Insights

  • Jordan Selleck | Why Valuable Content Matters
    POSTED 3.24.20 M&A Masters Podcast

    In today’s episode, we sit down with Jordan Selleck– the founder of 51 Labs. 51 Labs provides digital marketing services to the lower-middle market and were founded based on a string of failures that blossomed into success. Our guest, and 51 Labs, focuses on generating quality and engaging video content for their clients through using original ideas and avoiding “templated” content.

    We’ll chat about why LinkedIn doesn’t work for 51 Labs’ target market, the biggest mistakes people make when marketing on LinkedIn, and how to be front of mind to the advisor community…

    As well as:

    • Being the go-to marketing firm for the lower-middle market
    • LinkedIn engagement strategies
    • Using Vlogs in your marketing strategy, and
    • Sourcing deals from LinkedIn

    Listen now…

    Mentioned in this episode:

    Transcript

     

    Patrick Stroth: Hello there, I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here, that’s a clean exit for owners, founders, and their investors. I’m really looking forward to today’s conversation because it covers a topic that is near and dear to my heart, which is marketing slash business development. I’m joined by Jordan Selleck, founder of 51 Labs. 51 Labs provides digital marketing to the lower-middle market. And I’ll let Jordan tell you more about that. But first of all, Jordan, welcome to the show and thanks for joining me today. 

    Jordan Selleck: Thanks a lot. 

    Patrick: To give our listeners some context why don’t you tell us how you got into 51 Labs? What led you to this point in your career?

    How Jordan Got to Where He is Today

    Jordan: A string of failures. So it’s been this crazy, crazy journey. I got to college into 2007 and went to Merrill Lynch, Private Wealth Management. Nobody in their right mind was going to give someone 50k who was fresh out of puberty, like in 2007 2008. And so I actually met a person at a Christmas party in 2007. She taught English in Italy, and I thought that was much better than doing Merrill Lynch, Private Wealth Management at 22 years old. So I actually headed to Shanghai. And I taught English in Shanghai for 18 months. 

    Met a guy at a bar who did investment banking, and then made that kind of seamless transition from teaching English in Shanghai to banking in New York. I did six years, two months, eight days of investment banking. And it was, yeah, it was, I forgot the hours. It was actually an awesome experience and it really taught me how to market myself and how to do development. You know, we were in the New York office, we will get hired by a, you know, a Japanese private equity firm to sell a business for them. Part of what we would be doing is contacting global buyers. 

    And in the New York office, you know, we would be helping to contact the US sponsors, the US Corp dev teams, in addition to being hired on US all sides. So did that for over six years. And then my former boss gave me the swift kick in the tail, which I actually needed. He basically said, like, I know you are interested in doing your own businesses. I know you’ve probably been doing it for a couple years, like, here’s three months severance. 

    Best of luck, and I’ll support your first business. And it was actually the swift kick that I needed. He paid for two of my early events. He’s one of my customers now, one of my clients now at 51 Labs. And so this kind of brings us to February 2016. And I’m kind of wandering in the desert trying to figure out what the heck am I going to do with my life and my career. And then in late 2016, I started a business called DebtMaven. So basically think about a platform that connects private equity firms with lenders. 

    Have 400 lenders in the network. And the whole idea is that, I mean how do you basically be the eHarmony of lower-middle market debt financing? So raised $100,000, built a team, we sourced 750 million dollars of deal flow. And actually half of that came from LinkedIn for free. So with DebtMaven, ran it for a couple years then just decided that I don’t think I was as passionate as I needed to be about the technology platform. 

    Didn’t raise enough money, failed with vision and just a whole bunch of, you know, first-time founder mistakes. But, you know, this was at the end of 2018 when I decided to really shut down the technology platform, but kept the brand open. And I’ll come back in a couple seconds why that’s important for keeping the brand open. But at the beginning of 2019, my wife and I were talking, and actually wasn’t really talking. It was her telling me you have one week to find $15,000. 

    So I first asked her do I need to do it a legal way. She confirmed that I did. And then at the beginning of 2019, I just had to really think like, what am I best at? And what I was best at is sourcing deals through LinkedIn. And that goes back to how 50% of the 750 million dollars and around 55 deals that we source, half of that came from LinkedIn for free. And so at the beginning of 2019, I was really just freelancing because the people from my network, you know, I’ve been in the financial for now, 10 years, they just saw what I did on LinkedIn. 

    They were kind of curious. And they basically said, you know, here’s five or 10,000. Can you just do whatever you did for us? You know, one thing led to the next and, you know, actually some of our earlier clients, our earliest clients who really got us off the ground were firms like, SPS, Compufit, Middle Ground Capital, Nipson, my former investment bank at DDA Partners and Live Oak Bank. And so one of the things that I was really curious about is like, is this going to work for, you know, outside of me? 

    And at the, on the second half of last year in 2019, that’s when our clients started to say the first post you did for me, got me four new deals. Another client said the first post you did got me five new deals. In fact, you know, I’m down here in LA right now and we’ve been on a week of pitching new business. And in every single meeting, the managing partners are mentioning how they see our videos, they see our posts on LinkedIn, even though they don’t like or comment on the post, they definitely view that. 

