.
Alexandra: Interesting. Okay. All right. So now we know a little bit about who's buying, right? There's PE, there's gaming strategics, there's non-strategics, but they're... Sorry, non-gaming, but strategics. And the next natural question is of course like what are they buying?
And you alluded to some of these things and the co- components that help you get bought. But again, for most founders, this is the next realistic step. It's not that easy actually, especially in games. I think a lot of founders, they assume that if they've built something they're proud of and there's made some money, there's a buyer out for it.
But, and the reality is, is that like most of the headline deals are scaled and like very IP rich and mostly mobile businesses. And these are companies that need to hit a certain scale and a certain profile before they actually get bought. So, I think like let's spend some time sort of like discussing this.
I think in your mind, fundamentally, what does a studio have to look like to be acquirable? Like what are the actual qualifying criteria like revenue, profitability, growth, team size and IP?
Brogan: Yeah, and a lot of those things are critical, right? So, you have to... For the most part, I think, and there, there are two key categories.
One is, like, if you think about the services side, so work-for-hire code out, and then there's the IP side. So those are two big businesses in gaming. And, and there's been a ton of transactions. On the work-for-hire side, we think of Keywords and Virtuos as being the granddaddies of, of them all there.
And then on the IP side, it's everybody's in that game. That's where the PE folks are investing. And PE is also work- investing in work-for-hire side as well because it's much more predictable, at least theoretically, than an IP bet. A game launches, it may hit, it may not, as- Yeah ... as we know. So those are really two important parts of the business, and there are criteria for each one.
But on the, on the pure IP side, I think if you launch a product and that product, generally speaking, does over a million units. Now this is kind of depends on your development budget and your team size. Let's say it's a team of, you know... It could be anywhere for two people in early access launching a game.
A small game. Or it could be a team like Brigada, who launched Quarantine Zone, who's a client. Smash hit, first game they ever built. Now way over, you know, a million, two million units in the pa- just the past three or four months. Creates a whole new opportunity where people- Mm ... will, one, identify it. And to your, to...
I think we may talk about it later, but you're gonna get inbounds because people are tracking everything on Steam and seeing how you do. That gets you in the game. I think it... In, in some cases, even maybe half a million units would get you in the game, but a million is definitely gonna get you in the game.
People are gonna begin calling you or trying to get a hold of you. So, I think that's the key. If you scale out of that, so let's say you become a Void and you got a hit on your hands and now you're selling 10, 12, 15 million units, it's different. 'Cause now when a big company looks at you to buy, you're gonna be a bigger ticket price, and so they expect a bigger, more mature management team-
Alexandra: Mm-hmm
Brogan: Than you may have had if that team was built by a couple really, really smart young engineers, right? And they haven't quite scaled. Because someone now coming in at a level where you're gonna pay, let's say you're paying north of 250 million in any case. Mm. Then you're gonna be looking for a management team that can scale it to a billion, and very rarely do developers have that team in place, right?
So, they have to build the team. A lot of times we'll help build that team with them and then take them into market so it feels like they can actually scale to them. So, they're looking for scale, too. Can that team scale? Can they get another mark? Do they wanna be in other markets? Do they wanna do the hard work, right?
Or do they wanna, you know, take a few million dollars and, and, and retire or do something else, which is also very common. So one of the things I see in the smaller games the most is a lot of times developers just get fatigued. They've built the same game. They're seven year early access. A lot of times they're not ev- don't even get to 1.0 and they just wanna go do something else.
Which is also ironically where I think some of the best investment opportunities are in gaming.
Alexandra: Yeah.
Brogan: It's kind of at that level.
Alexandra: And we'll definitely talk about, like, that in terms of, like, deal structure and the earn-outs, because I think that's a really, like, that's a really important point. I think a lot of people by the time they get there, just given games have such a long R&D cycle, like, they are there, right?
They're not like some entrepreneur who found their unicorn three years ago and are like, "Wow, it's so big now." It's like, "We slogged through this development for eight years. We've done it twice. We're actually on the sequel, and we're tired now." So, we'll talk about that in, in a little bit. But- Yeah ... I think you started mentioning there and creeping into things that are outside the financial profile, right?
Like, you know, I'm thinking about pipeline visibility. I'm thinking about how their pipelines are structured, um, sequel potential, the team retention, the fr- the depth of the franchise. I think, like, how often do you think that a buyer is looking at those sorts of things in addition to any of the other things that we said before, like revenue, profitability, growth, like that, that magic million unit number that you ta- that you talked about?
Brogan: Yeah, it's interesting. So, a lo- I'll mention the other challenge that a lot of developers, including our clients have, which is once you've had a success, it feels like you can have a lot of successes. It feels really easy when you're on top of the world. And what often happens is that people will say, "Okay, that was cool.
We did that. Let's go do a different game, different IP." We all have... They all have ideas for a lot of great games, and a lot of times it's outside their core wheelhouse. So, you're building a four by four party game now, but you're actually a survival crafting hit. So huge challenge. And what'll typically happen nine times out of 10 when a buyer comes in, the developer will believe that that's, "Wow, this is gonna create more value.
We have two IPs, two different areas." But the problem is anybody wants the sure thing, and they want to double down and make sure that you maximize resources in the key core franchise and IP. So, they don't value that other hit, even if it's a smaller hit. Mm-hmm. So, if they buy you nine times out of 10, they're just gonna close that off and close it down.
