• James Darnell | Unlocking the Potential of Successful Family-Owned Businesses
    POSTED 3.30.21 M&A Masters Podcast

    Our special guest on this week’s episode of M&A Masters is James Darnell. James is the Managing Partner of KLH Capital, a private equity firm based in Tampa, Florida, that focuses on serving family and founder-owned, lower middle-market companies throughout the US. KLH Capital was recently recognized as Private Equity Firm of the Year by M&A Source.

    “We’re always thinking, ‘How do we add value? How do we help teams be more successful? How do we help them grow? And, what do we have to do to make that happen?’”, says James.

    We chat about KLH’s firsthand experience with buying, as well as:

    • Unlocking the potential of successful family-owned businesses
    • Offering leadership development services to transition ownership
    • Investing in technology to make more data-driven decisions
    • Establishing a better paradigm with Reps and Warranties
    • And more

    Listen Now…



    Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by James Darnell, managing partner of KLH Capital. KLH Capital is a private equity firm based in Tampa, Florida, that focuses on serving family and founder owned lower middle market companies. In addition to being extremely active with six successfully completed deals in 2020, KLH Capital was recognized as private equity firm of the year by M&A Source. It’s not too bad during a pandemic. James it’s great to have you here today. Thanks for joining me.

    James Darnell: Oh, it’s a pleasure to be here. Thanks for having me, Patrick.

    Patrick: Yeah, James, I mean, we’re just starting off here. But let’s be honest, okay. You were kind of sad to see 2020 go, weren’t you?

    James: Well, you know, in a lot of ways I was, before the pandemic, I spent my life on an airplane as a road warrior. And last year gave me a pretty unique opportunity to spend more time with my family and my kids. And so, you know, while while you know, definitely a challenging year, in a lot of respects was also a blessing in many others. And for that, we’re grateful. But But yeah, like, like many I was glad to turn the chapter on the year.

    Patrick: Yeah, well I’d say with with the change in travel and business development, I think sometimes less is more. So I think we’re going to happily adapt to that. If things change up. So before we get into KLH Capital, let’s start with you, James, what brought you to this point in your career?

    James: Well, I’ve been pretty fortunate, I grew up, again, a lower middle class family in South Alabama, which is not a really a hotbed for investment banking, or private equity investing. But I had a great family who helped me get to college at the University of Alabama. And in college, I went to work for a small business broker in Birmingham, Alabama, who kind of taught me how to buy and sell companies, and some told me how the business worked. And from there, I was fortunate enough to go and actually help run one of his first portfolio companies as the CFO. And so I got to work inside the business for a few years, you know, really living kind of what we call a wartime, you know, experience, because this was during the financial crisis. And so I get to learn a tremendous amount about how a business really works from the inside. 

    And that’s actually helped me, I believe, to be very successful as a as a private equity investor myself, just kind of really understanding what the company is going through. And, you know, US private equity guys, if you don’t know this, we actually are the smartest guys in print. And that’s a that’s, it’s in the Bible. That’s how it works. And, and so, you know, private equity, guys like to sit in conference rooms, and say, we’re going to pursue a differentiation strategy, or we’re going to move this or we’re going to do this or whatever. And having sat in an operator’s chair, it’s, it’s helpful to have a perspective to understand that, you know, it’s not always quite that easy. And so I got to do that for a couple years. And then after I did that, my partner Will, and I, you know, saw an opportunity to continue building KLH. Ah, and so then I moved to work here at the, at the firm, and I’ve been doing it ever since. So it’s been a been a wild ride so far.

    Patrick: Well, I think that when times are easy, you know, take the learn very much. It’s when times are tough, that all of a sudden, you have to start breaking rules, or breaking habits and and trying something different. So I’m sure you’ve got a lot in your time there as an operator.

    James: Yeah, that’s exactly right. We have a saying around here that says, you know, revenue growth covers a lot of sins. And, you know, and when wet revenue stopped to grow and or God forbid, pulls back, then you get to see kind of who’s been swimming naked, so to speak. Right. And, you know, that we learned that in 08, 09, we’ve learned that last year, and, you know, try and learn from those experiences and continue to build build great companies.

    Patrick: Let’s talk about KLH Capital. And I tend to get an insight on that companies by with their culture and their founding and so forth by the way, their named. Tell us what KLH get named for?

    James: Well, KLH was actually formed as kind of a joint family office for a couple of high net worth, you know, guys here in Florida, who were mainly managing their own money, and the K, the L and H were their initials. And my partner Will and I were actually the first you know, employees who were working for them to help them do their deals and help them manage their personal portfolio. And over the years, we did really well, we made them a lot of money. And we raised a fund and we invested that did really well and so on and so forth. 

    And over time, my partner Will and I actually did an MBO of our own and bought our firm from the guys who had originally started it and, and so we have kind of first hand experience going through what we help our portfolio companies do, which is, you know, help the people who have built the firm realize liquidity and value for what they’ve created, but also enable the younger generation to continue to have a runway in the path to grow their careers and build wealth for themselves. And so that’s what we got to do here. So yeah, the K on the L and H, the KLH, or just, you know, the, the name of the firm that we were, we managed to buy and, you know, represents kind of the brand that we’re trying to build. 

    Patrick: And you continued the brand, you didn’t go ahead and name it Darnell.

    James: Yeah, that’s right. We I mean, look, we toyed with the idea and we said, Hey, well, what if we change the name of it? or what have we rebrand or something like that. And we just felt like there was actually true value in the name out in the marketplace. And when people we believe when people say, hey, I’m working with KLH, that means something and and that represents something that you’re going to get a fair deal with people that you can trust, and you’re going to be treated with integrity and respect. And, and we believe that that helps us win deals and invest in the right businesses. So for those reasons, we decided to keep it.

    Patrick: Well, yeah, your focus is on owner founder lower middle market companies, you haven’t scaled up. What why is that tell me about your direction there and if it’s a passion or a business choice. Why lower middle market and not upstream?

    James: Our passion for this segment of the market is really rooted from, you know, kind of our heritage of where we come from, you know, we grew up working with, you know, founder and owner, operator, you know, businesses that have never been, you know, exposed to institutional capital. So, you know, firms that don’t have great financials. Firms that don’t have maybe the best websites. Firms that don’t know how to put a fancy board deck together in a fancy spreadsheet together to explain things to the smart CFA guys in New York and Chicago with their fancy ties and things that so these businesses, you know, are great companies that have a tremendous amount of potential to grow and realize higher levels of success and help, but they need they need help getting there, they need a process, they need a guide, who can help them reach their full potential. 

    And that’s what, that’s why we really exist. And so, you know, the size of the companies have changed over the years, as just the amount of money you know, that we manage, you know, it’s changed. But But all of our companies have in common is that they’ve reached an inflection point in their life cycle where they’ve built a lot of value in the company. And the owners of the business need to realize some of that value. But they want to align themselves with a partner that shares the same vision and values for where the company can go, that they have. And my job and our job here at KLH is to equip them to realize that vision and, and do it in a way that everybody is able to enjoy and have fun while we do it. So that’s why we exist.

    Patrick: Yeah, I think that’s fantastic. That’s why we really want to highlight firms like kale h capital, because I sincerely believe that the lower middle market on top of the very, very large marketplace out there, there are a lot of companies in that space that truly need help. They’re great companies. But if they don’t know about KLH Capital, or firms like yours that are committed to firms their size, they’re going to default and go to a higher priced institution, where they’re not going to get great response time, they’re not going to get the resources that fit their needs. And they’ll get overlooked, they will get overcharged, but they’ll get overlooked. And it’s just not a fit. 

    And a lot of these organizations, like you say they don’t have the clean financial state don’t have things that are presentable and staged, like, I guess, staging a house. And so it’s organizations like yours, that can look through that and see the value. And so that’s why we love highlighting organizations like yours. Now, James, you know, what does KLH Capital bring to the table? You’ve got experience as the operator, and you are looking I’ve got, I figured that you’ve got the patience with organizations that aren’t as, quote unquote, pretty or claim, but what do you bring to the table that helps the fund and makes a good partnership?

    James: The primary thing that we bring to the table is experience helping companies make the transition from you know, family owned or entrepreneurial led businesses, to companies that can run with the premier middle market businesses, you know, in their industry, right. And so there is a large chasm, if you will, between where these companies are today and where they need to get to, both in their maturation, their leadership, their systems, all those types of things. And that’s not a knock against where the companies are today. Because those businesses are great companies. 

    They created a lot of value. You know, they’ve done well they’ve created a lot of wealth for the you know, family or the entrepreneurs. built it, but it has potential. And that’s what we’re really about is helping them unlock that potential. And so we spent a lot of time working with the leader on developing their team, right. And so leadership development of, you know, the C suite, which gets a lot of attention, but also that second tier of managers to make sure that that that entrepreneur who maybe has never been on a true vacation in the last 20 years, because he’s always going to be in the thing can can can build a team where he can really truly disconnect and get away. 

    And yes, that we spend time with him working on things like that. We do a leadership forum, we invest a lot in coaching, we do a lot of things like that, to help those teams, we spend a lot of time on systems and infrastructure. So technology is a obviously a very powerful force in the world today, for entrepreneurs who have been reluctant to invest in technology, because they’re not quite sure of the payback on it, we’re able to come to the table and say, No, no, no, no, look, this absolutely works. If we put in, you know, a route based GPS software into your fleet, you know, we can look how many, you know, road miles, we can say driving every year and what this means for gas and repairs, and maintenance and insurance. 

    Like, here’s the payback, we’ve done it eight times in the last two years, like, hey, let’s put in this new earpiece system, which will give us access to all this, you know, data and analytics that will help us make more data informed decisions, which will, you know, hopefully make better decisions, but also help us create more equity value, you know, for the company down the road, as we’re thinking strategically about our options. So think about a lot of things like that. And then there’s just kind of the housekeeping of how you run a business, how you do your accounting, how you do your insurance, what bureaus your real estate situation look like. And so we’re able to kind of help with all of those types of things, you know, both at a board level, and if the company needs, you know, kind of at a at an operational level with some of our operating partners that we would bring in.

    Patrick: I think that’s unique in what you say here, where you’re not just helping the C, the C suite, you’re going down a level to middle management, the folks that have to implement and monitor and actually get feedback. And I can’t understate how important that is because particularly when you’re incorporating new technology, and you probably have a lot of cases, we’ll talk about, you know, your your target your target profile clients, but in portfolio companies, but I can imagine that not everybody embraces new technology, the same way. And there are some that will actually really fight and you talk about the the GPS routing, because I had experienced with that with moving and storage company where they really thought the division manager or whatever, really fought the new electronic GPS systems. So it’s helpful to have that that guidance, not just the checkbook.

    James: Yeah, no, that’s exactly right. And we’re, you know, is, as you even said, that I’m thinking about one of our portfolio companies right now, where the CFO is, is is fighting me on the idea of putting in a new inventory management system, because, you know, he kind of likes it, how he likes it and stuff. But the problem is, it doesn’t, you know, allow for the centralized purchasing and things that we need to do to be able to make the business more efficient, more lean, and so, but that’s, that’s the job, right? I mean, and this is where we, you know, there’s, I got a lot of kids, so I think about things and, you know, in kind of the parenting paradigm a lot of times, right. 

    And you can use the carrot, or you can use a stick. And, you know, we don’t ever like to pull the stick out. And so it’s just a matter of, okay, maybe you’re not a carrot guy, maybe you’re a strawberry guy, but there’s nothing I can do to help you, you know, get you to where I want it where I want you to go. And, and, you know, sometimes I gotta nudge you along a little bit. But, you know, once once, once everybody’s able to get over the reluctant fear of like, you’re here to change everything, then then we’re able to generally make a lot of progress in some of these initiatives. 

    Patrick: Well I think the other observation I make with what you’re what you’re saying here is that unlike the perception of the non M&A perception, where you’re not involved with this on a daily basis, when you come up, you’re experiencing mergers and acquisitions, as from what you hear the news is Company A buys Company B, those are right, you cannot remove the human element in mergers and acquisitions, okay, it is really a group of people choosing to partner with another group of people with the objective that one plus one equals five. And if you try to remove that human element, you’re you’re not going to you’re not going to move forward. So it’s great that you guys focus so much on the training and the education and the coaching. Coaching is great. I mean, and that that’s a new development in education now is everybody now has a coach.

    James: Yeah. Now that’s exactly right. I mean, you know, I think 20-30 years ago when you know, the idea of private equity and you know, we’re called today, the lower middle market came to be, you know, it was really just financial engineering, right? If you bought a company cheap enough and didn’t go bankrupt, then you were generally gonna make money but did you use debt Just, frankly, was pretty simple, not a lot of work. But these days, you know, you have to do that. But like, it’s not necessarily about, you know, what you pay for a business, you know, I mean, because everybody kind of understands what fair value mean is for most companies, and nobody’s really going to give their business away anymore. 

    It’s about creating value, you have to actually create value, or you or you don’t have a reason to exist. And so that’s what we, in my partners, and I wake up every day thinking about is like, okay, we’re very fortunate, we have eight companies that we are fortunate enough to be partnered with right now. And Lord willing, another eight that I don’t know about that are out there somewhere, you know, today, and we’re working on thinking about how do we add value to those guys, you know, how do we help those teams be more successful? How do we help them grow? And what do we have to do to make that happen?

    Patrick: Well, I’m sure those eight companies are looking for you right now change. Why don’t you guys, give me the profile of your ideal target. What are you looking for?

    James: So we focus on industrial service and distribution businesses. And sometimes light manufacturing businesses that are typically going to be between 20 and 50 million per year in revenue, that we think have the potential to double over, you know, the next 4,5,6,7,8 years. And those are those are the types of, you know, if I was to describe the perfect woman, if you will, or the perfect deal, that that’s what it would be, you know, sometimes we go smaller than that, sometimes we go bigger than that. But those those are the type type companies on the surface. 

    But once you kind of check the box on that, because that’s just two bullet points, like does it meet this yes, or no? It is really about the situation, you know, where a family or an entrepreneur has built a business, they’ve created some value, and maybe it represents the vast majority of their net worth, they need to do a deal, right, they realize they need to do a deal, they need to be thinking about succession planning, they need to be thinking about their estate and liquidity and taxes. 