    And so, you know, I’ll kind of get into some of the tactics here in a couple minutes, but to kind of round out the story with 51 Labs, I really started because I, out of necessity, you know, I don’t have a marketing background. I come from investment banking and doing a FinTech platform. And I just kind of felt my way, stumbled my way into this. And so now we have a team here in the US, we have a team overseas, a couple videographers. And what 51 Labs is best at are kind of two swimlanes. 

    Number one, LinkedIn and number two, video. So for example, on LinkedIn, how do we get you 10,000 views a week for free and then on video, how do we make sure you have a quality brand video that doesn’t just suck and it’s this corporate with getting suits and ties and pretend like we’re something that we’re not. You know, our vibe, our tone is kind of the anti-corporate. And I think that kind of leads to an interesting topic that we can explore in terms of the state of the market with today’s m&a community versus the last vintage and kind of the earlier decades. 

    But yeah, we’re focused on LinkedIn and video. And that’s kind of the life story. I think one other thing to note is a couple years ago, I started a nonprofit called Elite Meet. Co-founded it with a former navy seal. And, you know, that’s a passion of mine is helping transitioning veterans. This nonprofit Elite Meet helps transitioning special operations, veterans as well as fighter pilots and intelligence agencies. Veterans for communities to get jobs. We found 200 people jobs, have a million dollars of sponsorship and have 800 members, done 55 events. And people can check out the organization at a Elite Meet, just kind of googling that.

    Patrick: How about that. And I would encourage our audience, I mean, I’m a visual person, we’re talking about digital marketing, we’re talking about visuals, I would strongly recommend anybody to go into LinkedIn and look up the company 51 Labs, and you’re going to see probably about a half dozen of the videos that, the digital marketing videos that you’ve done for a variety of private equity funds, the lower middle market ones, and I got to tell you, they are absolutely professional. 

    They are not templated where each video looks like the other one. So it’s not, you know, insert name here and have the same couple shots. Sweeping cinematography, great audio, which you can kill a video by having lousy audio. And it’s absolutely professional. And you know, people need to kind of put a face to the names they see on XYZ Capital. And let’s talk about real quick the market out there for the lower-middle market. I mean, the need is for lower-middle market private equity funds to stand out from the crowd. How many are out there and tell us the value that they get from doing this kind of thing? 

    Jordan: Yeah, actually, if we could rewind just a little bit on the company page. So this is actually a very interesting takeaway for everyone to remember. I don’t have a website right now. We’re launching it next month. Our company LinkedIn page is actually not that good. And this is really, really important. 

    There is a misconception in the market that when you’re active on LinkedIn, it needs to be company down, but that is the opposite of what works in our market and the opposite of what works on LinkedIn. So what does work is if you go to my LinkedIn page, my personal LinkedIn page, just type in Jordan Selleck on LinkedIn, and you go to my post, the post in a given week for me are getting, you know, five to 15,000 views for free. 

    If you do those same posts on your company page, you might get a 10th of that if you’re lucky. And that’s because the algorithm wants you to pay for that. So we can come back to kind of some of the top mistakes on LinkedIn. In fact, here are three very, very easy ones. So, you know, I was actually looking through your posts, and like one of the quick fixes for your posts, Patrick, are not doing external links. So that’s kind of mistake number one. 

    And Mistake number two that people make is sharing. On LinkedIn, sharing is not caring. So for example, if you close a $50 million deal, do not post to your company page and then share it to your network. It won’t work. I’ve seen it for three years, personally and with our clients. Number three, and I think the biggest mistake, is people produce boring content. If you just get your PR Newswire link from the hundred $200 million deal that you did, you copy and paste it and you press post, it sucks. 

    Like, just be honest with yourself. It’s bad content. And so we’re in this new era of private equity, private credit, the m&a community where people don’t do business with brands. They do business with other people. And this is particular to the lower-middle market. An example of that, let’s say a well-known lawyer from one firm jumps to another and they have a great tech practice. A lot of clients aren’t going to stay with that same law firm. They’re going to follow, you know, Jane Smith, who’s going over to the new firm, because they like Jane. 

    They’ve been working with her for 10 years, they feared all the ECGs, she posts online and it’s her brand. And that’s a really interesting takeaway for our market is don’t focus on the company, focus on your personal brands, because it is what the market longs for. They want to know who are you, not the brand in the lower-middle market. And secondly, it just doesn’t work on LinkedIn to do company posts unless you’re going to throw 10s of thousands of dollars behind it. That’s more like core middle-market and Large Cap. 

    Patrick: Well, let’s talk about your ideal client in terms of the need is to set yourself apart from the rest of the competitors, the other players in the market. And let’s give the audience an idea how large is the lower-middle market for private equity, number one. And then number two, how does this help them separate themselves?

    Size of the Lower-Middle Market for Private Equity and Standing Apart From the Competition

    Jordan: Yeah, so, you know, you’re in private equity and private credit. You’re talking to thousands of firms, right? You can have anywhere between, depend on how you slice and dice it, funded or independent sponsor, which is now a very large community. You’re talking two to 5000 firms, depending on how you slice it. 