So, the focus is really on what's your IP, and I would tell clients like, "Don't invest in any other IP until you've maxed out everything you think you're capable of doing in the, in the- On the one ... the hit that you already have."
Alexandra: Yeah. In that realm, like are there genre or platform realities that like we should be honest about?
I mean, obviously mobile is pretty much dominating lately, but it wasn't before, right? Like, you know, Sony and Bungie, Microsoft and EBK, Xbox and ZeniMax. Like, is the PC console mid-market, like that million-dollar unit number, like is that just a harder sell today, um, and like less deal heavy, or do you think that like actually like that's a really popular place to be?
Like, you're... been talking a lot about this million-dollar unit number.
Brogan: Yeah, I think it's a great place to be. And, and I... So, I worked be- in prior time in my life at, at both Sony and Electronic Arts, so triple A massive budget studios. Even back then the studios on a relative basis were even bigger on some of the games.
And the business models, if you compare those to the middle market, the companies that are doing between a million and 10 million units are nowhere near as, you know, extravagantly profitable. So, you might get down to a 20, 25% max profit with an EA kind of studio game. You're 80, you're running... We have clients that are running 80, 80 to 85% net profit margins, EBITDA margins, who are in that wheelhouse of the middle market that we're talking about.
Alexandra: Yeah, yeah.
Brogan: Yeah. EA to kind of a 1020 type period. Like that is to me, if I was investing personal, personal cash, that's where I'd be investing. I think that's the sweet spot, and I think people are finding that out. But the challenge is you, you gotta get developers to return your call, right? And they're often small teams, they're busy, they're not necessarily financially or business savvy.
They, they're doing it almost as a hobby and it turned into a hit, right? And they're not interested in talking to suits, right? They're not interested... They wanna talk to people who are like them. So, it's a great opportunity, but it's not an easy one. Yeah. And you have to invest the time. Yeah. It's similar to what people say about getting investments from savvy PIF in Saudi Arabia.
You gotta invest the time. You gotta be there, you gotta get them. It just doesn't work any other way. Yeah. It's the same thing with that independent developer. You gotta be in that world and you gotta live that world. Very similar to UGC and Roblox. You gotta live in that world. So, Andrew Perrault, one of the partners at, at the DBC and one of the founders, spends a tremendous amount of time and got to know Johnny do big y- five years ago, early before a lot of these, these companies hit it and that platform became a viable space to build on.
But it's another area where private equity is now looking at it, and you would've looked at two years ago like doesn't make any sense for private equity because of the platform risk, right? And then you've got a very unsophisticated base of users, in many cases they're kids that are building these amazing games.
But similar profit margins, that's the way I think of it. Mm. 90% net profit margins. It's hard to ignore businesses with that kind of a business model for very long.
Alexandra: Yeah.
Brogan: So, you're seeing the other activity.
Alexandra: Plus, of course the, the Roblox, less of course the Roblox, platform fee of, like, 70%. But,, yeah.
Brogan: True. Which makes it even more crazy how profitable these companies are- Right ... with a 70% clip right on the top. That makes it amazing.
Alexandra: Okay. But we've been spending a lot of time talking about, like, oh, like, the, the, you're, you're, you're g- you get bought because you're desirable and you're, like, an indie developer and you're reclusive and you've got this hit and, like, the suits can't reach you.
But, like, what about studios that, like, which is the probably the majority of them, right, that are not yet profitable and, like, don't really have a hit on their hands, but they're, like, doing okay, right? Like, you know, like, does that change the math? And like, you know, like, I guess it's kind of like would you d- would, would one of those guys get bought?
Let's just say you sold half a million units but you're not profitable. Like, you've got a bigger team, you're sitting somewhere around 50. What is, what does that do? Is that sort of like the inverse question of what sort of studios should not be trying to sell right now? , Like, where's the market going on, like, telling them no, no matter how good of a process their, you know, their team is and how, you know, you know, decently okay the game is going?
Brogan: Yeah, that's a good, good question. I, I think the... What happens is, is there's a different set of buyers, and there are buyers typically with less funding behind them who can't afford to do the bigger avoid deal- Hmm ... for example, right? But they can do a half a million unit or 100 million. There, there are certain groups of folks, some of the publishers are kind of in that space too, where you have publishers that are backed by private equity capital- Hmm
and they're able to go after some of those, those smaller bets. And by the way, they're not... The big boys aren't in m- you know, there's no EA there circling around that's gonna bid up the pricing. But that because of that, the pricing multiples don't tend to be as high as you're gonna see in someone that's sold 5 or 10 million units, right?
So, in other words, let's say on a revenue basis, you might see a 4X, 5X potentially on a big hit game, but on a 250, 350, you're gonna see a smaller multiple. You're gonna see maybe a 3X, 2X. And 2X is where you get into the realm of kind of code development too, between one and a half and two and a half X.
So, so services businesses. So that's the challenge, and that's why I would tell somebody like, "Let's figure out how to get you to a million," right?
Alexandra: Right.
Brogan: And if you're a code dev company, I'll tell you, "Let's get you profitable and then let's get you to 5 million," because you're gonna get an ex- you're gonna get higher on the multiple scales, right?
Alexandra: Hmm.
Brogan: Yeah. So that's how you maximize value. But there are buyers. They're just, they're just different, smaller, and maybe many of them we wouldn't have heard of. They're not common names.
Alexandra: I see. Interesting. And yeah, that's sort of what you were mentioning before is like, to get ready it takes years to get yourself to like optimize the best outcome.