    But they want to preserve their heritage, because identity to business people, particularly men, and the women were differently, but for men, our identity as the leaders and the bosses in the kings, if you will, of these kingdoms is very important to them. And these kings want to be thought well of, in, in, in their communities when they come and when they go. And so you know, that means doing a deal with people that can help them make sure that they feel good about their name, and what they built and how they, how they left, if you will, kind of thing and so the people that are concerned about that, or whatever, we were the right fit for those folks.

    Patrick: Now, so the majority of your portfolio companies, management stays on or owner founder stays on, and you’re bridging that as they go to the next chapter of growth? Or are they looking just for exit?

    James: We strongly believe in investing in managers who have a demonstrated track record of success in running their business. So sometimes, you know, if you have a team of three people, maybe one person wants to leave immediately, one person wants to leave in two or three years and one person wants to retire in five years, you know, so you see you kind of are constantly, you know, configuring the team. But if somebody just wakes up one day and says, hey, I want to sell my business and you know, head to Cabo, then we’re probably not the right fit for there’s, there’s groups out there that absolutely would be a good fit for those entrepreneurs. 

    But that wouldn’t be for us. And so, you know, we’re looking for somebody who’s, you know, generally in their 40s, or 50s, right, they’ve run hard for 20-25 years, they’ve got another five or 10 years left. But they’re also understand the way the world works. And, you know, they maybe they’ve gotten their business to somewhere where they need some help kind of reaching that next level. And, you know, as part of that, you’ve got to do a transition. And so that those are the types of situations that we’re looking to help with.

    Patrick: Are you limited geographically for the area that you target or all over the country?

    James: KLH invests all over the country. We generally spend more time west or excuse me, east of the Rocky Mountains as you would expect the based here in Florida, it’s just a little bit easier to get to. And so it’s a little bit easier to be in front of our management teams. But we have invested in Colorado before we’ve chased deals in Washington and California before. We’ve got businesses now in Texas and New Jersey and Ohio. And so really anywhere anywhere Delta or Southwest flies we are will be there.

    Patrick: Now I don’t know if it’s accurate to connect you with with University of Alabama but I get kind of a feel that another unique element that you’re looking for is a sense of competition. Somebody who enjoys competition and enjoys pressing their limits and pressing about their envelope for performance because it sounds from what you said earlier that you’ve got firms that want to make it to the next level, and they want to be up with their competitors and stuff. So you’ve got, you’re looking for organizations where management has kind of a fire in the belly.

    James: Yeah, no, that’s exactly right. I mean, there’s no such thing as a free lunch. And so, you know, in any industry, that is making money, you know, there’s somebody out there plotting to, you know, take that from right, the famous Jeff Bezos quote, right, your your margin is my opportunity, that that exists in more than just, you know, selling books over the internet, as Barnes and Noble learned. And so, you know, for all of our businesses, we preach that and so we, we kind of train, we practice, we work hard, we do the hard things, because it is about winning, it’s about growing, and, sure you got it, you got to have a fire in the belly, you know, to do that, and that’s part of, of making sure that people are the right fit for what you’re trying to do. 

    You know, I mean, if you if businesses are a, you know, I wanna say a cash cow, but essentially cash cow type companies that were really, really dominant, successful, and, you know, they’re just kind of rotten out or whatever, then again, that’s great, I hope to own a cash cow myself, personally, one day that I can, you know, continue to milk into my later years. But, you know, for investors like us who are passionate about building great enduring businesses, those might not be the right candidates to start with. And so that’s where it’s so important to understand. You know, you’re you’re the business owner and the management team, what is their vision? Where did they see their business go? And, and can you actually help them with what you know, that you’re good at, so that you can be aligned from the beginning in what your strategy is, and what your goals and and what your objectives are.

    Patrick: One of the things we have to remember with mergers and acquisitions is that, you know, it’s not all done in a vacuum, there is risk, there are dangers out there. And I can imagine what you come across a lot of times, James, with the portfolio, companies that you’re targeting their first time, M&A folks, and so they haven’t been used to this whole process. And they don’t realize until they’re in the negotiations that they can be held personally liable to the buyer, you if you know, there are any financial problems that happen post closing or something unknown comes out that wasn’t turned out very diligently. 

    And so for the first time, the these owners and founders realized that, hey, I don’t have a corporate veil to hide behind it is being in my money that’s at risk. And that creates a lot of tension and a lot of fear. And one of the things that developed over the last couple of years, especially great for the lower middle market, is there’s an insurance product out there that can literally take the indemnity obligation that the seller has to the buyer, and transfer that over to an insurance company. So buyer has peace of mind that if something does, you know, unforeseen happen post closing, they’re going to be made holding, their financial loss will be covered. And for sellers, they know that they’re not going to be risking a clawback or a very large escrow. 

    That’s going to be held back for several years, because, you know, the insurance policy is stepped in, and the products been reserved for mid market deals. It’s called reps and warranties insurance. And in the last year and a half, you know, the news has been a little stunted, because of the pandemic and just can’t get the news out about it. But now you’ve got transactions down in the $15,000,000. 15 to $20 million dollar level that are now insurable, which wasn’t the case in 2019 or 2018. So, you know, I’m just curious James, you know, good bad or indifferent what experience have you guys had rep and warranty on your deals?

    James: Sure, we’re big fans of the rep and warranty policies. We use them for virtually every, you know, transaction, we’re involved in both as buyers or sellers in businesses. They’re particularly helpful when we’re investing in a new business because, you know, the indemnification agreements that you referenced are essentially like a prenup, you know, in a marriage, and it’s just really, really awkward. You know, when you’re engaged and you’re planning a wedding and they’ve been so excited to have to talk about well, but you know, if something goes wrong, we do we are going to sue you for this and sue you for that. 

    Like it just it just I’m telling it is extraordinarily awkward dynamic to start a relationship on. And so it’s so much more helpful to be able to say, hey, look, here’s these reps, you’re telling us that your customers are real, and your employees are real, or whatever in this company is going to ensure that and if they’re not, then this company, then this insurance company will be on the hook for that. And, and so, you know, you don’t have to worry about any of these reps and we’re all good, right? And it just allows the relationship to really kind of skip over that. That part of the house, they skipped over the part because she’s gonna have to negotiate it, but it just sets up a fresh paradigm for the relationship when you start out. 

    And for us as investors, it gives us a lot of comfort, because we’ve been in the situation before where, you know, God forbid, you do have a claim, but this is your CEO who is running your business, do you really want to make a claim against your, you know, CEO, or your management team, you know, is running your business for you, you know, kind of thing. And so, before the rep and warranty policies came to exist, the indemnifications, while they gave you, you know, some level of comfort, they weren’t really that valuable, you know, for a lot of people. And so we see a lot of benefit on the on the buy side. And of course, when we’re, you know, fortunate enough to be, you know, exiting some of our investments, we don’t want to be exposed to contingent liabilities for years and years down the road either. So, so we use them there. 

    And I do, you know, agree with you, Patrick, that they have become much more feasible for smaller deals. I’m under loi on a business right now, that’s a 16 and a half million dollar purchase price, you know, investment. And it’s an add on for one of our existing portfolio companies. And we’ll be using, you know, rep and warranty insurance for that transaction. And, you know, the cost is kind of getting baked in to the cost of the deal, and everybody understands it. And it’s really, it’s really not that big of a deal, not that big of an impediment to being able to get a great deal done.

    Patrick: Yeah, I think that’s the nice development of the marketplace now is it used to be kind of an act of Congress to bring this tool in, and it almost was, you know, had an impact on how the deals were negotiated with slowing down. And the cost was prohibitive years ago. And it’s become a very, very elegant tool, thus accelerating deals. But James, as we record this, we’re now into the new year. We’re coming up on spring. And I’m just curious, you had a great 2020. What do you see going forward? Either on a macro vision, or just for KLH Capital in your space? What trends do you see for the year coming forward?

    James: That’s a great question, Patrick. I mean, we feel that fundamentally, the the economy in the US is is quite resilient, quite strong. The fact that we’ve been able to do as well generally, as we have, despite the pandemic, I think, is a testimony to that. And we, of course, are super sensitive to the people who have been, you know, negatively affected from, you know, just a health perspective, but also their businesses as well, because not every company has done well. We have companies that haven’t done well. And we have some companies that have done well. You know, despite all those things, the economy is fundamentally strong. 

    And so as the vaccines continue to be distributed, and people become more comfortable with the new normal, and you know, states begin to open up that were otherwise, you know, more more conservatively locked down. We just think the economic engine is just going to continue to pick back up, we see unemployment, continuing the pickup, or unemployment continuing to decline as people, you know, come back to work. And now we’re very, very excited. We’ve got big plans for the year, last year was our best year ever. And we’re hoping that this year is our best year ever. Of course, there’s a lot of work to do that. And we’ve got to wake up and hustle every day and be able to create value for our companies. And that’s what we’re trying to do. So, we’ll we’ll be back to it. As soon as as soon as we roll off the air today.

    Patrick: James Darnell of KLH Capital. Thank you very much for joining us today. Just a great system there. And I’ll tell you, you got a competitive advantage, particularly against strategies because you’re going to take those owners and founders and give them that winning edge. And I can’t tell you how much that resonates from you. Thank you so much.

    James: Thank you, Patrick. I really appreciate your time. Thanks for having me.

  • Emily Holdman | How to Grow in 2021: Educating Potential Sellers with Valuable Resources
    POSTED 3.23.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Emily Holdman. Emily is the Managing Director of Permanent Equity, a lower middle market private equity firm based in Columbia, Missouri, that focuses on investments for the very long term. Emily is also named as one of Axial’s thought leaders for the lower middle market.

    We chat about growing organically with lead generation, as well as:

    • Entering finance from marketing and what her experience brings to acquisitions
    • Finding differentiation by committing to investment without the intention to sell
    • The intrinsic desire to be heavily involved with operations
    • Reaching sellers with a midwestern approach, by offering resources and information 
    • Evergreen tools and content marketing to educate sellers 
    • And more

    Listen Now…



    Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today, I’m joined by Emily Holdman, Managing Director of Permanent Equity. Permanent Equity is a lower middle market private equity firm based in Columbia, Missouri, where, as their name suggests, they focus on investments for the very long term. Emily is also named as one of the thought leaders in Axial’s Thought Leaders for the Lower Middle Market. So it’s an absolute pleasure to have you, Emily, welcome to the show.

    Emily Holdman: Thanks so much, Patrick. It’s great to be here.

    Patrick: Now, Emily, before we get into Permanent Equity, you’ve got a great story there, and your approach is really unique. Let’s start with you. How did you get to this point in your career?

    Emily: So I am not a banker by trade, and never took a finance class. I did study economics and journalism in school, and worked in major motion picture publicity straight out of school. That led into a marketing-related career. And so my short story is our firm’s founder, Brent Beshore, had a marketing firm. And about 12 years ago, I joined that marketing firm to lead their digital division. And I sort of grew up through operations as a part of the portfolio and then joined the investing side of things in 2011.

    Patrick: Now, unlike other people, we’re having the full business and, and banking and finance entry you came in on the other side, which is marketing/PR. So they’re very different.

    Emily: It is. I focus, obviously, on acquisitions, for the most part and support lead generation within our portfolio. So I still stick to marketing and sales. Everything goes full circle, I believe. So, I’ve done different things in my career that, at the time, feel really concentrated, but ultimately build upon themselves to serve our portfolio well over time, I think — I hope. And so as it relates to today in acquisitions, it’s a lot about marketing. And it’s a lot about sales.

    And so I still use the same things that I did, while working in the portfolio. But I think having an operator background, for the purposes of the types of acquisitions we do, is a better fit than using spreadsheets. A lot of you know this, I’m sure very well, but to the extent that a lot of it is narratively driven to understand how a company has endured over time, and how they found their product market fit and how they’ve come together as a team. And those oftentimes are more important than what you can find in the spreadsheet. So we stay pretty focused on that.

    Patrick: Let’s turn our direction over toward Permanent Equity. And I can assume with the name, there’s a purpose for it. But I like learning about a company’s history and their culture. And it’s usually reflective of how they named their firm unless they name their firm after themselves, which most law firms and insurance firms do. But, you know, why Permanent Equity? How did that come about?

    Emily: For a long time, our firm’s name was We actually just changed the name Permanent Equity at the end of 2019. So the name itself is fairly new. And it is intentional, right? When you think about, you know, people were always asking us, what does that mean, you know, what do you stand for? And so branding, right? We were constantly frustrated with ourselves. We had found a cheap domain. It was tied to our roots — “ad,” if you will, and then “ventures,” which made sense to us. And so that was the origination story for that.

    But ultimately, we’ve always had the same value proposition which is to invest with no intention of selling. And so if you think about that, it’s tied to durability, it’s tied to making a permanent commitment, a long-term commitment to be partners and within the private equity landscape, that’s somewhat of a differentiated value proposition. And so we wanted to be explicitly clear about that, and endowing the name to do so made a lot of sense. And at a broader level, it’s becoming a common term, right? So it’s our proper name, but the common term of permanent capital, or permanent equity is becoming more well understood. And so, we feel pretty good about getting to own the name.

    Patrick: Totally. Well, you know, what’s your reason for targeting lower middle market give us a little profile of of that Why?

    Emily: Sure. We were all operators by background. So the firm is made up of people who have worked in businesses of varying size well into the hundreds of millions of dollars down to the smallest, you know, kind of $5 million in revenue a year. And, and so for our purposes, we know what that landscape looks like, right? And we primarily look to invest in or partner with companies that are owned by families, right? Because again, when you’re investing for the long term, it’s a certain style of investing. And so we’re looking among founders and entrepreneurs and owners who have operated their businesses the way a family typically does, which means low to no leverage, right? Strong commitment to your team. A commitment to know who you are, and to abide by that and not just to appease shareholders or investors.

    And really stick to what matters most in life, right? So your legacy, your reputation, what people are going to know, before and after you’re gone. When we looked at that landscape, really, founders and entrepreneurs have very few answers when they go to sell, right? Or at least you think you do. The most common being a leveraged buyout from traditional private equity is a complete swap out of model, right? You’re swapping what was, a balance sheet that looks very clean for one that’s pretty heavily leveraged, right? And with expectations that are tied to a very different time horizon than you have historically tied things to. And so for us, we think that that answer can work, right? We’re not enemies of traditional private equity by any stretch.