    The fundamental argument to the firms that we’re speaking with, is that, you know, I’ll come in there to do a vlog, you know, 20-minute video interview. And they’ll usually start off saying, the reason why we are different is that we have an operating bitch. I’m like, cool. I have never heard that before. Okay, no, no, the reason why we’re different is that we focus on entrepreneurs and founder on businesses. Like cool. I’ve never heard that before. And so they say no no always focus on the lower-middle market, like, you know, sometimes we’ll go a little below that because we’re really really focused on that side of the market. 

    And I say, cool. I’ve never heard that before. And so one of the things that, you know, the state of the market today is that equity capital and credit is commoditized. It’s just a reality. I think people know that, but they don’t really know what to do about that. For example, if you just zoom into industrial, lower-middle market private equity, we could probably rattle off 50 firms that are either solely focused on it, that’s one of their three target areas, or they’re generalists and they do a lot of industrial deals. 

    So if you’re in an auction process, if you’re in a, you know, a small process, like what’s really separating you? How are you different to the sellers? How are you front of mind with the advisor community? How are you doing something different to LPs? Because you’re one of 50 plus industrial-focused private equity firms. And one of the things that we’ve discovered is that the market wants to follow the journey. And they’re kind of two things. Number one, awareness. And number two, reputation. Do people know about you? And do people like you and trust you? 

    For example, with reputation, one of our clients sent us out to their portfolio company to shoot some video, and we’re talking to the seller who had the business for over 40 years. And I asked him on camera, why did you sell to this firm? And without flinching, he said, Well, you know what, you weren’t the highest price, but I really, I did a lot of research. I saw your videos and I saw kind of what you have online and it just made me feel that you really understood manufacturing. So that to us, number one I verified who that was. We were recording now that great testimonial let’s get this one.

    Patrick: Oh, that’s a one in a million Yes. 

    Jordan: But when if you have 10 private equity firms that are all in industrials, and let’s say all their information is the same, like, who to do business with? You’re going to do business with the person you consistently see in a positive way. And price is not the only variable. So the, it’s been really interesting actually because, you know, honestly, I did not know the aspects such as LPs wanted to see this. I didn’t know that our clients would show this at their AGM. I didn’t know that, here’s actually another really cool case study. 

    One of our clients did a post about a manager at one of their portfolio companies. It got something like 25,000 plus views over a couple of posts. That manager saw the post. And then she did a before and after post in the manufacturing facility about an area that they cleaned up and they improve and that they’re applying Kaizen principles that post got like 275 likes on LinkedIn and 50,000 views. 

    So what is this really saying? A manager at a private equity-owned portfolio company feels more deeply connected to the private equity owners. Now, the private equity owners get to show a completely different image to their LPs, to the sellers who say like, do they actually care about their businesses, the shop manager and the others at the portfolio company now think like, our owners really care about us. So it’s a win all around. 

    Patrick: I can imagine that as people watch these videos, they’re picturing themselves being interviewed or being highlighted in this way. I can only imagine. There is a private equity firm out of Chicago called Parker Gale and they have a podcast and one of most popular podcasts actually. And they would interview people throughout m&a and technology and so forth. Well, their most popular podcasts, were conversations with interns that were working for them, then going off to business school and then being recruited back. 

    And you can get the feel and now they’re doing the same thing where they’re doing interviews of their portfolio companies, the principles of the portfolio companies and talking about it. So I think it has a great cumulative effect along the way. You had brought this up earlier, but why don’t we just briefly go over how have things changed in digital marketing, particularly for private equity in the lower-middle market in the last 10 years? 

    Four Factors of a Comprehensive Digital Marketing Strategy

    Jordan: So I have a thesis called BD Version 3.0 and BD Version 1.0 was, you know, multiple vintages ago when your partners and principles are responsible for doing their own deal sourcing through their fast beat networks. Version 2.0 happened, you know, five or 10 years ago, really in the past five years, where BD became a distinct function and it became a whole career track. 

    And then version 3.0, which really happened I think in the past year, is when the BD and investment professionals generally are starting to realize that they can’t just do what everyone else does in terms of relying on the Rolodex of people that they’ve known with a few people go to the same conferences that everyone else is going to and do things in a very one to one way. 

    They have to do things in a one to many ways that complements the one to one. And that’s really where the digital marketing skillset comes in. And it could be a little bit nerve-wracking like, Okay, what the hell do I post? What do I even say in an email blast? Do people even care about what I’m doing? 

    Or is this spammy? I thought this was private equity. I thought this was private credit. But we’re not in that air. Like, those days are gone. You need to make a decision as a firm. Are you going to be private and you truly don’t need a website? Or are you going to be where we’re at today, in this new reality of BD version 3.0, which is using the digital marketing skillset with what you have been doing and building on top of that. So what does that kind of specifically mean? One are you doing, do you have a LinkedIn strategy? 