But, you know, in one of our earlier calls, you actually mentioned that deal structure obviously really matters. You know, many headlines I actually find get skewed by announcing some like big buyout, but like half the value is locked behind like an earn-out. I think Subnautica is probably the most like recently popular example of like, "Krafton bought Unknown Worlds for $500 million," but there's like $250 million bonus like locked behind the performance of the business unit, and the payouts capped, et cetera, et cetera, for the founders.
, So, you know, TLDR, obviously the, the headline number that's like shown in the news is almost never the number that the founder actually like takes home. And on top of that, there's the question that, you know, many people don't talk about openly, but we're gonna... We were talking about it earlier, which is like what the founder actually wants their life to look like after the close, right?
Like the deal structure is obviously the mechanism by which you really determine what their, what their life looks like after the close or not. So I wanna start with maybe some basics for the audience, I think. Walk me through the components of a deal that founders like should know cold, right? Like cash at close, things like holdbacks, escrows, earn-outs, maybe other, and then maybe others that you might mention. What do those mean and like what, like how should you think about them as a founder?
Brogan: Okay. Yeah, so we think in terms of TEV, so total enterprise value is that headline price that you see. I'm gonna use a, a random number, $500 million.
So that's the total value that's perceived by the buyer of that company, let's call it a studio, over a certain period of time. It's either five years maybe, it might be the horizon, the return horizon, and it might be terminal. So, it might be over the course of 20 years depending on the product. Hmm. But it's over a period of time after close.
There's always some risk that after close a product won't perform, or I've said, "Look, we have..." A good example is even Last Epoch. It's, it exists. You can measure it. It's b- doing great revenue. It's all... But e- Last Epoch 2 doesn't exist yet, right? And we're, and, and the team at Double Eleven is building it.
So how do I project what that's gonna do? I can get a hint from one, but what if it's live services? It's a different kind of game. Like, so I have to discount the risk on that, and that's why I'm not gonna pay you upfront. I'm gonna pay you on a performance basis when it happens. So, you look at two components, upfront cash, which is the pure value of your IP, the revenue you're doing, the team, the staff.
All of your assets in a company oftentimes get kinda aggregated into what we think of as the upfront. The future potential, which hasn't existed yet, we think of in terms of the earn-out, and the earn-out comes in a couple key forms. One is kind of, you can think of it as retention-based, and then the other is performance-based.
So as a banker, I'm trying to maximize on that backend earn-out side the retention component, which means if you go into work, showing up for anywhere between two and five years, you're getting a big chunk o- of cash, 'cause they need you to keep the team there together if you're a leader, so that's where that component comes from.
The other one is performance basis, which is where you see the big headline numbers. So, of a billion-dollar deal, often 4-, 350,000, or million of it will end up being in that, that performance basis. It's measured in two different ways, and this is an important distinction. It's either measured on a profit basis, which we call EBITDA.
It's the general proxy for it, or revenue, and typically it's net revenue. So about four or five years ago, almost everything was done in EBITDA, and we work incredibly hard to make sure that they're net revenue based. So just think of it as the revenue of your products, you know, less platform fees- Sure, sure
right? And maybe some server costs. So, so close to re- maybe it's 23% off of gross revenue. And be- and the main reason why you want it that way and not EBITDA is because it's much more difficult to manipulate that number. There's few below the line checkoffs. Yeah. And that's where people got in a lot of trouble, because they were doing EBITDA based earn-outs, and companies were loading on costs that they couldn't control 'cause they didn't own the company anymore onto their P&L, right? Yeah, yeah. So, ha- making a net revenue deal is probably the most important point, and the, the harder you fight for it, the better. And I think almost all the deals we do now in the last couple years have been net revenue based on the earn-out side Having said that, let's just say the deal is 150 up front and 150 on the earn-out back end.
I would advise anybody, it's just better for your mental kinda health and acuity to just assume it's gonna be the number up front, right?
Alexandra: Right. Okay.
Brogan: So, if we're gonna transact 150 million, you should be comfortable with that being the number forever. And if it's not, then you should think of rescaling, re-engineering kind of your scope of when you wanna sell, right?
Because you know that's bankable. It's literally gonna get wired into your account in three months.
Alexandra: Right.
Brogan: E- everything else, you may be pretty confident about. It may happen, but it may not. And to your first point, Alex, most of the time in the past Gosh, three or four years, it's more likely not to hit than hit that earn-out
Alexandra: Right.
That, that was actually one of my questions, and you... I guess you already answered it. But, you know, I think obviously, like, you know, let's just say you ordered 60% cash at close, 40% earn-out. Like, how could you be thinking about that mentally? And sounds like your answer is you should think about that as being 60% is the free, is the full value, and the other 40% you ain't getting it.
And I guess another thing was, like, how do you get convin- conviction kind of in the fact that whe- whether you're off EBITDA target or of net revenue, right? Like, how do you get conviction that the earn-out part is actually achievable, right? And so, I think as a founder, how do you pressure test those terms?
, And like how do you think about, like, that,, being aligned with sort of like what you want? I think a lot of buyers obviously want the operators to stay, and founders sometimes wanna stay, but sometimes they really don't. And sometimes the buyer wants the whole team, but sometimes they only want a few of them.
So, when you, you kind of just gave me a little bit, a bit about, about that advice, but expound even further. So, like how do you advise founders, like, on this topic specifically about, like, staying and going, and depending on what they want- how they should try and structure the deals, in terms of cash at cl- like cash at close versus an earn-out.