    But to the extent that we think it’s probably bluntly applied, we think that there are plenty of opportunities and companies that are best served by a different model.

    It used to be that you basically could become an ESOP, and you’re gonna have to carry paper for a long time as a seller, or you could sell to a strategic and lose your legacy. Or you could sell it in an LBO. And so we wanted to do something that we felt like based on our operating backgrounds, served the businesses or the teams and serve the sellers in a differentiated way. And, you know, continue to have fun, right? So, you know, by being operators by background, we like to get our hands dirty. And we don’t want to step on toes. We want people who are leading the businesses to continue to do so if they so choose.

    But to the extent that we want to be helpful, we like the problems that are faced by companies in that $10 million to $200 million revenue landscape, right? You’re still trying to prove yourself. You’re oftentimes competing against somebody who’s significantly larger than you. And you’ve still got to manage resources compared to opportunity pretty closely. You’re still facing the challenges of prioritizing who you want to be “when you grow up,” right? Because that’s always, you know, sort of a moving ball.

    We found that our backgrounds, our experiences are extremely applicable. The skill sets and relationships that we can use to help those companies through the various obstacles and opportunities that they have, are meaningful. And it’s fun!

    We kind of have a saying around hereL life’s too short not to have fun. So to the extent that we enjoy the challenge that we’re in, we like that segment of the market, we think the opportunity is there, that’s where we want to be.

    Patrick: Well I think the other thing that happens is when you’re a company, and you’ve got size, and scale and legacy, you’re whether you’re cleanly run or not, you have something to put out in front for other people, you just put numbers or reputation out there. If you’re smaller, you could be a pristine, clean operation. But you know what there’s, you got to separate yourself from others. And in order to do that, you have to have a story, you have to develop a story. And that’s one of the things I like about what you and I discussed earlier is that you look at this, and you’ve got a whole content based approach on on how you do business, and then it all comes down to story. So talk about that approach, because we do that and lead into this other thing that everybody’s gonna want to hear about called your wonderful work. The messy marketplace.

    Emily: So yes, so I’m a journalist by background. Brent, our founder is a talented writer. And so early on in our careers, we’re sitting in the middle of Missouri. And we’re saying how do we compete, right? Because nobody’s going to care what we’re up to in the middle of Missouri. And so we really thought about how do we best articulate our experience? And how do we build trust? Because for sellers, in particular, as well as intermediaries and others in the marketplace, the hardest part is just building those relationships. Right? And you want to do business with people you trust, especially in transactions, right?

    And so we were trying to figure out how can we do that from Missouri. Obviously we did our fair share of roadshows and ACG meetings and steak dinners and all of that kind of stuff to get to know people and to know the landscape and respect it. But we wanted to talk to people in a different way and more tied to how we have done business in our companies over time. And so starting in 2011, we started writing quite a lot. And so our intent behind the writing was to basically put ourselves out there and say, you may hate our approach to operating, you may find us to be brash, or too focused on one thing or another, but to the extent that we can be only who we are, this is us.

    And so we’ll put it out there and use it as a trust-building mechanism, and hopefully have something to say that can be helpful, right. So I have a belief tied to, you know, kind of the permanence of what we do that most relationships have to nurture themselves over time. And what we found in in transactions in particular is, most sellers want to passively get to know potential buyers for quite a while, right? You can marinate on whether or not you’re going to do it anything a transaction or change of change of control, whatever it may be, for quite a while. And so what we found is the landscape of information available to sellers, while they’re sort of passively trying to get to know the landscape was last lacking, for lack of a better term.

    And so we said let’s try and be helpful, while putting ourselves out there, differentiating what we can about who we are, which was primarily tied to our value proposition, and also something fondly known as “the No Assholes Policy.”

    Those were things that, it didn’t matter where we were from, they stuck with people and were shared. So ultimately, what we found is that over time, we were able to build our email list. And distribute content, both on our site and through other third party sites in a way that helped to increase our reach and in a different way than through deals that are “actively in the marketplace.”

    Owners will read our annual letter or an essay that we have on risk, and they’ll read it, they’ll pass it along to their advisors, they’ll sit on it for a year or two years, and then they’ll reach out, and that’s perfectly fine by us. We have the patience and the ability to do that. And we think that it serves the market in a different way. I think I made the reference to you before, we look at it as putting hooks in the water, right? So you’re fishing, and you’ve got to have the hook sit for a while. And ultimately, you’ll see if you’re fishing in the right spot or not.

    But it takes quantity over time, combined with quality, because people aren’t going to share things that they don’t find value in. And so we’ve done our fair amount of experimentation with length of content, type of content. And what we found is we’ve published plenty of things that we wish we could go back and edit down or make longer in some cases, but it’s been a fruitful relationship, and has enabled us to get to know a lot of people who, particularly sitting in the middle of Missouri, we probably would have never otherwise encountered. We’re proud of that. Because even if we never do a transaction with those people, we have goodwill sitting out in the market. And that’s proven to be very helpful to us over time.

    Patrick: Well, and particularly now, as a result of pandemic, the whole business development process has been turned on its head and are no longer, you know, dozens and dozens of in face meetings or conferences, things like that, those are all gone away. And the savvy firms were those that have thought about doing something like content, getting materials out there not only about themselves, just in general as kind of what we’ve done to and I don’t know if this has come across for you, but it has happened in our experiences at Rubicon M&A.

    Out of the blue, somebody will reach out to us to help them with insuring their M&A transaction. And we will say in response, thanks a lot. Do you need any more information about us? Is there anything about us that you need to know to make you feel better as we go forward? And just know, you know, here are three of your content pieces that we’ve had, and they’re a year old? And they do kind of, you know, they accumulate interest. I would say just like putting putting some money away in a savings account? And

    Emily: Oh, yeah, the evergreen nature is super interesting, right? So we do something similar with tools that we have on our site. There’s a whole section of the Permanent Equity site called Resources. And within that we have both the written content, but we also have things like an Instant Appraisal tool. It’s a risk adjusted calculator that calculates a valuation on risk-weighted variables, right? But we have it set up so that it’s open source. You can use the tool and never send it to us. And so just for a personal calculation for a seller and intermediary looking for third party value validation on what they’re trying to value, it gives them a tool that they can use.

    What we found, which is super interesting, because we can’t see the inputs, right? Unless they send them to us. But we can see an IP address. And so what we see is IP addresses that use the tool repeatedly, right? Then all of a sudden, that IP address sends us an email. And it’s fascinating, because it’s something that says, again, people sit on things for a while. They think about them, they use them, they use them in conversations with other people. And this is how we interact with so many things. But we don’t think about it in the M&A landscape, because it’s so transactional — at least in structure.

    A good judicious owner is going to do their homework. So there’s these opportunities to now find those types of tools. And again, to your point, you use it as a trust transfer, too, if you get enough value out of something that a firm is putting out there, then you kind of feel like you know them, or at least are familiar enough with them that when you have the first conversation, it’s not cold. It’s not so sterile, which just makes a tremendous difference, especially right now, when that first conversation is very likely not in person.

    Patrick: I think it’s really important to emphasize this, that you are not downloading any of the visitors information as they go on and utilize your Instant Appraisal tool, because that’s a way that people are going to hesitate. They want to fill out a survey, but stop and think, well, now am I going to get hit up by a salesperson or something? And so that that is a great way to encourage engagement. And again, this is a long processing decision, if you want to sell your business unless you’re in a crisis mode. And it takes a while for people to warm up about it, even if they don’t necessarily get the information or the outcome that they’re expecting when they use the calculator.

    Emily: Absolutely confidential. We only see a valuation is someone sends it to us. But you know, it’s funny, we’ve heard from people who have ultimately contacted us that they input the information as it is in reality, and then they changed some inputs to try and understand, okay, if I work on this, how does it change the calculation? And it’s great, because it can help people to prioritize changes. It’s a useful tool in that sense.

    Patrick: Let’s talk about the approach you have or or how you guys are transacting? Because I mean, let’s not forget the name, the new name, now Permanent Equity. Okay, talk about your hold period. It is not indefinite, but it’s got a specific timeline.  We’ll get into that, why? And again, how that feeds into how you’re going to enhance a company’s existence when they partner with you.

    Emily: Sure. So to the extent that we’ve always been oriented, like I said before, with investing with no intention of selling. And for the first nine years or so of the firm’s existence, we were able to do that naturally because we were structured as a family office. All of the capital was coming from one source, and that source was comfortable with basically an indefinite hold — undefined. And that transitioned in 2017, when we had a group of investors that came to us and said, under what conditions would you all take outside capital and run under a fund model.

    And for us, we needed the incentives to be aligned in a way that didn’t feel like we were changing our identity. And so standing back with what we knew to be true as operators, and then what we had grown to understand as investors, there were certain things that were critically important to us. And one of them was we never wanted to be forced to do a deal. And so if you think about from a performance standpoint, tied to management fees, it’s very difficult not to do a deal when everyone is paying you to go do deals.

    And then from the standpoint of how how things interact and how you prioritize post close, we’ve never made an investment, trying to think about exactly what the exit looks like, right? That’s not why we’re making the investment. We wanted something where we felt like when we made the investment, we were never going to then be a forced seller. So many private equity firms are, based on their fund’s structure with the term length itself.

    So those were two of several key elements that were really important to us to sort of break down and reconstruct it in a fashion that felt authentic to us.

    What we ended up building is a model where we have a 27-year term, and that term is then potentially extended beyond that period, by a vote of the LPs. And so, comparative to a traditional 7- to 10-year fund model, we are very close to triple that amount, right? And then we have 10 years to invest the capital.

    We’re on our second fund now. So that fund has 10 years to invest the capital. So again, it takes time to get to know sellers. We have time to get to know opportunities. And we don’t feel like we have to move within the first year and deplete down our fund in order to be considered a success for the LPs.

    Patrick: I’m sorry, not to interrupt. I’m sorry but this just sticks out, okay. 27 years, is divided by nine three times, I can see that. But why not 26, why not 28? Why was that was that somebody number in high school or something?

    Emily: No, it was a lawyer’s number. One of the largest investors in the first fund — the original number was 50 years. We’ve always thought about it as being a true generation of capital. The attorney came back and said, you know, I’ve never seen that, and I’m not signing my name to anything that has that kind of duration. And so we said, okay, what’s the longest you’ve ever seen? That’s where 27 comes from, so it’s somewhat arbitrary. But to the extent that we have the options for renewal past that period, it’s really again, trying to make sure that it’s in the best interest of the companies and in the best interest of the investors to continue to hold the companies. We are never going to be a forced seller, and we really valued that proposition.

    But on the other side, we don’t take management fees. We’re self sustaining based on the portfolio that pre-existed the fund structures. That gave us the ability to make that transition without feeling it at a fund level, or at firm level, which was… we feel very fortunate to have had that position. And so we were able to just focus on finding the right opportunities.

    So the first fund was essentially a thesis fund. That was $50 million. We made four primary investments out of that fund, and then raised $300 million in our second fund, which closed at the end of 2019.

    It was an interesting process. Our capital base is mostly from family offices, individual investors, and in the second fund, institutions that have been incredibly, incredibly supportive and gracious in understanding our model. And getting comfortable with the value proposition as it differentiates itself from traditional private equity, particularly at the institutional level. You can imagine, they’re used to a very specific structure that has worked for a lot of people for a long time. And so, being able to think outside the box, we were really fortunate to find the right partners for that.

    Patrick: I would think also as a target partner company for Permanent Equity. And this is just a personal bias of mine. Is your approach on how are you going to improve the company, you bring them in, you’re going to grow them, you’re gonna get them bigger, but there’s one direction you go, which, which is, again, I say, near and dear to my heart. But why don’t you talk about because your growth is not on minimizing costs, or minimizing expenses or getting efficiencies, you focus on sales. Talk about that.

    Emily: Yeah, if you think about it, how is the company going to be here in 10 or 20 years? You’re not going to cost cut your way to that. And you can’t really focus exclusively on just putting a bunch of disparate companies together, making a mutation, and turning it into a corporate behemoth that then has an EBITDA number that’s much larger so you can get a multiple expansion. I get how it works. But for the purposes of longevity, you’ve then got to work through the mess of what you just put together. Right? And so for us, we focus a lot more on the systemic health of the organizations.

    We’re primarily looking for it through growing the opportunity side of the organization. And that can be done in a lot of different ways. In construction that can be tied to bonding capacity. In a lot of companies, especially those that are B2C focused, that can be improvement upon the lead generation funnel, and creating, obviously, line extensions and other ways that they can continue to meet market need. But we really look for that side of the table, and to continue to improve both the teams and the incentives that are aligned with seeing us continue to grow in a systemically healthy way. And we’ve seen that bear fruit for us.

    So, we’re really fortunate in the companies that we’ve been involved in now for close to a decade. It’s kind of the tortoise and the hare situation. “Slow and steady wins the race” is our bet. We could have very quickly added on various things to some of the companies, but where they are today has been primarily fueled by organic growth. We’ve done some small things to make acquisitions and whatnot, but we have really driven operators, and where the firm can be really helpful is focusing on very specific ways of improving lead generation or improving the cost structure around that. Not in a way that’s focused on cutting costs, to your point, but more in a sense of trying to make sure that as much opportunity as exists in the marketplace, we have sort of the arsenal of tactics to go and try and go after it.

    Patrick: Okay, let’s get into one thing. And this is from a prior conversation you had with me with regard to specifically lead generation. And that was one of your companies that was stable, things were good. And then COVID hit. And because you’ve done the work ahead of time to improve lead generation, they were on the precipice of just a boom. Swimming pools.

    Emily: Swimming pools, yeah, we’re talking about swimming pools. So we’re fortunate to be partners in Presidential Pools and Spas, which is based in Arizona, and they’re the largest residential swimming pool builder by volume in the country. And so they build a tremendous amount of pools every year, and they’ve been around for over 30 years at this point. So they have just a great reputation within Arizona. But when we got involved, they primarily had most of their leads come from home shows, from walking into the building, or from calling. They had a website, but… and we invested in 2015. So this is, you know, kind of five years back, right?