    And are you consistently executing as a small team or firm-wide, including the administrative assistants? So with LinkedIn marketing, do you have a video strategy? For example, we just did a study of private equity firms and 95% of sponsors do not have a single video. If you look back on LinkedIn, 77% of the 330 individuals that we study 77% have never done a single post on LinkedIn. 88% have either never done or they rarely post. 

    And that’s not even talking about the quality of the post. Because when people do post, it’s usually boring content. They just copy and paste an external link. So number one, sponsors, lenders, bankers, everyone else in this m&a community, you need to have a LinkedIn strategy that you’re consistently doing. Number two, you need to have some type of videos, whether it’s one brand video and 10 quick creatives that are easy to do, you need to have something because people will see it and they will see others who have it. 

    Number three, you need to have an email strategy. So this is more than just your one to one communication. You need to have quarterly, at least quarterly email blasts that go out to a targeted group that is pulled from your CRM. A lot of firms, I think they have, the vast majority of our market has come up to speed and not leveraging CRMs effectively. But it’s not integrated into the other stuff that they should be doing. So, you know, breaking it down and kind of rehashing this one LinkedIn strategy, two, video marketing, three having email marketing and four I just completely forgot. 

    Patrick: I think those three or three more than what most companies are doing right now, so I think you get it.

    Jordan: You could actually, here’s why this is important though. It’s important because if you’re a small fund, and if you’re an emerging manager, or if you’re just generally a smaller fund especially, you need to use these tools to leverage yourself because you can only go to so many conferences. You can only do so many calls and meetings in a day. 

    And here’s from this trip, there is one quote, that stuck out to me this entire trip to LA. and that’s what I went to ACG Orange County, and a managing shareholder of a law firm here said, I think I’ve talked to you, maybe two times, but I feel that I know you better than anybody else in this room because I follow your posts on LinkedIn. And that’s when it sunk in that this is what our market feels. They’ve been watching the story, even though they never like, comment, but they definitely view the content. 

    Patrick: I can second that. I can absolutely second that with our audience and both on our podcast for M&A Masters and our content pieces they go out where I will come across people and they, and you can’t tell whether or not they downloaded or they open things but they’ve seen it. and they’re Oh, you’re the firm. 

    Yeah, you do these every month or you do these every couple of weeks, okay. And so and you never really know until out of the blue, they come up and they show you a whole bunch of your content or they reply to your email blast to say I have a deal, I have a quick question for you. And they’re replying to your email blast, which is a lot of fun and very heartwarming and so forth. 

    Jordan: Well, yeah, I have another thought here which is if you are a BD professional, what percentage of your job is telling people about what you do? Like literally half of your job. Your job as a BD professional is sales and marketing. And, yes, there is the part of it where you are true like assessing deals, you’re working with your IC, you’re working with the rest of your team and thinking through deals, but half of your job is just getting your name out there and staying in front of people. So why would you not use tools that make your life easier and give you leverage and that are one too many to complement what you have been doing for five to 10 years? 

    Patrick: Absolutely. Well, why don’t you briefly tell us, because I’m sure there are now many, many of our listeners here who would, are interested or you caught their attention. Talk about the engagement process. How do you onboard the client? What’s that look like? And, you know, give us the profile of your ideal client. 

    51 Labs’ Ideal Client Profile

    Jordan: Yeah, our clients are exclusively within the private equity, private credit, general lending, m&a community. It’s really like how can I be the marketing firm of this, of the lower-middle market plus, I think like the Oprah Winfrey of lower-middle market, like that’s what I’m trying to be. So a typical engagement will be, for example, like we’re going to like next week, we’re flying out to Chicago to do a shoot with one of our private equity clients. 

    On Wednesday, we’re going to be at their office, and we’re going to be doing interviews with their team, getting the brand video done. And then day two, we’re actually doing a portfolio company shoot at their newly acquired company in Chicago. Within five business days, we turn the brand video to them, which usually takes 10 to 15 days with others. And then with that brand video, it just gives us so much content that we can use to fill out their LinkedIn calendar for three months ahead. 

    And so depending on the client’s needs, what we’ll usually do is we will do the content strategy that you could use across email, LinkedIn, however you want. And then we will do the content planning on LinkedIn. We will do the content drafting, we will do the content execution, and then the actual tracking. And then all of that includes the video services, which is, you know, really complimentary to LinkedIn, because it’s getting really high engagement right now. So, you know, a typical project will be anywhere between one to three months, and then we kind of decide, you know, is this working? Do we need to readjust? 

    So for example, one of our industrial, private equity clients that are, you know, thank you for making us number one on LinkedIn. Now, we just acquired a couple more companies and we’d like for you to just focus on doing video for that. You gave us the tools that we need and we can execute on LinkedIn. Perfect. Another client Live Oak Bank, they have a 25 person marketing team. All they wanted was our LinkedIn playbook and for us to do a workshop for them. 