Brogan: Yeah. So as, a- and that's definitely an important distinction. So, if you're a, a younger founder who's very interested in the growth capital that comes in an acquisition to continue building out your games and not have to worry about the back office stuff, let's say, then you're in a different scenario.
You might do a three to five year earn-out, maybe even longer. And a lot of times company... A lot of founders are really happy with the new owners. They leave them alone to predominantly they give them a ton of resource to build their dream games that they couldn't build before. Mm. Those, a lot of times you'll see those guys stay in 5, 10 years.
So, it, it really is interesting that way. But then you have others that are in two different categories. They really wanna do something else, and to me, I think of Roblox Young. And then people who wanna retire or they've just been doing it for too long and they're burnt out. It's up to whatever, you know, everybody's different and they have different goals.
In which case you wanna minimize that earn-out track. And so, like, one of the deals we did last year, the founders were very interested in retiring. That was part of it. Mm. And so the key from a banking standpoint is you wanna be very upfront. Like, this is what the founders want. That there's a team to, to rise up and, and really take the reins and run this thing, but the two founders are out.
So, they're, no matter who the buyer is, they're gonna want that to be, "Okay, out sounds good. How about five years?" And then we say, "No, how about six months or a year?" Then you end up somewhere in the-
Alexandra: How about immediately?
Brogan: Yeah. Yeah. How about tomorrow? How about now? Does now work for you? And it ends up, let's say it's two years.
In this case it was two years, which is pretty reasonable. Two years will fly by. And in some cases the earn-out... So, in that case you have a retention component, which I love retention 'cause it's butts in seats. If you show up for work you're gonna get paid Right? And then if you do, and then the next component is performance, but they have a certain period of time where they feel like they can let go even if, the other people on the team are five-year, right?
At least they're only, only obligated for two years, and they have some type of a consulting contract typically after that. So, the way that I would do it is maximize upfront cash. And again, that could be cash and equity, depending if the company is publicly traded, in some cases even private. But you're gonna maximize even in that upfront cash, 'cause cash is king.
And then you wanna, on the earn-out, you wanna try to maximize retention versus performance, right? So, it's something that's more guaranteed that's gonna ha- In that case, I'm, I'd almost count that as guaranteed. It's almost like upfront. If you stay here two years- Right. Right ... you're getting paid. I see.
Alexandra: Yep. Yep, yep.
Brogan: And then the last one is performance, and then if you do performance, you want it to be net revenue based, not EBITDA based.
Alexandra: Mm-hmm. Okay. Cool. All right. So last one on structure before we talk about, like as we mentioned, some of the, the war stories and the deals that you guys have worked on. I know there's some that we've particularly prepared that we think are interesting.
But founders also often only own a portion of the cap table, but like, not the whole thing by the time that they get there, to the sale. How do you advise on like managing the investor expectations and like the, all the waterfall conversations in parallel with the buyer negotiation? 'Cause obviously some of these things are better for the founder or they're better for the investors in the cap table.
What's, what's like kind of like your general like advice for founders in, in managing that dynamic?
Brogan: Yeah, it's interesting because that gets too early in the process if you take on capital and you look at the structure, the capital structure in a fundraising deal. So, the most important term to understand is pref- preference or pref stacks.
So, preference is whoever puts in money, if it's an institutional investor, it's a little different than an angel, because oftentimes an angel will take common stock, right? A common unit if it's an LLC. But if in the case of a professional round, a VC, a strategic, they're prob- it's probably gonna be a conversion to a C corp, and they're gonna want, you know, preference.
So, preference basically means if it's, let's say it's a 1X preference, that's a good deal, but it means in an exit, they get their money out first, and then you share after that in the, in the, the upside on a pro rata basis. But in a lot of cases, especially in the last few years, because it's very difficult to get funding, you see preference stacks at two, three, and four. So, if I put in $20 million and I have a 3X preference, that means I'm taking out $60 million before you see a dime. That's crazy.
Alexandra: People are doing 3X liquidation now?
Brogan: Yeah. Not as much now. Wow. In the, in the last 18 months we saw. So, two and a half, three was not even insane. So, and the way, so here-
Alexandra: Ah, they're farther from the market. That's crazy. 3X, 3X, 4X liquidation preference is nuts. Wow, it's... Okay, keep going.
Brogan: Yeah, and here's the lure. The lure, Alex, is I'm gonna give you the highest valuation of any term sheet by a mile. So-
Alexandra: Hm.
Brogan: Yeah ... you're probably worth $100 million.
I'll, I'll give you $200 million if you give me 3X. And sometimes founders are lured into that huge big line number, and they don't realize that there, there's backend implications. Which is why we love, which is why we do a lot of early stage fundraising, even though it's not our business, just to make sure and protect the downstream consequences of M&A.
Alexandra: Mm.
Brogan: So that could be a whole nother podcast, but it's v- Yeah ... incredibly important to not make mistakes early on- Mm ... to make sure that you can maximize that exit downstream.
Alexandra: Okay. All right. This is part of the conversation where we get to learn from some real deals. I think obviously you can't name some of the names, but I wanna walk through some examples because I think, like, the, the kind of the patterns matter and there's things to learn.
I wanna hit on three threads. I think one was around timing, one is stories about leverage, and one's kind of about, like, the long game. So, the first one is that you said you had a story about a studio that was running low on cash, but there was a promising new opportunity in front of it. And the instinct, I think, in that situation was to take that fire sale immediately.