    It was really a question of how are we going to improve their online presence, but also create tracking mechanisms to make sure that when someone contacted them, we can understand what they ultimately ended up deciding to do, as far as you know, improving their backyard. That’s all tied to addresses in the pool market. So you’re able to kind of see how that happens over time. So we built a lead scoring system, built a new approach for them in terms of how they spent money in the marketing funnel, and within a couple of years, we had dramatically changed the lead funnel as a whole. Now leads were predominantly coming from online. That was kind of a flip flop. For them, it had historically been a very small amount of their lead volume, and now became the dominant source, which has fringe benefits just around being able to track the information. Somebody who walks around your showroom, it’s harder to collect all the information than somebody who submitted through a form, and then you can keep track of them from there.

    But as the company has continued to grow based on a variety of different factors, lead generation not being the only one, but where we stood in 2020 is the company was significantly larger, but still has some critical mass issues. Capacity constraints around production are very real, especially in construction markets right now with labor constraints. You can only build so many pools physically at a time. And as the pandemic hit last year, it became capacity constrained, frankly, on both sides of the house. So both in the sales team, and for production, it became a metering system. We had to figure out how do you safely have conversations about what you want your backyard to look like. It was an issue, right, because it’s not something that you can do in kind of a remote capacity. A yard has to be measured. And you’ve really got to make sure that you understand the soil composition, and all of those things. So it’s technical enough that it can’t be done… it can be done socially distanced, but you can’t do it completely remotely in most cases.

    And then from a production standpoint, you can only build so many pools. So we ended up having to gate the lead system. We were fortunate enough to have advanced the lead funnel system to a point where we had the mechanisms in place to be able to continue to make potential customers feel like we cared that they had contacted us, but that they were in somewhat of a waiting room until a salesperson was going to be available to talk with them, and help them to design their pool. And then from there, they have to get in line for production.

    In March, we’re questioning whether there is going to be any demand at all. And by April, it was very clear that we were going to need all of those mechanisms in place. And to be quite frank, those mechanisms are still in place to varying degrees, just depending on what our capacity can hold on to. And we think it’ll be another strong year for that team this year as they continue to work through the backlog of people who now recognize that their home is more important than it’s ever been.

    Patrick: It’s just a great story. It’s very, very memorable. How does this track with your profile? Share with me what’s the ideal profile of a target company that Permanent Equity is looking for? It’s not purely just construction.

    Emily: No, no. We we look at a couple of different things. factors. We are not industry focused for a variety of reasons. But we focus on the durability of the value proposition. So if you look within any given market, what we’re focused on are things that, if you’re if you’re going to like measure durability versus growth, we’re far more interested in durability. Growth matters. We love growth, but to the extent that the prioritization is always going to be in durability, which necessitates then what we lovingly describe as more boring companies, right? You do what you do. You know what you do. It’s well defined, and you’ve probably been doing it for a while. Profitably.

    And that’s sort of the baseline of what we look for. And then a large part of it for us is around team. So we want to understand again, what are the priorities of the sellers? Do they want to stay involved in the organization? We have a very different value proposition for people who are looking for a majority recap and a partner, compared to an LBO. Under our model, you would still benefit from distributions because there’s no leverage on the company. So that’s a very different value proposition for them. So we feel like we have a compelling proposition in situations like dissolutions of partnerships, as well as everyone continuing through a recap.

    And then from a legacy perspective, for those that are looking for retirement, and haven’t been satisfied with more traditional options, there’s very compelling conversations to be had. My favorite story to that end is two aerospace companies, sister companies that we purchased in 2019, from a 95-year-old seller. And this individual had been approached for years by traditional private equity. But she had a team that had been incredibly loyal to the organization. Some of them working there in excess of 40 years. So it was very important to her that the organization continue to maintain its autonomy and identity, and that those people would have the jobs that they had been so loyal to, through that transition period, and for as long as they so choose to stay.

    We found an incredible match in that and felt like it was mutually just an incredible fit. Because that’s a legacy that we intend to honor long term. And again, because of our actual financial structure of the deal as well, that company had no debt. So it was able to work through a decline last year, especially in the first half of the year, without having to make major restructuring changes to the organization. And that’s just a really fortunate position to be in.

    Patrick: So what you can’t overlook, if you’re listening to this is that you cannot take the human element out of this, you know, for M&A. People are not in M&A every day, they look at it as news headlines, Company A buys Company B and they move on.

    Emily: And they’re just assets to switch around, right? It’s not complicated. No! It’s made up of human beings.

    Patrick: Exactly. So you’ve got a group of people choosing to partner with another group of people with the outcome, the the ideal outcome is one plus one equals five or more. And, and having the the nice and being able to sell the fears of the people involved is very, very important. And I bring that up just to, you know, as we think about fear in there is the amount of risk that’s there, this deals aren’t done in a vacuum at all, when and what sellers come to find out very painfully, sometimes in those surprises that they are personally liable to their buyer partner financially, in the event, something post closing blows up that they didn’t anticipate, and it’s built in within the contract.

    And that can bring some friction, particularly for somebody who’s owned a business for a while and all of a sudden, they’re not used to selling and now they’re going to be personally liable for something that could be out of their control. And that creates a little bit of tension. And what we’re very proud of it in the insurance industry is that there’s an insurance policy that can insure deals. Now is available for lower middle market deals as low as $15 million in transaction value, where the policy takes the indemnity obligation of the seller, transfers it away to the insurance company, so that rather than the seller being liable to the buyer for financial losses, the buyer suffers post closing that were not accounted for in the rest of the seller reps.

    If that happens is still the buyer coming after the seller, buyer goes to the insurance company. And we like that because buyer gives peace of mind knowing that if something bad happens, they’re hedged on potential losses. Seller gets a clean exit. In most cases, the insurance policy replaces some or all of any withhold or escrow so there’s even a great financial benefit in a component. And to take away the fear for sellers, I would say in our experience, nine times out of 10, the seller will pay for that insurance policy, some or all of it on behalf of the buyer. So it’s taken care of. And the type of product I’m talking about is called Reps and Warranties insurance. And I’m just curious, Emily, good, bad or indifferent. You’re doing these M&A deals a lot. What experiences have you had with rep and warranty?

    Emily: Yeah, so we are still pretty old school on our reps and warranties. We still go through and draft drafted the entire section. And we don’t use insurance. We can understand where it can be applicable in the marketplace. For us, our diligence process is differentiated enough. We use diligence as a way to get to know the sellers. We talk through both the fundamental reps, obviously, but also through risk factors that are embedded in the business, and making sure we’re of mutual understanding as we move forward. That is really critically important to us. We still go by it in an old school fashion. But you know, the market, I think we’ll continue to see plenty of people using that type of product, particularly those that are focused on very quick closings.

    Patrick: Well, now as we’re coming in, we’re just at the beginning of 2021, I do have to underline again, that you were named as one of the top 20 thought leaders for 2020 by Axial for lower middle market M&A. So let’s let’s lean on you as the thought leader, what do you see going forward? Or what trends do you expect to see in 2021? Either macro or lower middle market M&A, or at Permanent Equity in particular?

    Emily: I’m not sure that it’s as much about leadership as it is just a willingness to be opinionated and vocal about it. But to some extent, I’ll take the the compliment either way.

    I think where we’re sitting now, 2020 was slow from a deal opportunity standpoint, and we knew it was going to be. We anticipated that from the spring onward. I will say that it was a very fruitful time for us to just work on building relationships, and just being there for people who are going through stressful times. That time of uncertain uncertainty is some of the most stressful and particularly when you’re in the driver’s seat of a company, that is a tough position to be in. So we just tried to be there for people, if that makes sense.

    As we move forward, we’re seeing some people who, for a variety of reasons, whether demanded by time and age, or just, kind of thinking through what they want to do next are coming back to market. We’re starting to see a return of deal flow, which is positive, and we’re excited about that. But we are continuing to see people who are sort of trying to figure out how much of their 2020 outcomes are sustainable long term. And so the narrative built around that I think is going to be something that we’re going to continue to unpack and understand, probably for the next two to five years. Patrick, I’m sure you remember — I got heavily involved in 2011 in looking at M&A transactions, and so it was kind of on the back end of 2008 to 2009. It was two years later. And by that point, you would start to see the narrative story for each organization.

    It’s like, never waste a crisis. There’s so many things that we’re going to learn over the next couple of years. And from an operator’s perspective, it’s a really good time just to think about the fundamentals of how your business is structured. And recognize what you’ve done well through this period of uncertainty, and I think that for the market at large, and particularly for transactions, it’s been a nice reset.

    In 2019, I remember being pretty frustrated by the hubris of both sellers and other private equity professionals. Leverage is abundantly available and there’s nothing that’s going to derail this economy and just sort of all the things that were kind of steamrolling and snowballing in a positive direction, and then, we all got a humble pie.

    Right? And us included. But to the extent that I think people having a reminder on why leverage needs to be judiciously thought through. It can be helpful in certain situations, but to the extent that it’s not an obvious answer for everything, at least from our perspective, we think that that has been reset to some extent.

    And then we think that there’s going to be plenty of opportunities for people coming out of this to see economic expansion and we’re ultimately, I’m very bullish on the future of the American economy, North America as a whole. And we think that for sellers and buyers alike, that landscape is going to be pretty strong.

    Patrick: Emily Holdman, how can our audience find you?

    Emily: I’m fairly easy to get ahold of. My email in particular is all over our website, but it’s And I also tweet quite a bit so you can find me on Twitter as well. And don’t be a stranger is what I would say. I’m pretty quick to respond and happy to talk through things, even if they’re sort of in infancy in terms of deal structure or an opportunity.

    Patrick: No, you’re not hard to find, if I could make a recommendation to my audience, go check out, click on the About tab, and you’ll scroll down to Our Home. And then you can click on that and you see all the nice intimate elements of the firm. The house that they use as their office, and all kinds of interesting factoids, real estate prices, top restaurants in and around.

    Emily: We’ve got to increase the profile of Columbia, Missouri. It’s a great place to live. I think it’s supposed to be one degree this weekend, so maybe don’t come visit us this week. But it’s usually pretty good.

    Patrick: Emily. Pleasure having you. Thanks again for joining me today.

    Emily: Thanks so much, Patrick.

  • John Warrillow | Precisely Why You Need Representations and Warranties
    POSTED 3.16.21 M&A Masters Podcast

    Our special guest on this week’s episode of M&A Masters is John Warrillow, the Founder and President of The Value Builder System™. He is also the host of Built To Sell Radio, and the author of the bestselling books, Built to Sell: Creating a Business That Can Thrive Without You, The Automatic Customer: Creating a Subscription Business in Any Industry, and The Art of Selling Your Business: Winning Strategies & Secret Hacks for Exiting on Top

    We chat about what dangers to be aware of during a sale, as well as:

    • How to strategically leverage debt
    • The natural and inevitable expansion of buyers in the market
    • How to maximize your value with multiple bidders
    • Who to involve during negotiations in order to retain companies’ employees
    • M&A is not DIY – how to keep your coveted information private
    • And more

    Listen Now…



    Patrick Stroth: Hello there, I”m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. We have a real treat today, I’m pleased to be joined by John Warrillow. 

    John Warrillow is the Founder of the Value Builder System, a simple software for building the value of a company used by 1000s of businesses worldwide. His best selling book Built to Sell, Creating a Business that Can Thrive Without You was recognized by both Fortune and Inc as one of the best business books of 2011 and has been translated into 12 languages. John is the host of Built to Sell Radio, ranked by Forbes as one of the world’s 10 best podcasts for business owners, something we aspire to here one day. In 2015, John wrote another best selling book, The Automatic Customer, Creating a Subscription Business in Any Industry. John completes the trilogy with his latest book, The Art of Selling your Business, Winning Strategies and Secret Hacks for Exiting on Top. Well John, as a longtime listener of Built to Sell Radio, it’s a real treat for me to have you here on M&A Masters. Thanks for joining me today.

    John Warrillow: Well thanks, Patrick’s it’s good to be with you.

    Patrick: Now, John, before we get into the Value Builder System, and then your your latest book that came out the Art of Selling Your Business, let’s set the table for our audience and give them a little context. Tell us about yourself, what got you to this point in your career?

    John: Well, I’ve started a couple of businesses that I’ve sold, I wrote about that experience in a book called Built to Sell which goes back 10 years ago. It’s funny, we put together a little questionnaire for that book called The Saleability Score, which is a little like 10 questions survey that identified whether you were ready to sell. And that questionnaire became very popular on our website for, and it got me thinking, there’s probably a business out there for helping entrepreneurs understand what drives the value of their company. So that became the precursor to what we now know as the Value Builder System. And, and, and that’s been something I’ve been focused on for the last few years.

    Patrick: Yeah, with a lot of people that are involved in M&A all the time, you know, and I admit, this was me, you know, six, seven years ago was that when you think about acquisitions, or mergers and acquisitions, it’s always Company A, buys Company B, read about the Wall Street Journal, these big, massive deals, and so forth. The reality is, M&A is a group of people choosing to partner with another group of people. And the objective is one plus one equals five or six. 

    You can’t get the human element out of mergers and acquisitions, because it’s just what’s driving is people and people. And so you cover this really elegantly with the Art of Selling Your Businesses. The issues with the human element, obviously, fear and greed come into it. And if you’re not prepared, it can be a real traumatic experience. And so you kind of outline that in your book in a step by step version. So let’s start very first part. How do business owners even know when the right time to sell is?

    John: Well it’s a great time right now, the M&A market is absolutely on fire. And that’s important, but you know, driven by interest rates, interest rates are very, very low. And most of the deals that I think we’re talking about today, the M&A deals are really underwritten by debt, right. So the private equity group making the acquisition or the strategic making the acquisition is is really the one that that is making the thing happen with debt. And so when debt is cheaper, almost free, which is what it is today, it makes it very, very easy for an acquirer to make money. So I think it’s a great time right now, even though we’re just coming out of hopefully, coming out of this pandemic. 

    And, you know, some people have had businesses that have been damaged by that process. I think that can be to some extent, counterbalanced, if you will, by the the the interest rates of where they’re at now. You know, the other way to think about the question, which is sort of a glib answer to look at when’s the best time to sell is, is, is when somebody’s buying, right? So when you get an offer, to buy your business, it is a very unique moment, because for that moment, you are in the driver’s seat, right? You’ve got negotiating leverage, they’ve come to you, and you’re in in the position of power. Whereas if you’re flogging your business, shopping it, if you will, all of a sudden, you’re less positioned for power. 