    And actually on their first deal, they got five, on their first post, they got five new inbound. So it’s, you know, a typical engagement is one to three months, it really depends on where they’re at. It can be anywhere between, you know, five and $25,000 a month. It all depends on the scope of the services. But, you know, there are a couple of basic packages. And it’s really tailored to what they need. I wish I could give, you know, here are the three standard options but it’s just there’s so many different variables that go in and what they’re where they’re at. 

    Patrick: I think it’s, as something as specialized this is tailored specifically to whatever the particular needs are for each respective client. And that highlights their strengths or needs ideally. And nobody wants a one size fits all off the shelf canned product so that’s great niche. 

    Jordan: Yeah, it has been simultaneously good but also a pain because you’re figuring out how do I approach this? 

    Patrick: Understood. Well, and if you’re making a 10x to 25x return, price becomes no object. 

    Jordan: That’s, I didn’t actually understand that until some of our clients said, Yeah, why would we not? This costs us, you know, 10k to do a brand video and it brings in one deal, guess how much we’re going to make off that? 

    Patrick: How can our audience, because I’m sure they’re chomping at the bit right now, how can they get ahold of you? 

    Jordan: Easiest way is go to LinkedIn and type in Jordan Selleck, SELLECK, or you can hit me up on email at jordan@5149.Labs.com. That’s 5149. Labs. com. Don’t go to our website. We don’t have one. We don’t really have a need of one. No, we really haven’t. So hit us up on LinkedIn, or an email and we respond quickly.

    Patrick: Great. Jordan. Thank you very much. And on top of all this, I have a feeling you and I are going to be working together in the very near future. So thank you again for being a guest today.

    Jordan: Looking forward to it. Thank you

     

  • Bud Moore | Why Community Matters in M&A
    POSTED 3.10.20 M&A Masters Podcast

    In today’s episode, we sit down with Bud Moore, who is the founding partner of Valesco Industries– a lower-middle market private equity firm in Dallas, Texas. We love everything Valesco is doing, especially because there is a large need for their expertise, guidance, and capital in the lower-middle market.

    “Our ideas are muscle, and so we put that behind companies to help them grow and become a bigger and better version of what they were,” says Bud on the topic of how Valesco came to be. 

    We’ll chat about Valesco’s primary markets, value-added distributions, and…

    • Moral and ethical commitments
    • Banishing preconceived notions
    • M&A trends
    • Rep & Warranty

    Listen now…

    Mentioned in this episode:

    Transcript

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Bud Moore, founding partner of Valesco Industries, which is a lower-middle market private equity firm based in Dallas, Texas. Bud, thanks for joining the podcast today.

    Bud Moore: Hi. Patrick. I appreciate you including me.

    Patrick: The reason why we reached out to you is that there is a growing ocean of opportunities in the lower-middle market. There are more and more opportunities. We are seeing not only in here in Silicon Valley with technology, but throughout the country for a variety of reasons. 

    And as I speak with experts in m&a I’m struck by this growing chasm between the middle market and upper market companies and the amount of services and resources available to them. And then you get to the lower-middle market and there is just this crying need for not only capital, but expertise, guidance, and so forth. And it’s, there’s just this wanting audience out there that’s really looking for help. 

    And I think firms like Valesco Industries are ideal to come in and provide just the types of help that they need to move on. I didn’t want to steal your thunder, but if you translate or define the term Valesco, that means to grow strong, which is a very, very helpful name. And that’s where a lot of the lower-middle market companies are trying to be. They’re trying to do that before they ultimately go to an exit. So I appreciate you making yourself available. Before we get into all things. Valesco, let’s talk about you. How did you get to this point in your career?

    How Bud Got To Where He is Today

    Bud: So mine was a bit of a circuitous route. I started out actually in investment banking on the sell-side. And did that for a number of years in a market downturn, decided I would switch to the buy-side and did that for about four or five years until I found myself in a place that I was so full service for my clients that I felt like I was a private equity guy and not getting paid for it. So I thought I’d fix that problem and actually get into the private equity side of the industry. 

    And did that in 1994 as in what today is referred to as an independent sponsor. So our ideas are muscle and putting that behind companies to help them grow and become a bigger version and a better version of what they were when we made our investment. So did independent sponsor work really until the great recession of late 2007, early 2008 timeframe. 

    And during that period of time, we had exited almost all of our investments, I’d like to say because we were brilliant and saw a recession coming, but really more so people found value in what we had. And in that particular market, we’re paying quite well for what we build. So we sold what we had, and then a private moment, sat back and thought about what we hadn’t done that we should do next and thought raising a private equity fund might be a great idea. And so we set off to do that and raised our first formal fund in 2011. 

    I guess the lesson that I learned from that is, if you’d like a lesson in humility, you should ask everyone you know for money in the midst of the worst recession they’ve ever seen. But fortunately for us, it was successful. And that’s led into a successive fund and we’ve had great success and putting that to work and what for us is our lower-middle market companies and we kind of define that as 25 to $75 million in revenue.

    Patrick: Okay, and then the industries that you target being based in Dallas, people are going to assume it’s either, and now, this is a Californianian speaking, but if you’re based in Dallas it’s either you’re doing something in the energy or the cattle industry. Tell us what are your specialty areas.