And so, can you tell me about sort of what happened and what did they actually do instead?
Brogan: Yeah, what was interesting is a, a very well-known developer came to us with, with a franchise everybody listening would, would probably recognize and know. And they had got into a scenario where they had bought multiple franchises because of the success of the original one, and got themselves in the cash, cash pickle.
A real challenge. And they came to us with three weeks of runway left, and I think 95 developers. So, three weeks of runway. So, we have, I think if one client has three years and another one has 10 years, like... And the one that has three years, it's a policy to always have three years cash, 'cause it's, that's how they sell engineers, say you're not gonna get laid off.
It's pretty awesome. But in this case, they had three weeks. So, I first thought I was getting punked by somebody. I didn't think it was real, like someone's messing with me. And then I thought They're already out of business, they just don't realize it, right? And I don't know how you don't realize it yet.
And my third thought was, "All right, we're supposed to be an elite crew here, we're gonna go for it. How are we gonna save them?" And so, what ended up happening is we said, like, "How do you save a big company with a big payroll with three weeks?" You, you can't do an institutional deal, we can't do any deal with diligence, and so it becomes friends and family.
So, who do you know? Like, your number one, mom, dad. Let's talk to mom and dad. Yeah. This is where we go. And then it's, "Okay, let's talk to your friends. Let's talk to mom and dad's friends." What we end up doing is we, we got a call with about 12 of, of this founder's parents' friends- ... on a call, and I got up and pitched the company to them, which was tough because I know they have three weeks of runway left, 'cause now I'm on the hook for money.
And I would say the average age was probably early 70s of this group, and there were people on my call- Okay ... there's probably like 12 or 14 people nodding off, people were leaving to go to supper, just like, boom, gone from the call. And but we knew we had to get it done, and in that call, it was about a 45-minute call, we ended up raising over half a million dollars.
So bridge, first bridge to actually make a couple payrolls, which thi- then gave us time to go bridge again with a professional lender.
Alexandra: Mm.
Brogan: And the bigger challenge was we had to bridge another time, so three bridges before we got a deal done with a, a, more of a growth equity investor- Mm ... and it end, ended up being a great invest- almost a $30 million investment, which was crazy.
But the challenge, we had to keep bridging because in this market, deals take a lot longer than you think, and you need to plan that. So, a typical M- M&A, I, I, sometimes fundraising's a little quicker, but, but for M&A it's gonna be about six months. In these cases now, it can be a year. Almost- Yeah ... every deal is 10 months to a year.
So, the other thing that, that developers and founders have to plan for is a longer cycle. Mm. So we still try to do every deal in four to six months, and very few of them come in within 10 to 12. So, we end up getting the deal done, save the company, both products are now back on the rails again, and the team couldn't be happier.
But the key lesson for me is the more time you have, the better. Like, normally you're gonna come to DVC six months, eight months, a year ahead of time so that we can plan and get you out of that situation as quickly as possible. The deals that we got were decent, but you're not in a position to get a very good deal when you've got a few weeks of runway left.
Alexandra: You're up three weeks of runway, yeah.
Brogan: Yeah. Just getting any deal you can get, and I think- Got it. Got it ... they're pretty happy with where we ended up, but that was kinda the one to me that was, like, super interesting. And from, from DVC's standpoint, we're like, "There's no way we can let this franchise die, it's too incredible."
It's a multi, multi-million unit selling franchise, but they just got under their skis by expanding too rapidly, right? Got it. Which I think a lot of people get into that, that same challenge.
Alexandra: Very cool. Okay. Well, bef- I, we're gonna go to our second one, but just because I'm super curious, in your elderly, , like, geriatric group of people fundraising bridge round, what vehicle did you use to actually take their money?
Did you just like a crow- like crowd c- fundraise it? Like, like what did you... Like a, like Kickstarter it or like what did you actually do?
Brogan: It was more just a, a very simple promissory note. It was more of a- Okay ... direct flat note. Wasn't a safe, but more of a promissory that, that could convert.
Alexandra: Okay.
Brogan: Yeah.
Alexandra: Interesting.
Brogan: In some cases they were just, people just wanted to do a straight loan, like a short term 12-month loan. And we accommodated that too.
Alexandra: Mm-hmm. Mm-hmm.
Brogan: But we would have done any, any deal we, we needed to do to get that money in the door.
Alexandra: Okay. I see. Fascinating. Okay. So the second one, I think there's, um, a version of this story where basically the studio gets an offer, and a number that's like on paper, like fairly reasonable and, but it, but it wasn't exciting and it, but it was reasonable and I think a lot of founders would, would take it.
But basically I think in this situation you told me they said no and they reran another process later on. So, tell me about this scenario and sort of what did we learn from being offered a first number and then saying like, "Hey, actually we don't like it. Don't be tempted to take it. Roll our sleeves up and do something else."
Brogan: Yeah, so this story to me is about the value of an advisor, like a competent advisor, right? So, and this deal is, th- this deal goes back a, a couple years. It was a pretty big deal by a really big strategic. And the strategic was already an investor. They were, they were on the cap table already. And what was interesting is the, the GM and the founder, the three founders of the, of the studio wanted to just kind of organically run a process themselves, right?