    And I always remember the story of Rand Fishkin, Rand built a company called SEO Moz, which is a software company to do SEO, basically, search engine optimization. And Rand, built it up to 5 million or so in revenue, and he’d been told that his business should be worth giving it the fact it’s a SaaS company around four times revenue. And so they were at five and he had a goal of getting to 10 the next year. So in his mind, he was like next year, we’re gonna be worth 40 million bucks four times 10 million in revenue. 

    He gets a call out of the blue from a guy named Brian Halligan, who was at the time the head of HubSpot, which is an all in one marketing company and they figured out that they wanted to add SEO. And Halligan said, look, you’ve done this amazing job of the SEO product. Why don’t we buy you? And Fishkin said, okay, well, what do you have in mind, and Halligan said, how about 25 million bucks of cash and HubSpot stock. Now, that’s five times revenue. That’s pretty good offer. For any business and even a SaaS business which have high valuations. It’s still a great offer. But Fishkin had this 40 number in his mind. And so, ultimately, he pushed back it says it’s 40 or nothing and Halligan said, well, we can’t do a deal. 

    And Fishkin went away. And instead of selling his company, he raised venture capital money and got into a whole bunch of different product lines. Unfortunately, many of them failed, started to suck cash out of the company. And at one point, the VCs got really worried about Rand himself, he kind of fallen off into us it kind of spiraled into a point of depression. When he decided or the VCs decided that they should remove him from the board. So he became a minority shareholder in a company he didn’t control. And I asked him on the podcast I did with him. I said, Rand, what was that like? I mean, is your is your stake in the company worth anything anymore? 

    And he said, probably not because the VCs invested with preferred shares, so they’ll get their preferred return before Rand gets anything. And I followed that question up with a question around what that offer would have been worth that $25 million in cash and HubSpot stock is HubSpot stock in the meantime, has gone through the roof

    Patrick: Up and to the right, yeah.

    John: Yeah. Up and to the right. And he said, yeah, it would be worth close to 20, 200 excuse me, $200 million. And I tell you that story, because I think the answer the question, when’s the best time to sell is in many ways when somebody like Brian Halligan is buying.

    Patrick: Well, I think this environment is ideal. When you think about the number there, there’s a finite number of good companies out there to be purchased. Okay. However, the universe of buyers keeps getting bigger. And you think that it’d be the opposite. But no, because when you consider there about 4500 private equity firms out there, more than half of those, the majority are targeting companies under $50 million in transaction value. 

    They’re competing with 1000s and 1000s of SPACs, or excuse me, 1000s 1000s of strategic acquirers. The newest development for larger companies are the special purpose acquisition corps, the SPACs, that’s the shiny thing out there. You also have 1000s of family offices, and then you’ve got wealthy individuals who want to be just independent and go buy a company. So there are there’s a universe of buyers out there. What do you think is you attribute as one of the biggest mistakes that owners make when they go get ready to sell?

    John: Well, I think you just touched on it really well, Patrick, and that is that they, you know, there is this incredible breadth of acquires out there right now. And what I see is a lot of sellers get married to the idea of selling to a strategic, right, they’ve heard that a strategic acquire big, big, you know, fortune 500 company is is the is gonna drive the highest valuation. And so they get sort of fairly myopic, and it’s got to be a strategic you got to be a strategic. And what that does is effectively takes your universe of potential acquirers from massive all these PE groups that you describe, and so forth, down to like a handful of companies. And that may sound okay, until you realize that negotiating leverage in this punching above your weight, if you will, is all about having multiple offers. 

    And I go back to a guy interviewed for the book a guy named Arik Levy. So Levy had two exits. One was a bit of a disappointment because he got myopically focused on one acquire the other he learned his lesson and created competitive tension so that the businesses were in the same industry. They’re in the locker space if you know anything about you get you the whole foods. You got the Amazon lockers, right? Same business model. But Arik Levy did it in laundries. So laundromat would have lockers so that you can pick up your laundry after the after hours. And Levy built a great little business and laundry locker and he decided to sell it. He got one offer, did it himself. Didn’t hire a professional and got one offer. Accepted a letter of intent. 60 days went by guess what? The offer starts retrading they lowered the price by 20%. 

    Arik Levy without another offer in hand says, okay, fine, I’ll take your 20% discount, then they turn around and say, well, we thought we could get the money to buy your business, but we actually can’t. So you’re gonna need to lend us some money to buy it. So then he ended up financing the deal. So lower money, so not a great exit. He then went to build another company called Luxor One they put these lockers in apartment buildings, so people who buy online can get their stuff shipped and secure and stuff. But this time, he learned his lesson, he was really flexible. He said, I don’t you know, we we want to, in fact go out to the marketplace, and even went so far as to say we don’t even necessarily just want an acquisition offer, we’ll accept an investment round. So he was very open to the structure of the deal, private equity group, strategic etc. 

    Long story short, he got five offers for his company being open to all different types of buyers. Three of them were investment offers. Two of them were acquisition offers. All five of them, when they originally came in at the letter of intent stage were plus or minus 10% in terms of valuation. He then ginned one off the other playing one off the other in terms of valuation, by the end of this kind of auction process, he was able to triple the value he got for his company. Tripled the offer that he got through just playing one off the other. And we compare that exit with his first, right, and you see the difference between kind of myopically falling into the hands of one acquirer, versus playing the field, including private equity, including, you know, family offices, including strategics, as you described, there’s a huge universe of folks out there. Keep them all on your list, that’s what gives you leverage.

    Patrick: Well, that’s a constant, I would say, that’s one of the core themes that you repeat over and over again, in you know, The Art Selling your Business is to go ahead and have multiple players in there, because that’s probably the best leverage that’s available for seller. Those who have leveraged tend to tend to use it. And if you forfeit yours, you’re in a lot of trouble. Now, you’ve got a lot of common sense, advice on the mechanics, you know, of dealing with negotiating terms and so forth. I want to touch on a couple of them, because these can be you know, stumpers. But when a company is going into acquire another company, they’re going to go through their due diligence process, and sometimes that’s going to involve a request to you know, speak to the target’s employees or the target’s customers. Okay. How do you handle that?

    John: Yeah so first of all, I think when it comes to employees that that you want to bucket your employees into two buckets. You’ve got your rank and file employees, who shouldn’t really find out until you sell the business until the you know, the checks, so called in the mail. Or in you know, wired across. The other group is your senior management team, two or three people who have to help you sell your company, those folks are going to need to know your you’re for sale. And so when it comes to actually negotiating with an offer, I would hold back the the rank and file employees until again, the check is in your account. 

    The two or three senior managers will probably have to go to the negotiation, the management team meetings with you. And and and that’s okay. The thing you want to avoid, of course, is people using the veil of an acquisition offer, really, just to scoop your employees right. This happens a lot I you know, one of the stories in the book is it is a guy who a private equity group who went and made a decision that they were going to roll up a category in industry. And so they went and used a very superficial Letter of Intent to put under contract 80 different companies. 

    And when you sign a letter of intent, of course, that I know you know, this, Patrick, you give up negotiating leverage, right, you sign a no shop clause, so that company was effectively tied up. So they tie up 80 companies and they, you know, go through the, the the ceremony of meeting with the managers in an effort to do due diligence, they had no intention of buying 80 companies. In fact, they only bought two of the 80. What do they do with the other 78? Well, they recruited the managers that they met along the way. And it’s one of those horrible stories but it happens all the time where the acquirer is using the veil, the so called acquirer in air quotes is using the veil of an acquisition for no other purpose to find out your private information and your employees. 

    So I think that you want to make sure that you’ve got a process in place to to really validate the people you are working with to make sure that they are closers. They do actually transact they do make acquisitions. Talk to other entrepreneurs who sold to that PE group or that strategic to find out if they are If they have a reputation for closing, because because yeah, these games happen all the time. 

    Patrick: You really have to have professionals on your team. Why don’t you talk about this? Because there are two things I think I’d love your opinion on, first of all having an intermediary or investment banker. And then if you talk about their role, and then also the other one, you talked about you described as your left tackle. Having a real savvy, M&A attorney, not an attorney,  general business attorney, but an M&A attorney. So start with those two professionals and give me your thoughts.

    John: You’re absolutely right. I wouldn’t sell a business without an M&A professional. I think it’s crazy. I wouldn’t sell a house without a real estate agent. Of course, you can do it. But their job is to create competitive tension right? In the case of Arik Levy that I just referenced, the Luxor One versus the, the the laundry locker, the difference was in may pay in many cases, he hired an M&A professional. In the Luxor one deal he had Trip Wolfe, who’s a sell side M&A guy that ran the process for him got the five offers in the first example where it went poorly. He tried to do it himself. So look, it’s not a DIY project. 

    The left tackle comes from the movie, The Blind Side, the book of course by Michael Lewis, where he described when a quarterback rolls back in the pocket, a right hand throwing quarterback, he kind of turns his back to the left side of his body. And of course, that exposes him to a 300 pound lineman coming to flatten them. And so the left tackle is the defensive player that basically protects the quarterbacks blindside. And that’s the description I used for the corporate M&A professional. The lawyer, excuse me, the legal representation that the corporate lawyer who is a specialist in M&A, and their job is to kind of pump the brakes, right? 

    The M&A guy on your team is likely to kind of nudge you jet gently to accept terms and do points, right because they they get paid when a deal gets done. And your left tackle that the M&A attorney is there to kind of pump the brakes a little bit. And when it works, those two have a mutual if not always ammicable, but certainly a mutual respect for one another. Right? Because they know they each are doing their job. And I think that that that that’s an important piece of the puzzle, you know, to go back, Patrick to the earlier point you made, which is this idea of using protecting yourself from a legal perspective, I just was triggered by one of the guys I put in the book. 

    This guy’s name is Aurangzeb Khan. I think I’m pronouncing him in right his name, right. But he built a business in the UK called ebookers. They are an online travel agency. And the most important the way these businesses work is they get a commission, right, they get a commission from the hotel chains and airlines when they book, you know, book revenue, kind of like Expedia, right. And there’s sort of four or five major online booking engines in the world. And the most coveted secret in this category is the commission rate. Because obviously if you as Expedia know what Travelocity is paying on in terms of a commission rate, then you’ve got leverage, right? 

    Well, in the story, that in Aurangzeb’s case, when he sold ebookers, which is the Expedia of the UK market, he realized that the commission rate was his most coveted secret, but he took his business to market anyways, he got four offers, he learned later that two of the acquisition offers were not real. They were simply there to find out the commission rate. And, and and and you say, well, you can’t use that information. They sign an NDA, sure, they sign an NDA. But if you know what the commission rate is, you don’t have to all out and out say that, that you know just how far you can push the airline until they break, right. And you don’t ever have to reveal that you found that out through the M&A process. And so that’s just an example of why you need a really good M&A attorney who can can really protect you along these lines.

    Patrick: And there’s a great balance that you have there where you’ve got your your investment banker that’s trying to push the deal forward, getting you over the obstacles and possible little fears out there. And then you’ve got the cautionary kind of the safety manager, the attorney push it back the other way, and they’re constantly thinking, worst case scenario, and the investment banker’s thinking best case scenario just to get you to move forward. So it’s an interesting balance.

    John: The worst case and you find you get this balance wrong, is when you hire a an attorney who is a generalist, right? Like the same guy or gal who incorporated your company defended you on that, like wrongful dismissal suit or whatever, and says, oh, yeah, yeah, we can do M&A. Right. And they’ve done like one deal in the last nine years. The problem with hiring someone like that, although they may be your best friend and really, really, you know, heart’s in the right place. They don’t understand the M&A process and as a result, they tend to have their foot squarely planted on the brake right. 

    They’re like, I can’t do anything that would expose my client to any risk whatsoever ever. And as a result, nothing gets done. Because the attorney doesn’t know what market terms are, what realistic rate, you know, reasonable reps and warranties are what are way outside market, right. And so you really need a really solid experienced M&A professional and an M&A attorney to do the deal for you. And it may not be that the guy or gal who incorporated your company probably isn’t.

    Patrick: Absolutely not, because they’re they’re going to be looking at disclosures in the reps and warranties. And what you have to understand is that the seller individually, personally, they can’t hide behind the corporate veil. They are personally liable to the buyer, if they make a representation or disclosure in that schedule to the buyer. Buyer performs diligence, but you may not know everything that’s there, you may have forgotten something. And then post closing, if the buyer suffers a financial loss within the contract, they can come out after you and collect dollar for dollar and claw it back. 

    And so it’s a real big area of fear. What what I appreciate, and it hasn’t been widely publicized on lower middle market sub $50 million transaction deals, there’s actually an insurance policy that takes away that risk, where the insurance industry will go ahead and look at what the disclosures are, they look at what kind of diligence the buyer performed. And then they say, great, well, we’ve looked at everything for a couple bucks. If anything happens, we’re going to transfer that indemnity obligation away from the seller, and we’re going to take it over to the insurance company and we’ll absorb it. The buyer suffers a loss, the insurance company will pay the buyer so the seller gets a clean exit. 

    So if something does blow up that they had no idea about it, you know, it gets taken care of. It also helps because it off sets any escrows or withholds because no need for an escrow or withhold if an insurance policy is collectible and out there. And is a great development that’s been out there. I know when we’ve we’ve heard your your guests talking about issues on the diligence and the reps as a real big area of fear.

    John: Yeah, absolutely. Because, look, I mean, you’re selling your business, for freedom, right and and the last thing you want is to have an incomplete or as you say, not a clean exit, right having that. I mean, you might as well keep control your company, if you’re not going to be fully out. Why sell it right? If you’re if you’re not going to have that sense of freedom. When I when I talk to entrepreneurs about why they sell their company, I think it comes down to this core need that I think all of us share in common, which is the desire for freedom. And they want a clean exit. 

    And you know, I go back to a guy named Joey Redner. Joey, is another guy a feature in the book, he built a company called Cigar City Brewing. Brew pub in the beginning, and a brew brand, I should say a specialty beer. And he built it up, he borrowed about 800 grand from his dad the very beginning to build a brew brewing facility. And a lot of money, very capital intensive business, but got it off the ground and it became really successful. And Tampa Bay, people were buying the beer like crazy and it was a hit. So much so that he ran out of brewing capacity. He goes to the SBA and gets him to guarantee a massive loan to build out his brewing capacity even further. 