    Bud: It’s a great assumption. We’re actually kind of embarrassed being here in Texas. We’ve never actually done an oil and gas transaction. And we really regretted that several years ago and went out and spent quite a bit of time doing a white paper on whether or not we should invest in the energy industry. And what we discovered was we just weren’t smart enough to do that. That’s a very complicated industry. So for better or worse for us, we’ve really focused on manufacturing, value-added distribution and business services. 

    And that’s been our focal point for a long time. And if you take a look at industries, there are some industries where we’ve had better luck in and others. The food industry has been good for us, heavy equipment, things of that nature. But I would tell you, we’re looking really more for a unique profile than a particular industry. And in doing that, we find really great niche market companies that we’ve had good succession growing and building. 

    Patrick: When you say unique profile either operationally, a need they’re fitting, location, what do you mean by that? 

    Bud: So and we kind of boil this down to three basic financial characteristics that define a broader list of operational characteristics. For us, we take a look at the EBITDA margin, you know, our principles say it needs to be 10% or greater. I would tell you most of our investments are far greater than 10%. We look at working capital efficiency being defined as inventory and accounts receivable as a ratio to sales being 30% or less. And we look at six asset utilization compared to sales for turns or greater. What that tells us is we’ve got a company that is in a niche market in its industry, it’s able to produce, it doesn’t burn working capital. 

    It generates working capital and doesn’t have to invest every dollar of earnings into its next dollar of growth. Let’s just roughly speaking kind of the principles that we’ve operated under. And as we apply that against industries that we’ve looked at and invested in, you’ll find really a broad variety of things all the way from aerospace to heavy equipment to food manufacturing. We even currently own one of the largest producers of drug testing for professional and amateur sports in the world. 

    So it’s a wide variety of things that we’ve invested in, but what we like a lot and we think this is true across numerous industries, and even in an industry that people would consider to be unattractive, they’re always one or two players that have figured out how to do it extraordinarily well. And what we’re looking to do is invest in those companies, work with that team to be able to continue to professionalize and build that business and really grow it into something of true significance.

    Patrick: One of the things you mentioned earlier was value-added distribution is value-added. Explain that for me.

    Why Value-Added Distribution?

    Bud: Sure. Value-added distribution is we take a look at distribution. Commodity-oriented products really aren’t of much interest to us. We would define that as products that generally carry kind of a 20 or 25% gross margin, resulting in maybe a 5% 6% net margin at the end of the day. Unfortunately, if you want to grow in a distribution business like that, you’re investing this year’s earnings and next year’s growth. 

    And you really don’t really generate any free cash flow for your investors. You just invest in the business with, you know, with your end being when you decided to stop doing that. So for us, we look at businesses that are taking products and doing something tangible to them. 

    A great example, we invested in a business a few years ago that was producing high school promotional and high school fundraising items. So think of it as your local sports team for your high school but instead of buying cookie dough or pretzels or things that you probably really don’t want to support the team, you go to our online portal and you buy the team’s sweatshirt or t-shirt or ball cap and you support the team that way. We were mining substrates that are already manufactured, t-shirts, or anything that we were making. 

    But we would put on them the school’s insignia and then sell them out to their fan base. And to us, that was value-added distribution. And, you know, that’s the type of thing that we think really has, you know, great consumer desire in the marketplace. And we really like businesses like that, that have figured out a creative way to address a customer or consumer want or need.

    Patrick: As I was researching your organization and looking through your website, it’s unmistakable that you see this undercurrent, talking about not only the financial component of what you’re doing and adding value to your investments and so forth, but there’s a real moral and ethical commitment that seems to drive your operations. Can you talk about that, please?

    Ethical and Inclusive Operations

    Bud: Sure. We, when we look at the investing in lower-middle market businesses, we really can’t make the claim that our money is greener than anyone else’s money. There are a lot of investors that try to invest into that space. What we focus on is how do we do the right thing for the business, the right thing for the employees, the right thing for the community. It’s something that’s extremely important to us. 

    And the way we look at it is, you know, every day the companies that we’re invested in are providing hundreds of jobs for people in the community that allow them to have mortgages, allow them to have, you know, pay for their family’s expenses and overhead and really creates the future for them in their community. And so, that’s extremely important to us. So rather than just putting money into a business, we really like being able to come in and make a difference in the business to make it a bigger and better company. 

    So that people have a career and not just a job and, you know, you’ll see that throughout our companies in the way we’ve invested in teams and in areas. Not all of our companies are in a lower-income community. But many of the people that work for our businesses may go home tonight to a lower-income community. And so we’re respectful of that. And you’ll find that better than 60% of our employees are minorities and the businesses that we’ve invested in, you’ll find that we have promoted women and minorities into positions of leadership within the companies. 

    And so we really, we believe strongly in people that want to work hard and apply their abilities, that we should be giving them the opportunity to succeed. And that’s been a driving principle for us. In addition to that, we try and spend a lot of time working with the companies themselves, to help people with a vision of how they get better in terms of their business. And I think that’s something that not everyone in private equity, actively does. And we’ve prided ourselves on doing that for a long time.