And the challenge with doing that is multifold, but I'll just mention the few key ones, which is, one, when you do that... And they had bids from Microsoft, they had bids from, I think Tencent bid, I think, you know, all the bigs. Google bid on them, like, but the problem was they were all a certain number call it under $100 million, and they were all coming in on different terms on different times. So how do you manage that?
Alexandra: Right, so you couldn't, like, yeah.
Brogan: Yeah.
Alexanda: You couldn't actually.
Brogan: Run the process, yeah. There was no kind of... You couldn't really create a process. You couldn't create compression or heat in that deal.
And I think doing a deal for, call it $100 million would've been great. Like, that's a huge outcome for everybody, right?
Alexandra: That's not bad.
Brogan: But-
Alexandra: That's pretty good. Yeah ...
Brogan: No, I would take that all day long.
Alexandra: Mm.
Brogan: But the, the, what, they, they realized it's just, it was more the process part was too crazy, and then people would be waiting, and then they'd pull out because it was like they're waiting too long, right?
And they... So then they eventually came to us. We ran it, we tightened the process, compressed it, ran it, hard process. The company that was a minority investor ended up buying it. They had already put in an offer. Because we compressed so much tension about all the other Microsofts of the world, the other big buyers, they end up, the end value was two times their original bid.
Alexandra: Oh, wow. That's huge.
Brogan: So, if you wanna... To me, it's like the value of a, a, a competent banker, what they can... 'Cause people oftentimes say it's 4 or 5%, whatever it might end up being. Like, that seems like it is a lot, right, for people. But you can make that value 10X in getting a return like that, right? Mm. So they do it on their own, pay a banker a few points, and you get $100 million.
So, for them, they're clearing $95 million more. Like, they're gonna take that every day. So that was that story of, like, running a, how important running a process is in almost every instance. And I would say that I can't think of an instance in the last six years where someone can argue to me that they ran their own process and got a better deal.
You can get a deal, for sure, but there, it's impossible to maximize your deal if you're trying to do it on your own, 'cause you don't know the market. Mm. How do you know if it's a good deal? Right? 'Cause they're not out there every day scouring deals and figuring out how to create heat and compression.
Alexandra: Right. Okay.
Brogan: So that's what I thought was a big lesson on that one, is like the value of really running a, a, a hardcore process.
Alexandra: Okay. Cool. And so, then the th- and the third story that we're gonna talk about is, like, that's kind of, like, not a change in the business, right? But that's a change around the process, right?
About how to... You said heat and compression, right? Like, this is not like nothing, like, really substantially changed maybe about the way the company was operating, et cetera. But now we're gonna talk about one that is more like that. And so this studio came to you. They said they actually wanted a price, but you were like, "You cannot get that."
And you worked with them for years before they actually went to run their process in market. So, what did that engagement look like,, and what changed about the business in that time, and what role did DBC play in shaping it?
Brogan: Yeah, it's interesting. So that was a co-development work for hire studio based out of Florida.
The GM... This goes back now maybe three, four years, when I first met the GM at Dice, and he had heard... Someone had referred him to me, and so he chased, tracked me, literally tracked me down, I think, and found me. We sat down, and he pitched me the idea of, of selling his company, his co-development studio. And I said, "Well, tell me, tell me about the company.
Tell me about the, the clients you have." And they were great clients, big clients, triple A. And the revenue, I can't remember, the revenue was call it like a few million dollars or whatever, and I just told him, like, "I, I appreciate your, your, you know, aggressiveness here in trying to engage anyone, a bank or whatever to help you, but you're too small."
And telling him that he was too small drove him insane, and so he wouldn't leave me alone. For like six months, he kept pestering me, pinging me, saying, "We can be big. We can do it. We can be big." And finally, I just said, "This determination is just so off the charts, I have to help. I have to help this team."
And so I engaged with them, and then we had a wor- And we said, "But here's what you need to look like. If you're co-development, you don't have enough client diversification- Yeah ... you need to triple your revenue."
Alexandra: Mm-hmm.
Brogan: You... So how are you gonna do that? Like, so we need to build a work plan to scale it out.
And over about two and a half years, they scaled, and that was triple the revenue. And then we sold them. I think that was probably now maybe a year and a half, maybe even two years ago. And they sold, they, we got them a deal where they had two-thirds cash up front, so, because we're talking about earn out.
So two-thirds cash up front is pretty good, so you have a third on the earn out. And the earn out was pretty short. It was like a couple year earn out. So they were incredibly happy about it, but the key was, like, we would lay out with them the goal, where the goalpost was and where we're gonna have to, when we would have to keep moving it to make sure that you're gonna get that exit valuation, right?
Mm. If you wanted to exit for w- let's just make up a number, 20 million bucks, then you're not doing it today, but we can help you figure out what those m- benchmarks are to get there. And we can do that, I think, with just about any client to really help them get there. But the, the difference was we had time.
Alexandra: Mm ...
Brogan: Like- they was, they had a smart, Wipperson had a very small team, but doing some pretty good projects early. And we could say, "If that's the, the goalpost and you wanna get there, we can create a roadmap for you with your board and whoever else, your, your team, your founders, to get there." And with pretty good confidence feel like you, you know, y- if you follow that roadmap, you're gonna be able to have a strong exit.
Alexandra: Okay. Across all of these three, two, two final questions before we kind of talk about the future of, of gaming and M&A and close our show. But, what is one thread that you'd pull for founders on how timing actually works in the M&A process? And the second is, if a founder today is listening and they think that they're, like, two or three years away from being sale ready, like, what should they be doing now?