    So he’d have you know, 10s of 1000s of cases a month or whatever he was selling. Things are going well for a year or two more. And guess what he runs out of capacity again, now he’s in hock to his dad, he’s got a massive bank loan. And the banks come in and say Joey will lend you the money, just sign here, Right. All your personal guarantee in place to expand the production facility again. And Joey throws up his hands and goes enough. You know, like, I feel like the gambler at the poker table who’s just being asked, like, I just won five hands in a row and you’re just asking me to put all my chips in the middle of the table again. Like it’s crazy, I won. 

    And and he said, I just wanted that sense of freedom to be out. To be out from under all this debt and all these obligations. And, and I’ve always remembered that story, because I think that is the essence of what you get when you sell your company, right. Is you get that your first foot on the rung of Maslow’s hierarchy of needs, right? Like when you get a clean exit and you sell. Like, no one can take that away from you, right? You you you have, you don’t have to worry about money anymore. And I mean, that doesn’t mean you’re not going to work most like Joey was 40 when he sold his company, right? 

    He’s gonna have lots of other things that he does in his life, but he’ll never be able to slip his foot off that first rung of Maslow’s hierarchy of needs. And I think that’s what we you know, as entrepreneurs, that’s what we all crave. And when you sell and the in the owner can claw back half the value, you know, because you forgot to disclose something. I mean, it’s, it’s tragic. So I think it’s a I think it’s a really important issue you raised.

    Patrick: Well, we talked about before how you can maximize your value getting multiple bidders, and some of the issues out there and improving your leverage and so forth. Let’s just give one quick little reference to some of the things to be fearful, or just be aware of. And it’s really helpful because if you can spot these spot these things coming, you’re prepared for and you’re going to have the right response. Let’s talk about, you know, what are some tricks that an experienced buyer could try to apply against an inexperienced seller? What do you have to look out for. Just mention one of them. 

    John: Yeah, I mean, look, private equity companies will ask you to roll equity, right. So when a private equity company buys a business, they generally don’t have management in place, their financial engineers, they’re not managers of companies. So they’ll say, look, we love your company, you’ve done an amazing job, we’re gonna, we’re gonna buy your business. But we want you to hold on to 30% of your equity, we want you to roll that into a new entity, now we’re gonna grow that new entity with lots of debt, and maybe we’ll buy some more companies, and then we’ll go on to sell that in the future. And we’ll make a truckload of money. 

    They call it the second bite at the apple. And it’s a very overused expression, which I can’t stand. But in any event, that’s what they say. So you might get that pitch. And in theory, when it works, and I’ve seen it work, it can be spectacular for both the private equity group as well as the entrepreneur who kept a rolled equity. The challenge, however, is that it doesn’t always work. I’m reminded of a guy named Ryan Moran, who I just interviewed on my podcast, where he built a company. And it was a supplements company to my recollection, and it was about $20 million of revenue. And he sold it, I think it was 18 or 19 million bucks. 

    So like a big number of big, big successful exit, that was the valuation but he got 60% of his money up front, and was asked to roll 40%, into a new entity. And he thought, that sounds great. And they had all sorts of great plans for his company. And, you know, but they wanted to bring in a new manager. So they brought in a new CEO to run the company after Ryan stepped down. Well, the CEO had no idea of how to run the company. He taught the private equity company piled on a truckload of debt in order to try to grow the business and bring on and pay the salary of this fancy CEO. 

    And long story short, the company wasn’t able to pay back the bank debt. The company ultimately defaulted, went bankrupt. Now, the PE company lost its money on that deal. But so did Ryan, the 40% of his equity that he rolled into the entity went to zero. And he was out of control because he was a minority shareholder in a company he no longer controled. And so that’s the downside, that’s a rolling equity rolling a lot of equity is is really, you know, it’s a gamble in the sense that you are, you are not the majority stakeholder anymore. Yet, you’ve got a significant portion of your net worth in a company, you don’t really control. the dirtiest one I’ve ever heard is, and I’ve only ever heard this once. And so I don’t think it’s a common practice. 

    But I did hear at once that the acquirer the private equity group, asked the seller, to guarantee personally the debt, the private equity company was taking on to grow the business after they sold it, like so here, I’d like you to buy my house. And and, and you’re basically that when the seller is saying, or the buyer is asking the seller to basically guarantee their mortgage, it’s like the craziest thing I’ve ever heard. But again, there’s all sorts of shenanigans that happens in that space. And just be mindful of the the equity carry, and, and, and, and, and for sure, there’s some great upside it happens. But there’s also some significant downside.

    Patrick: And these are the types of nuggets that are really helpful for owners getting out there considering this as they go through this life changing transaction. And I will say that the book is not full of, you know, checklists and to do and step by step programs is a number of these real common sense advice points. And you go through the whole process from beginning the transaction all the way through to the end, including the exit, which is a great guideposts for them. And so define your ideal profile for your ideal client.

    John: Yeah, look, I mean, it’s really someone who has a business worth somewhere between one and $50 million. So they’re not startups. They’re not dreamers. They are not. What’s that?

    Patrick: Hobbyists.

    John: Yeah, they’re not hobbyists. They are, they’re running real companies, with employees, they have put everything on the line in their life to to build this company. They know it Joey Redner’s case everything there is to know about brewing beer, but probably not as much about the M&A process. And so we try to really help owners do what they do really well, in the case of Joey’s you know, selling beer. And so we can help them with the the actual kind of punching above their weight, some of the negotiation theory around effectively selling.

    Patrick: Now, as everybody’s been listening to you’re making reference after reference of all the people that you’ve spoken to in your podcast, I would sincerely invite people to go check out John’s podcast. Built to Sell Radio is on iTunes, and pretty much where all podcasts can be found. And it’s a great entertainment set of stories about all of these things. And you get to see these real life experiences and is nicer probably hearing other people’s experiences before you fall into some of the columns yourself. John, in addition to the Art of Selling Your Business, how can our audience find you?

    John: The best place to go is And there’s a little button in the top right corner. I think it says free gifts. You can download a bunch of free stuff, white papers and videos on what drives the value of your company. So just click on free gifts, and all roads all roads lead to

    Patrick: John Warrillow again, absolute pleasure having you. Thanks for joining us today.

    John: Thanks, Patrick.

  • Dan Phelps | Creating More Confidence For Sellers
    POSTED 3.9.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Dan Phelps, Founder and Managing Director of Salt Creek Capital, based in Silicon Valley. Salt Creek Capital is a lower middle-market private equity firm that partners with talented executives to acquire profitable small businesses across the United States. Dan earned his MBA at the University of Chicago and spent time in both venture and smaller private equity investing experiences before founding Salt Creek Capital over 11 years ago. 

    “We’re identifying businesses that we believe would be quite attractive investment candidates. We look at financials and the competitive landscape while our executive partners look at operational issues and how well their background and skill set match up with that business. When those two things come together, the operator sees an opportunity to leverage or strengthen experiences and we see a great acquisition candidate,” says Dan.

    We speak with Dan about giving sellers more comfort and confidence during transactions, as well as:

    • Preparing for changes in leadership with the Executive Partner Program
    • The need to quickly implement new software and systems
    • Creating opportunities for organic growth using the expertise of the new executives
    • And more

    Listen Now…


    • Salt Creek Capital’s book: Exit!: Optimizing the Sale of Your Business to Professional Investors


    Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today, I’m joined by Dan Phelps, Founder and Managing Director of Salt Creek Capital based here in Silicon Valley, actually, just down the road for our offices. Salt Creek Capital is a lower middle market private equity firm that partners with talented executives to acquire profitable small businesses across the United States. And this is one of the rare times that I can actually say to a guest, howdy, neighbor. So Dan, welcome to the show.

    Dan Phelps: Hi, Patrick, thanks so much for having me. It’s a pleasure to be with you.

    Patrick: Now we’ve got a great story for the approach that Salt Creek Capital takes. And I think we may break a little bit of news here in this interview. So I’m looking forward to that. But before we go down that route, Dan, let’s start with you. How did you get to this point in your career?

    Dan: I started in principle investing over 20 years ago, shortly after earning my MBA at the University of Chicago, and spent time in both venture as well as smaller private equity investing experiences before founding Salt Creek Capital over 11 years ago with my partners, to two of my partners who are still with me and busy working every day. And I think we we had an investment strategy on lower middle market acquisitions that really focused on two factors that evolved into our strategy first, that many lower middle market businesses, meaning those that were $5 million, and below in EBITDA, were largely underserved by the private equity community. 

    Most PE firms looking for businesses larger than that, well, those businesses oftentimes were too large for an individual investor to acquire. So there’s the sort of the soft spot in the market of I would say, a million and a half to about 5 million of EBITDA, and we felt like that was a good market for us to serve. And second, it’s often the case that those businesses are owner operated situations or family owned businesses. So concurrent with a sale of control in those businesses, there’s many times the need for new leadership. And so that transition of leadership, as part of the acquisition was something that we wanted to make sure that we were prepared for, and had the capabilities to work through with a seller, concurrent with the transaction. 

    So those two dynamics have really led to how we’ve developed our investment thesis and platform, I would say to be prepared, what we’ve done is develop a bench of executives that we work with, through what we call our executive partner program. And those folks are involved with our sourcing efforts and ultimately become CEO of a company that we acquired together. So the seller is able to see those executives and meet the CEO who would be coming in post closing giving that seller more comfort and confidence in what will happen to his business post close. 

    And frankly, those executives enable us to differentiate ourselves from other buyers, because, you know, they stand out with the experiences, they bring in the accomplishments they’ve had in their prior roles. And we found this to be quite attractive to a lot of executives who have maybe run larger organizations, of bigger companies, but he had more of an entrepreneurial interest in wanting to explore that be backed by a private equity firm invest personally alongside us as part of that transaction. So it does a nice job of aligning interests with the management that we bring in of that newly acquired company. And, again, differentiates us in many respects.

    Patrick: I think that with, you know, this approach, which is really unique, you could probably have the executives that want to partner with you, they’re probably a little better at picking up investment opportunities, because you’ll have a lot of PEs, you know, have real talented, intelligent people that are out sourcing deals and working theories. You’ve got literally operators that know what they really want to do, and they know what works, and they know what to look for and, and are probably pretty successful in finding, you know, successful ventures.

    Dan: Absolutely. You’re so right about that. It definitely helps our sourcing and the rigor of the selection process that we go through. Essentially, we’re identifying businesses that we believe would be quite attractive investment candidates and we’re looking at financials and competitive landscape, our executive partners are looking at those operational issues that you mentioned, and how well their background and skill set match up with that business. 

    And when those two things come together, the operator sees an opportunity to love or strength and experiences, and we see a great acquisition candidate, way we get excited, and we go after it. And we’ve completed about 35 of these transactions over the last 10 years. And in each one of those cases, that was one of our executives becoming CEO on day one. So that that’s definitely a working model. It’s it’s proven to be very effective for us.

    Patrick: Well, tell me a little bit more about Salt Creek Capital, and you’ve been around 10 years. So you’re not new to this thing. And you’re committed to the lower middle market. We’ve talked about that. And we can get into that a little bit. But let’s get real basic here. Because unlike law firms or insurance firms that are completely lacking any kind of creativity, you know, we just name our companies after the founder’s name. Okay. This isn’t called Phelps Capital. How did you come up with the name Salt Creek?

    Dan: Yeah, great question. I relocated from Chicago, to Northern California here. And we used to live in the western suburbs in Hinsdale and salt Creek actually runs through Oak Brook and Hinsdale and some of those communities. And, you know, many of the private businesses in those areas were Salt Creek this or Salt Creek that and I sort of liked that feel that these were, you know, family owned businesses that had been around serving the community for a long time. And so I adopted that, as we began to focus on other family owned and privately held businesses is, you know, the type that we were seeking. We actually have some pictures of the real Salt Creek here in our office.

    Patrick: Well how about that. Why it’s just I mean, parallel was San Francisco’s a different districts, you’ve got the Sunset district, and the Parkside district, and, and Nob Hill, and you would have all those businesses named, you know, after the district so that it’s some continuity there. Excellent. The focus that happens with a lot of firms is they start with real small acquisitions as they’re getting started. And then over time they grow. You didn’t do that you’re not up in the, you know, 500 plus million dollar transactions, you’ve kind of kept to your knitting. Why take that rope?

    Dan: Yeah, I think a couple of reasons, one of which was that approach that we took in the market that we wanted to serve again, those that were underserved by private equity firms, but too large for individual investors. And that ability to help with a change in leadership, we think really gives us a differentiating approach. And I think post acquisition, it’s also given us a playbook over time through all the various experiences we’ve had. And some of the organic improvements that we believe we can make to a business once we acquire those those companies. And initially, it’s a lot of times implementing new software and systems of family owned, a business or owner operator oftentimes may be more interested in cash flow and less interested in gap accounting, we have a different set of needs. 

    So we end up introducing different software’s and software and systems to help manage and focus on KPIs key performance indicators, we may end up focusing a lot more on growth than an owner who’s preparing for retirement, and less interested in taking on more risk. But instead, feeling like that business is doing a great job serving lifestyle, we may decide, hey, let’s expand our product line or let’s expand our service area. We may invest in additional capacity to to grow output. 

    There’s a lot of different things we do typically on an organic basis. That’s not to say we don’t do add on acquisitions, we definitely do add on acquisitions. But we do want our investment thesis to be achieved if we can get there organically. Because there’s less risk that a new add on acquisition is required for us to meet our investment objectives. There’s there’s risk that you find the right add on at the right time at the right price. So we tend to be pretty organically and operationally focused investors. 

    And I think that that has a nice dynamic with many of the employees of the company, because they now see more opportunity. There’s new things for them to grow into and try. Whereas maybe there wasn’t as much emphasis on growth and expansion, up until our involvement in that new leader that comes on that I’ve described and some of the skills and experiences that that executive can bring to the company and enabling growth and looking for new avenues to to build a business.

    Patrick: Yeah, that’s kind of exciting because you’re finding companies are at that inflection point. And it’s at the very top, you’ve got the owner founder that they’re these ones are specifically looking for an exit, as opposed to other owners and founders are looking to partner and continue on. That’s not a fit for you. But you’re at that inflection point. And unfortunately, you have an owner that has his or her plans, but then you got everybody else that’s involved that have, you know, different time horizons timetables, and it’s at that point, you can go ahead and come in and assist an organization in a pivot, I think that’s fantastic. 