    Patrick: I think as I got into working in mergers and acquisitions, you have a preconceived notion on how the players work and the relationships and so forth. And then when you get deeper into it, as you see, particularly if you’re a target company out there and you’ve got more than one option for prospective buyer or partner, financial partner. It’s not always the top-line number this out there that leads to a successful close or successful exit. 

    I always look at this as, you know, this isn’t company A buying company B. It’s people working together. Mergers and acquisitions as people. And one of the great value adds that I think private equity, your entire industry can deliver. Particularly for owners and founders is they can only grow so large on their own. And to take that next step, they need partners to get them there otherwise they may take a misstep or, you know, not get to where they want to get. 

    And, you know, the concept with private equity where I’m sure you guys do this, too is you know, making a partial investment or maybe rolling, they roll over some equity. It is amazing how an owner or founder may sell 60 70% of the equity in their firm to a private equity company. And then five years later, their remaining 30 or 40%, is worth significantly more than the original batch of equity they had sold over. 

    And I think that’s just that second bite of the apple is something I did not know about with private equity until I got into the business. And boy, that’s a real great thing, particularly for the people that are responsible for coming up with these companies and these services that in most cases didn’t exist until the owners and founders created them. And I think that’s a great thing you do. As you look you know, you’ve been involved with this for a while, are you seeing any trends in m&a that you can comment on?

    Recent M&A Trends

    Bud: I think the ones that everyone sees out there right now there’s just a lot of capital seeking return. And the public markets have been pretty good over the last year or two. But just in general, if you look over a more extended period, you know, those types of returns are not projected to continue. 

    And so people are looking for return. And as they look for returns, alternative investments, of which private equity is one, tend to drive a lot of interest. And I think it’s different in the lower-middle market. Looking at putting your money to work there is different than putting it to work and KKR or Blackstone or someone like that. This is money that’s going to work for which you’re going to have to put elbow grease behind it to really make it pay off in the right way. So as money comes into the marketplace, I think it has the hazard of increasing prices. It’s not great for us, it’s great for sellers. 

    But as it increases prices, you really gotta have a plan for what you’re going to do with the business because you can’t just put money in and step away and hope that that works out. So we think that the real trend that’s going on right now is, we can’t change pricing. So what we need to do is change how we look at the value proposition. And I think if you’re going to step up and pay a larger price for a company, in this market, you have to be convinced of how you’re going to grow that business going forward. 

    It won’t be for a flat company, it’ll be for a growth company. So I think right now, lots of capital in the marketplace, I think people looking for ways to grow that business and grow that enterprise are really the big things that we’re seeing going on. And then what I hope I’ll continue to see as more and more people focusing on the operations side of the business, to help make that plan for growth really come true. Because it’s all great on day one when you see the hockey stick projection of what we’re going to do over the next five years, but you’ve actually got to execute on that to be able to make it real. 

    Patrick: I think also that there are if you get a target at the right price, that capital tends to be a little more patient than other capital. And so I think it all, it goes in with that where you really do have to have not just this idea of an investment, but Okay, now how do we make it work five years down the road from now? And I think there’s a lot more focus on that delivery than just we have to get this target right now at whatever price.

    Bud: No, I think your statement is right, as far as, you know, look, how you look at the investment, how you want to optimize it. but the thing that we try and keep in mind, it’s really more than just the day of the investment and it’s more than financial economics. If you want the economics to turn out in your favor, you’ve really got to get the team behind you. The people that you’re investing in, they have a business and yes, we’re buying in some cases, patents and we’re certainly buying brick and mortar and we’re buying machinery and equipment but what we’re really investing in is people. 

    And we’ve got to work with those people to help them be better at what they’re doing. We’ve got to create a relationship that makes them want to grow and build their business. We have to give them an understanding of how they win in this process. And I think doing all those things together really makes for the right investment. In our experience, if you’re selling a business, this is the most one of the most precious assets in your life. It’s really, it’s more of your family, in some cases, than your family itself. 

    You see people more that you work with, you’re there five days a week, if not longer, you’re there for long hours. And when you’re ready to exit, you have a lot of personal connection to those people and when you sell, you want to make sure that you’re selling or taking on an investor that’s got the same passion for helping and working with those people and growing them that you had. And I think that’s part of what makes an exit meaningful for people that are really looking and do it the right way.

    Patrick: Bud, quick question. We didn’t cover this when we spoke earlier but just off the top my head, have you guys on any of your acquisitions or your transactions, have you guys use rep and warranty? I’m just curious if you have, what kind of experience you had with it.

    Why Rep and Warranty?

    Bud: You know, we’ve used rep and warranty on numerous of our transactions and really made that almost a universal standard practice probably three years ago. We’ve found it to be, it’s not covered that we have very often had any type of claims on. But I can tell you, it makes our closing process much easier. Dealing with the representations and warranties inside of a purchase and sale agreement is one of the scariest things that I think sellers deal with. 