Brogan: So yeah, great question. So, the key on a process success is momentum. So, there is pre-product, so you might actually have a great product that's got million, 2 million, well, probably not a million, but half a million wish lists for a new game or something, let's say. And you're- been working on it for seven years, you wanna go do something else or retire or whatever.
So, you've got that benchmark. In my mind, you have then marketing beats typically. So, there are o- opportunities to have marketing beats that create wish lists and things like that, that are tangential or ancillary to sales and cash, but still good because your product is at launch. And I think you wanna focus on having those beats.
In this case, it might be your fundraising versus exiting. But in any case, you're, you're managing the beats. So those are the, the marketing beats because there is no finance beat yet. In M&A, you're focused on the finance beats. So, it's incredibly important once you're out fundraising that you don't have a tail off, because we're in a very much a risk off market, right?
So, we were in a risk on market, meaning people were willing to take extraordinary risks during COVID between kinda 2019 and then the first half of 2022. People were... Money was floating, it was free. Feds funds rates were really low. Money was, you know, flowing really well, and everybody was in the game, right?
In that case, it was very different. But in this case, it's very risk off, so people are looking for very specific assets, and they have to be performing well. So the problem is if you get into a process and you're like, "Okay, now I'm ready to sell," and then you launch a product and it fails, or you don't hit your stated numbers, because in banking, we're casting what were called pro forma financials, so your forward-looking numbers If you could run a process in three months, those numbers didn't really come back to haunt you too much because the deal is usually done, right?
Maybe on the earn-out, but in general on the upfront. Now, if a process is taking nine months to, to a year, y- that pro forma is now your real numbers. So, you have to be able to, to structure and engineer DLC launches, content drops, skins to keep the audience coming, audience coming back, keep retention going during the process.
And the thing that I see the weakest at some of the other banks is they're not engineering, they're not managing those beats, the revenue beats. And we had a deal, like a, a deal that closed early in the year where we had a massive miss, a massive miss, and you know you're gonna get a call from the other side as soon as they see that because you're sharing all the, the data and documents.
And it was really difficult idea. We managed holding the line on the top line TEV, and they wanted to drop it by, uh, 40%. And part of the reason why we did that is because we figured out what they thought the terminal value of the business was. So, we kinda knew long term what they thought. It was a short-term issue, but it was a big problem.
A lot of companies would've walked away, and if it was private equity, they would've walked away, I think, from that deal because it was such a big profit miss. So, you wanna make sure you hit your numbers, I think is absolutely critical in process. And so, the buildup to that is the same. Before I go into a process, I wanna make sure that I have these cadences of DLC drops, revenue, new product, that it's not gonna drop off over the n- literally, I'd say the next year.
You wanna keep it, you know, be pretty confident you can build into the year. It's more important than what the volume is, whether it's 200,000 unit sales or, or 10 million, th- it's the fading that makes people in a risk-off market really nervous and they'll retreat, they'll retrade, which is an important term I think people don't understand.
A retrade is after an IOI or a term sheet, so which is non-binding. They get into diligence or the product tails off, and then they come back with a new offer. And you're in exclusivity, so you have no leverage anymore, right? So, you wanna make sure that once you get into exclusivity, which is might, maybe a 60, 90-day period after the IOI, that you're rock solid in terms of your performance.
Alexandra: Okay. And the second question, which was about the founder listening who thinks they are two or three years away from being sell-ready, what should they be doing now?
Brogan: So, I think now you're building the right team, you're building ki- you're probably figuring out what you wanna focus on, on, in terms of the, the product.
You, I would say you wanna maximize the value of the IP that you're betting on and banking on, and not worrying about multiple IPs. In most cases, nine times out of 10 developers are already thinking about those other IPs, and then some of the best will go, "Mm, that's distracting. I'm gonna pull back to that singular IP and focus and double down on it."
So, I would say focus three years out, focus on doing one thing great, because purchasers, whether you're... Especially if you're strategic, you're not buying a company for multiple products nine times out of 10. You're buying them for one IP that you believe fits into your portfolio. It's very rare that people are buying developers for their, for...
And how many developers have two or three massive hits, right? It's usually still one. So, you should know that. You should know, like, the, you're not gonna get value for that side project. You're not gonna get value for something that's, you know, in pr- in prototype pre-production, a vision. You will get virtually zero value for that every time.
You'll only get value for what's real, right? What's, what's, what customers and communities are really using and building about. The other thing is everything is community-driven to, it feels like to us today, so building the community is important. There's value in that, and there's value in creating retention dynamics around those, those folks once a product is in market, right?
Because they keep coming back. So that's a really valuable thing you can work on three years out. But, and staying really fiscally disciplined. Figure out ways to, to build for cheap, whether it's with AI, whatever, you know, it might end up being. And, but I would say stay hyper-focused on a single IP. Make it, make it work.
Alexandra: Cool All right. So, we went through a lot of the basics,, and we talked a little bit about the market today and sort of like what the guidestones are for founders. But I wanna close today's episode by talking a little bit about the future. So obviously, I would love to understand some of your predictions for the back half of 2026 and into 2027.
You know, you mentioned we're in a risk-off market, do you think that, that we'll still be in a risk-off market? You know, and does something like EA's deal closing change the dynamic at all? And second, I would love to understand, is there an emerging category in gaming M&A that you think people aren't paying attention to right now, but should be?