    I also really like the idea of serving this underserved market, the lower middle market owners and founders, especially those that are looking for an exit, they’re not used to looking at M&A, they don’t think about it very much. So they don’t know where to turn. And then they end up defaulting to big institutions, or, you know, putting a call to Goldman Sachs or something like that. But big, big, big organizations that, you know, it’s not their fault, it’s just they don’t have the bandwidth to bring resources down to that level to meet their needs. 

    So like you say, this group of great entrepreneurs that have added tremendous value to society, in a lot of towns where they are, they get overlooked, they get underserved. They get, you know, not very good responses from from the institutions. At the whole time they’re getting overcharged. And you know, if there is a transaction, they end up leaving money on the table, which is in nobody’s interest. And so it’s great when you got organizations like Salt Creek Capital, that you’re not a fit for everything. But for that, that one inflection point type business with the leader, I think that is ideal. 

    So the more people that are aware of that, I think, benefits and the great thing is, you don’t have to worry about transition, you’ve got the team ready to just step right in and carry carry forward. And that’s always I think, post post closing, introduction of new management and that kind of integration, I think it can be a real challenge that you get to bypass.

    Dan: Yeah, thank you for the kind words, and we totally agree. And oftentimes, it’s not that business owner maybe hasn’t prepared or had a game plan for what to do transition wise. But that can change. You know, adult children may decide they don’t want to step into dad’s footsteps and run his business. And there’s other career paths they choose to pursue. And maybe there’s not a number to strong enough in the business to step up. At the time the owner wants to retire. There’s there’s a lot of different factors that can lead to that situation where new leadership is required. 

    And so finding a group like us that can assist with that leadership transition is important. I wouldn’t say there’s, as many of us that are willing to take on that that leadership transition risk, I think there’s a lot of PE firms who really look for strong management who are going to continue with the business. And I think that’s a very logical approach to take. There’s definitely risk and leadership transition. But But there is a risk there. And that risk is that you are going to see eye to eye with the CEO whose business you’re acquiring, and that you’ll line up in terms of what you’re trying to achieve growing that business and your investment thesis. Whereas we definitely take on risk that our new leader is going to learn that business. 

    But we have a good solid working relationship coming into that that new ownership role. Our executive partners typically work with us, you know, could be as long as a year trying to identify a good company to acquire, meaning we’ve had a lot of time in the saddle together, understand that executive strengths and where we think he or she may need some support. And likewise, that executive learns a lot about us and our expectations and what we think are good sort of risk reward value creating exercises essentially, learn a lot. They learn a lot about our playbook, even before we’re invested together in a business. So that that relationship coming in we think is valuable. 

    And I think is important for a seller to see that we have a cohesive group that there’s a uniform outlook as to what should be done in developing and growing that business. For many sellers, as you pointed out, they may be in a community where they’re a very large employer and they’re serving the needs of that community. Their name may be on the building out front and they have a lot of pride in that. in that business and in may have spent more time building that business than raising their kids and their families. 

    And so that handoff is is of critical importance, they really want to know that that person who will be sitting in their seat has a lot of great experience that the ownership group as a long term growth outlook that that makes sense to them. And I think hearing from the CEO and from Salt Creek collectively as to what our plan is for the business, you know, helps ease that that transition, if nothing else, from an emotional standpoint.

    Patrick: Well, let’s also think of one other default decision, the owner founder, that’s uninformed, and just, they’re not ill educated, they’re just they’re not informed and this where you in the private equity community come in, is, if the owner founder wants an exit, their first default is possibly an institution, but that really does look for strategic. And they’ll look for one of their competitors, or, you know, a supplier or some other organization out there. And, you know, they that decision may not be always the best fit for the owner, because, you know, that industry, maybe they’re they’re, you know, hampered him. 

    But the other thing is a real risk is, you know, with private equity coming in you figure management, and most of the employees are going to be there. But if it’s a strategic acquisition, there are going to be reductions in force, there’s going to be redundancies. And there are some organizations where, you know, you’ve had your your team there for decades, as another just another thought out there to to advantage that you can bring to the table versus a strategic I imagine.

    Dan: You’re absolutely right, Patrick. And I think the the range of different outcomes, and the range of different types of buyers and transaction type are endless. And you and I are involved in this everyday with our life, this is what we do. On the other hand, if you’re a business owner, and you’re manufacturing or if you’re providing industrial services, and now you’re faced with a sale of your business, this is not what you spent 10 or 20 years preparing for there’s there’s very limited guidelines, and hopefully you have a good attorney that you can work with. And your accountant is good at advising you as you prepare for a transaction. 

    But seeing the sort of lack of resources, one of the things we’ve done at Salt Creek is to author a book, and the book is intended, specifically to business owners. And it’s called Exit, Optimizing the Sale of Your Business to Professional Investors. And it very much is how to, to think through who are the types of buyers and some may be strategic and, and have expectations about closing down a plant and consolidating operations somewhere else and could be private equity buyers and their expectations and what they’re like to deal with. 

    And even within that community of private equity buyers in what what are the different transaction types, if you’re wanting to retire, and there’s there’s going to be a need for leadership transition. Or if you still have some years you want to work and you want to roll equity and have a partner for some period of time, there’s, there’s a lot of things to consider and think about, we’ve tried to cover many of those different topics in our book, and are publishing it currently will be available shortly. Both an E book and hard print versions. 

    But you know, we’ve we’ve just heard from so many sellers that this is a daunting and stressful process. And, you know, we’re learning in every transaction we do. But we do this, you know, 50, 60, 70 hours a week, and we’ve been doing it for decades, hard for someone who’s going to do this once in life, to get comfortable and to learn all that they need to to make sure they have a successful transaction.

    Patrick: Yeah, I think is outstanding, that you’re going ahead and you’re sharing your knowledge with the market out there not only for prospective clients of yours, but for people that may want to, you know, do it themselves maybe and you know, at least it’s not, you know, exit planning for idiots. So the idiots guide to exit planning. So that’s, that gives you a little bit, you know, step up from there, but I’m sure this is something has written, you know, for the for the entrepreneur, the non M&A expert, and I’m sure you’ve got a step by step roadmap for how to stage what the process is like, because I think the biggest fearful thing is the unknown.

    Dan: Yeah, you’re exactly right. And I think, you know, having a book that talks about all these different types of transactions, but also the steps along the way, what are the milestones, topics to consider related to legal and debt that a buyer may use and leveraging your business oftentimes are things that, you know, we run into business owners and they haven’t thought as much about so. So we hope that this prepares them. You know, we work with business owners who are working with an investment bank and selling their business and maybe getting good advice, we have some that, like you said, would rather try to do it on their own. 

    Maybe that’s because they want to talk directly to a capital provider and have more of a one on one, which I think works really well. In particular, if there’s that leadership transition dynamic, because they’re almost looking at it as much as an interview for who’s going to be sitting in their seat when they’re gone. And not necessarily willing to have the details of their business splashed about to a number of buyers. And so for that, for that owner who wants to have a more direct conversation with a PE firm interview, the person who’s going to be sitting in his seat, keep a smaller number of buyers, allow us fewer number of buyers into the details of his business. You know, we think this book will enable that type of transaction as well. 

    Patrick: Well, I’m looking forward to that. There’s one other element with with M&A that is discussed theoretically, and there’s quite a bit of risk that’s involved in the in these transactions, they don’t happen in a vacuum. And when owners and founders come to the realization that well is at risk to my counterparty, if things don’t go right, that comes really there to you know, front and center, because a lot of business risks can be covered, you know, with with the shield of the corporation and D&O insurance and other things like that. But when you get into a transaction, the buyer or the seller, for the first time realizes that their house could be at risk, literally when you’re talking some of these deals. 

    And so that brings just a higher level of concern of stress. And and you know, dealing with the unknown, what’s been great in the insurance industry is there’s a product called rep and warranty insurance that heretofore was available only to deals north of $100 million in transaction value, it has now come down both in price and eligibility criteria to be able to provide insurance for deals as low as between 10 and 15 million in transaction value. It’s it’s it’s become very accommodating. 

    And the purpose of it is to take that indemnity obligation that the seller owes to the buyer and remove it from the seller and put it with the insurance company so that if there is a post closing breach of the seller reps to the buyer, buyer doesn’t pursue the seller, buyer goes right to an insurance company collects the check. Seller gets a clean exit, they’re not going to be fearful of a clawback. And in a lot of cases, the insurance policy replaces any monies held in escrow or withheld. It is a nice nice thing that goes out there is not a fit for every deal. But I’m just curious than, you know, good, bad or indifferent. Tell us of any experience you’ve had with rep and warranty insurance.

    Dan: Yeah, we had a great experience with rep and warranty insurance on a sale not too long ago. And this was a business that we’d owned for three and a half years and had an opportunity to combine with a strategic and a new platform essentially. And by acquiring the rep and warranty insurance, we were able to distribute cash out to investors more quickly, it helped our IRR because we weren’t waiting for an escrow. Whereas larger than escrow to break, somewhere down the line, the buyer felt good about the fact that there was a backstop for any breaches of reps and warranties. 

    So it was a more efficient use of capital than tying up the purchase proceeds in a larger amount for a longer period of time than we would have otherwise. So I think we’re going to increasingly look to rep and warranty insurance, especially on the exit. On the buy, depending on the size of the transaction and how much complexity that may introduce into the transaction, we’ll have to make a decision. Like you said, every transaction is unique, but I think it’s worked very well for us on the exit. And we’ll continue to to look for those types of products to help us.

    Patrick: You mentioned that the ideal profile of a prospective investment for you is going to be an organization where management and owner founders looking to transition out. Could you fill out that profile a little bit more. I mean, what’s what’s your ideal target look like?

    Dan: Yeah, that’s a great question. And there’s really sort of two general profiles. One is the executive who’s later in life you may be late 60s, early 70s. And the purpose of the transition really is to achieve liquidity for retirement and so on. They are not as excited about rolling equity or having ongoing involvement with the company, it’s really more of a clean break type of situation. And so this, this transaction allows them to achieve liquidity many, many times, most of their net worth is tied up in that business. And this enables retirement. 

    The other type of transaction, and we’ve done several of these is someone who’s younger, and maybe still has some energy and enthusiasm and excitement to be involved with the business. But they have other professional interests. So they want to spend time pursuing other things in life. We bought a business, for example, from someone who started the business in college. And so by the time he was in his late 30s, early 40s, and feeling like, gosh, is this the only job I’m ever gonna have? And good for him, he was an excellent entrepreneur for starting a business in college. 

    But he got involved in investing in real estate and doing some other things outside of the area that he lived in, and needed a partner, essentially, to provide the day to day operation. And the focus required to grow that business and take it to the next level. And he chose to roll some equity with us, he chose to remain on the board. He had a wealth of knowledge on the industry and was and continues to be a great partner to us. But we were able to free him up and provide him liquidity to go do other real estate investing and professional things that you now has the time to do. 

    So those are sort of the two main in profiles, it’s either that sort of last transaction before retirement or it’s the transit transition to another part of a professional career, and providing liquidity and some chips off the table to go do those other things that you may have an interest in doing. Another aspect of the executives that we work with it’s important is many of them are recent empty nesters. Last child just went off to college or maybe just graduated college, they’ve got one or two more stops in their career before retirement. And they’ve done well, from a W2 standpoint, but they want to have a wealth creating event that will really help them enjoy their retirement that much more, they have some more flexibility. 

    Because when we buy a business, it’s not necessarily going to be where that executive happens to live. So that often results in that executive relocating to where the business is. and investing alongside of us and having ideally a very nice seven digit or more outcome after five years when we go to sell that business. And so it’s a program that fits very nicely for those empty nesters who want to really take a try something new for that last experience or two before retirement.

    Patrick: And Dan you mentioned earlier 35 transactions in the last 10 years.

    Dan: That’s right. 

    Patrick: Okay. Yeah, you’re not new to this. So I  think you’ve completed that learning curve. Let me ask you just we’re just in the new year, I think everybody’s glad that 2020 is in rearview mirror. But, you know, share with me your thoughts on just what trends you see for 2021 into 2022, either macro or specific to Salt Creek capital.

    Dan: Yeah, I would say one of the big trends that we’ve been tracking for years, and we see, fortunately, over the coming decade, is the large number of baby boomers that are going to be retiring over the next 10 to 15 years, it was a very entrepreneurial generation. Many businesses are owned by someone in their 60s or 70s. And we’ll need to transition so that that that first character is characteristic of a seller of someone looking for liquidity for retirement, we think will be a nice, a nice wave over the coming years for us to participate in somewhere around 200,000 businesses of the size and type in the us that we would be interested in based on our research. 

    And we’re doing a lot of work to actually build a database of all of those businesses. And we’re doing outreach to those business owners as part of our sourcing efforts. So we hope to find a lot of those businesses of retiring owners or those that are baby boomer, but we’d also be delighted to find those that are still early in their career and wanting a partner and wanting some liquidity and a PE firm to partner with and help drive that business to the next stage of growth. So either either of those two characteristics of a seller or business owner are exciting to us, but we’re, we’re feeling like we’re going to be in business for a while. And hopefully this, this is my last job. And it takes me another 20 years until I’m retiring.

    Patrick: That’s great to hear. I have two observations from from those which are absolutely profound as I was speaking with another fellow, Brett Hickey from Star Mountain Capital. And he had mentioned one thing where people are aware of things like COVID, or they’re aware of taxes or whatever, and they’re distracted. But one thing that just keeps marching on while you’re worried about all these temporary temporary issues, is time doesn’t stop. And so that was the thing is we’ve got that aging population that continues to age. So I think that’s very, very relevant. 

    The other issue is that I think the younger folks coming in to take over businesses very talented, and they are more focused and highly valued that live work balance. And so I think you’re going to have a lot of owners, but new owners or younger owners that are going to be looking to partner with somebody because they don’t have to do it all because they want to do the other things and have the diversity in their life’s lifestyle. So I think I think that Yeah, your market is not shrinking by any way, shape, or form. So I think that’s fantastic. Dan, in addition to this great book Exit, which please look for, and we’ll have a link on their show notes for so you can go ahead and grab it. How else can our audience find you?