    They don’t want to have their big payday and then turn around and write checks back to the company. They really don’t want to deal with big escrows that everyone’s going to argue about later, whether or not there should be a claim or not. And so what we found by using rep and warrant insurance, it’s really eliminated many of the discussions about what the reps and warranty should look like it comes down industry standard set of reps and warranties. 

    There’s a very minimal exposure on the sellers part. And from an insurance standpoint to the extent that you have a bad circumstance, that’s why you have the insurance protection there to be able to cover that eventuality. And we found that to be a really seller-friendly process. And so we’ve adopted that over the last few years as our standard.

    Patrick: I could not have said any better than that. So I won’t. Thanks very much for that. Bud, how can our audience reach you? How can they find you?

    Bud: Probably the easiest way is through our website valescoind.com. That’s valescoind.com. On there, we have all of our bios, our history, many of the videos on the management teams that we’ve worked with, as well as our contact information for easy access. 

    Patrick: And I would say it’s a story that is worth reading and worth following. Bud Moore, thank you very much for joining us today.

    Bud: Patrick, thanks. I appreciate you having me on.

  • The Rise of Smaller M&A Deals in 2020
    POSTED 3.3.20 M&A

    We’re not yet to the end of the first quarter, and we already have a solid idea of where M&A activity is headed in 2020.

    Deloitte put out a report, The State of the Deal: M&A Trends 2020, based on a survey of 1,000 corporate executives and PE firms that looks back at what happened in 2019 and their views and plans for 2020. And the outlook is good for M&A, although there will be some key changes to keep in mind.

    As noted in the report, M&A activity will continue to be very solid this year. Only 4% of those surveyed anticipate a decline in the number of deals. Sixty-three percent forecast an increase in transaction activity. That’s down from 79% last year.

    There will probably not be as big an increase compared to the last seven years, a boom time that has seen more than $10 trillion in domestic deals alone since 2013. But that’s to be expected as this level of growth in transactions is hard to sustain.

    As Russell Thomson, national managing partner of M&A services for Deloitte & Touche LLP put it in the report:

    “We’re fairly long into this M&A boom cycle, so it’s not surprising to see a drop in expectations for larger deals. What we’re seeing in the marketplace is more interest in deals in the sweet spot between $100 million and $500 million. Deals aren’t going away; companies are just being a little more careful about those larger deals.”

    So the boom is tapering off a bit, but it’s still a rising trend due to several factors, including…

    • Ample cash reserves in both corporations and PE firms.
    • The strong stock market that closed 2019 at record highs (which helps equity-funded transactions).
    • A belief that tariffs/trade wars aren’t too much of an issue.
    • A conviction that current interest rates will not have an impact on deals (and, in fact, 45% feel the interest rate environment will actually accelerate deals).

    But this is the biggest change we can expect in 2020:

    Fewer “Megadeals,” More Deals Under $500M

    The number of deals over $500M in transaction value will likely come down and be replaced by deals in the $100M – $500M range… and as low as $20M. This is for a variety of reasons.

    1. More corporate divestitures. Companies are looking to offload assets in this lower range. According to Deloitte, 75% of corporate execs expect to have divestitures this year, due to financing needs, change in strategy, and the need to offload technology that doesn’t fit a new business model.
    2. Returns for larger M&A deals have not been as valuable as expected. Firms just aren’t getting enough bang for their buck. According to the survey, 46% of respondents said that less than half of their transactions in the last two years gave them the ROI they were looking for. So look for them to reduce their risk and pursue smaller acquisitions that offer more impressive returns. Smaller targets, acquired at lower prices, are just a lot more efficient, cash-wise. To hedge and improve ROI, companies are looking for smaller targets. This isn’t at the expense of profitability. In fact, you can have a higher return on a $100M acquisition – 40% to 50% – than on a $1B deal.
    3. Strategic Buyers are also increasingly pursuing smaller deals because they have a greater need to acquire new technology as today’s tech is already obsolete. They need technology that is a better fit going forward to stay competitive. 
    4. Buyers can take advantage of more favorable terms when they go after smaller targets, especially those under $100M. 
    5. PE firms like smaller targets because they are increasingly looking for new acquisitions that they can “bolt on” to existing portfolio companies instead of hoping those portfolio companies grow organically.

    When they add on new acquisitions, the firms can expect to sell those portfolio companies at a much higher multiple than before. This is why they are getting better returns with smaller targets.

    What This Means Moving Forward

    Based on this Deloitte survey, it’s clear that M&A activity has slowed a bit but is still going strong, continuing a trend of an unprecedented level of deal-making that started back in 2013.

    Also, on the rise: the use of Representations and Warranty (R&W) insurance to transfer indemnity risk away from the Seller to a third party – the insurer. With this coverage now available to sub-$20M deals, look for this insurance to be a part of an increasing number of deals in 2020.

    Whether Buyer or Seller, R&W insurance coverage can offer many benefits including smoother negotiations, more cash at closing, and less risk. But it is important to have a broker with extensive experience with R&W insurance and how it can impact a M&A deal. If you’d like to discuss coverage for your next deal, please contact me, Patrick Stroth, at pstroth@rubiconins.com.