Brogan: So, I would say I'm quite sanguine about the kind of future of M&A going into 2027 in terms of the opportunity for developers. The... I generally think since COVID, the lull... So, so it was interesting, in COVID, literally, I would say like June 30th of 2022 was f- everybody was buying everything. By July 1, all the term sheets were getting pulled.
That's how dramatic it felt. It just fell off. And so, there's been a... We've all seen the restructuring, the layoffs, the refocusing. It, it's t- it's been crazy. But I feel like that leveled off over the past 18 months, now we're seeing people wanting to build again. The issues are, again, that they don't have a lot of internal capacity to build, especially new IP, and so they're looking externally.
That creates a bigger value on externally developed IP. And so now the process is, how are we gonna see that develop? And we're seeing more and more activity, the activity's just coming from different people. So back during the COVID era, we had a heavy embracer, you know, most of the Swedish publics, right?
The MTGs, right? The EG7s, they're all buying, buying, buying. But by the way, so is Microsoft and Activision, and EA, everybody was buying. Take-Two is buying. So you're seeing less of the buying from the bigs, the Take- the native US, Take-Two and, and EA and Activision right now, specifically, 'cause they're more right now, , parsing some of the assets that haven't been performing, like some of the ones we saw from Microsoft.
And then you've seen that whole Swedish contingent out of the game But what you did see at one point was a lot of the Chi- Chinese bigs. So, the NetEase's, the Tencents were, were strongly in the game, but they're not as strongly in the game anymore if, if they are, you know, at all. Tencent's certainly still active.
NetEase a little bit less so. But the Korean companies have been incredibly successful. The NCSofts, the NetMarbles, they've almost all been hitting on all cylinders. Krafton, right? Very, very strong balance sheet. So they've, they've kind of flowed into the market as others have ebbed. So there's still healthy pockets in the market, and then you have the whole private equity is fully engaged now.
Alexandra: Hmm.
Brogan: Right? We just saw the pur- recent purchase with TPG and that, that crew, and with, with Playstack and publishing, so that now it's like they can use that as a platform to go purchase IP, which Playstack doesn't have today, right? And to truly create, I think, value in publish, you need to have IP, own IP.
And that'll happen because that's the model. You build a platform and then you create bolt-ons around that. So, I think that'll create some activity and excitement in, in the market over the next, really next two years.
Alexandra: Okay. So, you're feeling, like, v- very positive about in being, being a seller in this market?
Brogan: Absolutely, yeah. Okay. In fact, we have, over the next two quarters, we have a new M&A process that's going to market every two weeks. Hmm. So that has to have a market for it, right? It has to be not just a seller side, our side, but it's also got a buy side interest.
Alexandra: Interesting.
Brogan: So, it's there. There aren't 100 buyers, but the buyers that are, that are there today are active.
Alexandra: Awesome. Okay, and the emerging... Is there an emerging category in gaming M&A that you think people aren't paying attention to that they should be?
Brogan: The, the ones we're seeing a lot more activity are UGC. Okay. UGC development tools, creator tools, using AI specifically. Roblox is hot, and Robux is about to get red hot because people are now comfortable with that platform concentration risk.
They understand that crazy business model where there's 70% off the top being clipped off. So, and then Minecraft, like, Mineville is a client. They're, they're just running the course. Like, and, and so people don't realize, like, that's a big business, too. Yeah, Minecraft servers. So, we're seeing excitement, especially around UGC, that there's a lot of excitement.
So again, my favorites are UGC, and I just love independent developers that wanna be great, wanna be elite, and they're probably gonna find 'em in early access, right?
Alexandra: Okay. Interesting.
Brogan: So those are the two spots.
Alexandra: All right. All right, and then lastly, if a founder is listening to this and they just got their, like, very first inbound, what do you think is the first thing they should do, like, in the next, like, week and a half?
Besides ignore them Nine ti- Or maybe it is ignore them I was just about to say. Or maybe it is ignore them.
Brogan: Yeah. I was gonna say nine times out of 10, ignore them.
Alexandra: Okay.
Brogan: Part of the problem is there are a lot of... Especially if it's from a financial company, financial sponsor- is there are u- their job is to just ping you and tell you probably they wanna buy you, and they don't really know who you are, what the company is.
So, you have to be careful about that 'cause I've seen a lot, and I wasted plenty of my own time in that scenario.
Alexandra: I see.
Brogan: Where is it a, if it's a known name, right? If it's a Tencent, some big name, it's probably never gonna hurt you to take a call. But if it's, if it's serious in some way, and you're like, "This is interesting.
Maybe we should test the market," whatever, then I would look at talking to advisors as well, and there are plenty of great ones.
Alexandra: Awesome. Okay. Well, Brogan, this was an amazing show. Thank you so much for coming on and teaching us all about, um, sort of like this end of life cycle, as particularly as it pertains to game companies and game studios.
If there's anybody that wants to reach out to you, how can they reach out to Double Black Capital? Perhaps they're looking for an advisor such as yourself.
Brogan: Yeah, feel free to connect on LinkedIn. We're on LinkedIn. I'm on LinkedIn specifically. Andrew, Arnold, Joe, our whole team we'll find there. I- my personal address is [email protected].
So, if people wanna shoot me an email and I'd be happy to kind of help them, guide them on their journey.
Alexandra: Perfect. Awesome. Okay. As everybody friends, that's our episode. If you have feedback or ideas, please hit me up at [email protected]. We're always open. And with that, I will see everybody next time. Thank you so much, Brogan.
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