    Dan: Probably the easiest way is our website. And that’s out there at We’ve got all of our team members and representative portfolio companies there. And I would say we’d love to hear from business owners that want to have a conversation with us, investment banks and and brokers that are working with business owners. But also importantly, executives who are interested in pursuing an entrepreneurial track and wanting to consider our Executive Partnership Program is a way to get there. And Carol Onderka is the person on our team who leads all of our executive recruiting efforts. And she’s also on our website and can be reached that way.

    Patrick: Well, Dan Phelps, Salt Creek Capital, thanks very much I would say to everybody, if you go to their website is a very user friendly website, unlike the private equity sites of 5-10 years ago, where you had to have some kind of password just to get into get get access to them. All the information is there. So it is very user friendly. Thank you again for joining us and best of luck for 2021.

    Dan: Thank you, Patrick. It was a pleasure talking to you today and I really enjoyed the time together.

  • Ed Bryant | The Trends Toward Software & Technology Investments
    POSTED 3.2.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Ed Bryant, President and CEO of Sampford Advisors. Sampford Advisors is the most active investment banking firm in Canada, focusing on the lower middle market tech sector, specifically software M&A. Sampford now has offices here in Austin, Texas, and was recently named by Axial as a member of the Top 20 Thought Leaders in the lower middle market for 2020. 

    We chat about the trends toward software investing, as well as:

    • The mindset behind the name of a company
    • Sampford’s laser focus on the middle market to outperform their competitors
    • Understanding the nuances of businesses in the lower middle market
    • Fostering private equity relationships
    • Reps and Warranties and the choices behind insuring transactions
    • And more

    Listen now…



    Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters, where we speak with the leading experts in mergers and acquisitions, and we’re all about one thing here, that’s as a clean exit for owners, founders and their investors. Today I’m joined by Ed Bryant, President and CEO of Sampford Advisors. Sampford Advisors is the most active investment banking firm in Canada, focusing on the lower middle market tech sector, specifically software M&A. Sampford also has an office here in Austin, Texas. Ed was recently named by Axial as a member of the top 20 thought leaders in the lower middle market for 2020. So as we get into 2021, who better to have on to talk about M&A in the software space. Ed, thanks for joining me. Thanks for coming along. 

    Ed Bryant: Thanks, Patrick. Thanks for having me. I’m excited to talk today.

    Patrick: Now, before we get into Sampford Advisors in in the tech, the tech sector, let’s set the table with our audience and give them a little context with you. How did you get to this point in your career?

    Ed: Yeah, it’s, it’s involved a few continents and a few countries. So I grew up in the UK and graduated in 1996. So just before the first kind of real tech wave, I went and joined Morgan Stanley investment banking, focus on tech media telecom in the Hong Kong office, and then got poached by Deutsche Bank to move to Singapore. And then Deutsche Bank said you want to go to New York and every investment banker’s dream is working in New York like that, in terms of the deal flow and everything. It’s, it’s the investment banking Mecca, if that if that exists. So I jumped at that chance. 

    And I’ve always been kind of, you know, very flexible about where I moved to right, just really open minded about that. I was in New York for a total of about 12 years. Unfortunately, New York is great for investment banking, it’s not so great for family life. And so and balancing young kids and that sort of stuff. And randomly out of the blue in 2012, I got a call from a headhunter asking me if I wanted to be VP of m&a for a technology company, in Ottawa, Canada, of all places, and most people can’t find Ottawa, Canada on a map, even though it’s the capital. And I’d been here once before in the in the summer, and it was a beautiful city, and no one tells you how bad the winter is, and, but we jumped to the chance. 

    My wife is American, we don’t have any relations in Canada at all. I did that job for a bit, I got promoted to CFO, it was in the mid market tech sector, and there really wasn’t anyone doing what we do. So that’s when I made the leap five years ago, to say, I’ll start my own firm, and focus on mid market tech.

    Patrick: And when you were coming around on there was Sampford. Obviously, you didn’t name it Ed Bryant Advisors at Sampford. And I always like asking this to get a feel for the cultures, you can tell a lot about a company by how it’s named. How did that come about?

    Ed: Yes, it’s a good story, I was of the school of thought that I didn’t want it to sound like a one man band, right? Like, if you sounds bigger than you are, then you usually win better business than you. You can especially started off no one knew who we were or anything and, and so I spent a lot of time thinking about the name, all the names that I came up with, you know, you go search for the web address or the URL, and it’s unavailable, right. You can’t get on anything these days. And then I heard a story about an Ottawa, a billionaire entrepreneur here who started nearly 100 companies and he names a lot of his companies after places from his childhood. 

    And so I thought that was kind of cool. It kind of had a little bit of personal meaning to it. So I, I was born in a village called Great Sampford in England, like a village of about 50 people I think it is, is a population. And as kind of saying Sampford Advisors that I just I was literally like, had GoDaddy up to look for the URL, and I just had punched in Sampford Advisors. And it was available in And I’m like, okay, Sampford Advisors it is. So it’s got lots of good personal meaning to me, and everything, but it also, it just sounded right. It sounded like an M&A advisory firm.

    Patrick: So well, and also also you’re coming from that, that that real small setting, and then now you’re in focusing on the lower middle market. Let’s talk about that real quick, because it’s very easy for companies that start small and then as they grow their clients and their focus grows with it, and that’s not that’s not the case for you guys. So why the lower middle market? I’ve got my reasons I’d love to hear yours.

    Ed: Yeah, I think it’s the most underserved. So I’m sitting there in that technology company, we were doing about 100 million in revenue. And there was one banker that called on me. And, and I thought initially, I was like, you know, maybe it’s just an Ottawa thing, like auto was a, you know, not Toronto. It’s not, you know, a big city. And but there’s a lot of technology companies here. It’s like they, they they nickname it the Silicon Valley of the North, but it’s not, I don’t know whether it’s justified or not, but and so I was just kind of left me kind of saying, like, Is there a gap in the market that matches up with what I do, I’m a, my heart, I’m a deal junkie, I love doing transactions. 

    But then also, the other side of the coin was that the middle market is the most active part of the market, there’s like, you know, especially in Canada, right. So there’s not really enough business for the big banks to go around, right. And they’re hyper competitive around all the big mandates and everything. And so we just found that focusing on the middle market, it was less competitive. We didn’t face You know, we faced really no competition in Canada from specialist technology firms. And so we just said, we’re going to do one thing, when and do it really well, we’re going to just focus on technology, we’re just going to focus on m&a and not capital raises or anything like that. 

    And we’re just going to focus on the middle market. And that laser focus, you know, five years on is really led us to significantly outperform any of our competitors, just because they don’t specialize like we do. And therefore, they can’t talk about the transactions the way we do, they can’t talk about the buyer universe, the way we do, they just are not well versed in valuation. So that is really paid dividends focusing on the middle market, rather than trying to focus on really large transactions.

    Patrick: Yeah, and that’s a real special skill set is dealing with the M&A as opposed to capital raises because M&A I like to think about is the most exciting event in business. Okay, and unlike others would argue that maybe an IPO is a bigger deal or more exciting than than an M&A. But M&A has the potential to be a life changing event. And sometimes, in some cases, generational. And there are a lot of moving parts to it, there are a lot of unique things that happened, there’s a lot of stress, because again, you have this life changing event hanging in the balance. And that just adds to the complexity of the deals. 

    And the worry that’s out there and to be an organization focuses just on that transaction element, as opposed to the other services, you can help a client raise to three rounds. And that’s nice. But once you get to the real big, rubber meets the road on those M&A, you need someone that can handle that and knows all the ins and outs. And I think it’s also particularly great that you’ve got these great focus and services and expertise that you find in an institution like Goldman Sachs. But at the low at the lower middle market, targeting Goldman and the large institutions that are fabulous, we need them to handle Apple and Microsoft and all that. But, you know, the lower middle market is underserved where they have huge needs. And it doesn’t take a lot to get those meet needs met. 

    And to have somebody that has not only the bandwidth to handle it, the experience and the focus, but the desire. I mean, that’s what we’re trying to do is find organizations and shout out about organizations like Sampford, to say to people in the lower middle market in the middle market, hey, everything you need is right here. And had we not talked about it, they probably never would have heard about it. And unfortunately, they get underserved and overcharged if they just default to the brand names and the institution’s why I’m just so excited to meet more organizations like yours, that are helping these people with literally, again, life changing events.

    Ed: And yeah, and and that is especially true in the mid market, right? Because a lot of the entrepreneurs that we help their life savings are tied up in their businesses, so they don’t have you know, they’ve poured everything into their business, not only their capital, but also their all their time. And so even for the middle market, it’s even more life changing, then, you know, for some of the large companies. And then you mentioned a good point, obviously, Goldman Sachs, obviously here in Toronto, like others are really good at M&A, but they can’t make enough money to cover their costs below $150 million deal size. And really, we find ourselves we never go up against the big guys on any of our deals. We’re going up against Deloitte or KPMG or PWC. And they don’t do enough technology deals to understand especially software to understand the market to understand the buyers and how how to think about valuation.

    Patrick: So now you mentioned you’ve got the experience, the familiarity, and the focus particularly with that niche in the software, because technology just like healthcare, it’s more than software hardware is all these different, you know, buckets that can be filled. What else besides those three I just mentioned are the things that Sampford Advisors brings to the table?

    Ed: Well, so you know, it’s understanding the business model and how to sell it is very important. So just really understanding like, how does the money flow? How does the company make money? Where do they sit in the marketplace, where what’s the competitive landscape look like? That’s really important. Because if you don’t understand that, you can’t sell it, right, you can’t sell it to someone, if you don’t understand what you’re selling. The other thing is that we know, you know, we made a big deal about pushing the private equity relationships. 

    So when I was at Deutsche Bank, we used to deal with all the big tier one, you know, private equity guys like Blackstone and Apollo and KKR, and all those guys. But they’re not the kind of folks that are buying businesses of sub $150 million in deal size. So we made a big push very early on seeing that the private equity wave was coming into tech. And so we have 500, plus middle market private equity relationships. And we we foster those very actively, just like we do our prospects, but then also the connectivity that we have. So we’re in Canada, but we have tons of connectivity into the US because myself, I was in the US for 12 years. My other senior guy in Texas has been there for a number of years. 

    And so we have strategic relationships as well that we can bring to the table for our clients. So I think that’s kind of you know, sector focus is really important, obviously, when thinking through this sort of stuff, but it’s also important when thinking through who’s the who you matchmaking with? And why, why should they care about buying a company out of Toronto for 20 million bucks or 30 million bucks or whatever it is? Really thinking through that. And that level of expertise is critical.

    Patrick: Can you give us an idea of just how much because this is largely a US market here for us. But also I can say you’ve actually bridged Rubicon now, so we’re now International. Thanks to you guys. What percentage of your business deal either deal flow or sellers or buyers, give us a feel on how much work you’re doing Canada versus the US.

    Ed: So most of the time, we’re representing Canadians but in honesty with selling them to Americans. So Americans have the most money, like both on the financial side, but also on the strategic side, the depth of the market capital markets is that so I would say last year 80, 90% of our deals were cross border representing a Canadian selling to an American. And at about the same percentage were private equity or private equity backed companies as well. So that’s, especially in the mid market. Like if you look at the overall M&A market, private equity makes up about 35-40% of software M&A deals, but in the mid market is much higher. I think it’s probably 60-70%. Because they do an add on acquisitions. So yeah, that’s that’s been an important kind of trend for us. But then most of our stuff is cross border.

    Patrick: Is a lot of that, and we might address this later. But you know, since we’re on the subject right now, is is the idea of the lower middle market the volume of deals out there. Is it because software as an industry is just so fragmented?

    Ed: Yes, yeah. So that really is like, either, you know, and there’s been so much more money, early stage money going into technology and software over the last 10-20 years. So and we see every day on the private equity side, private equity firms that have never invested in a software business are calling us and saying, we want to do our first software acquisition, what do you what do you have that you could show us? Because everyone realizes in you know, tech is outperforming and and they need exposure to that that piece. So yeah, it’s a very fragmented market across multiple different sub verticals within within software. And that lends itself to a lot of software companies that have kind of between five and 25 million of revenue, which is kind of our sweet spot.

    Patrick: You roll out your your profile of an ideal client for you where were you guys just do fabulous work?

    Ed: Yeah, so north of 5 million of revenue for sure. Mostly software, but we do do some telecom and kind of new media like Internet stuff as well. Mostly like bootstrapped companies as well. So not VC backed companies, we find that you know, the VCs are typically trying to roll the dice for for outsized outcome. And that makes it a little bit more difficult to get deals done in the mid market. Right? So, yeah, most of our companies, I would say like, of the 10 deals we did last year, I think most of them if not all of them were bootstrapped companies. And that leads itself to different profiles. 

    While that because they’re bootstrapped, they’ve been conservative about their cash flow and everything like that, which is actually an important metric, right. In terms of not, especially with the private equity guys, the private equity guys will pay very good multiples, but they won’t pay very good multiples for software businesses losing a lot of money, they want it to be breakeven or better. Otherwise, they probably don’t look at it. So that’s that’s the typical profile. And then I would say, most of our clients are probably have been at it for five to 10 years or more. And and looking, you know, this is their nest egg and looking to monetize on their nest egg and potentially retire.

    Patrick: One of the biggest developments has happened in the M&A space. And we can talk about COVID later, but the ability to remove a real tense element of the M&A negotiations and that’s usually involving the indemnification where, you know, sellers don’t realize until they actually start hammering out the deal terms with the prospective buyer that the owner and founder can be held personally liable to the buyer for a breach of the seller reps. That happened after closing where it’s beyond the owners knowledge, they don’t not aware of it, but it’s yet their money or their home or their future. That’s on the hook. 

    And so that gets to be a very sensitive part in negotiations on what’s happened, the big developer in the last 18 months has been the insurance industry has come in, and they have an insurance tool called rep a warranty insurance again, was reserved for the you know, 100 million dollar plus deals, that essentially takes the indemnity indemnification obligation away from the seller transfers it to an insurance company. And therefore if there is a breach and the buyer suffers financially, buyer doesn’t pursue the seller, the buyer comes after the insurance company and collects the check is great, because then the buyer knows they can be made whole, they have a peace of mind and security. 

    For the seller, they get a clean exit, they usually have little or no money held back in escrow. And that in depth, indemnification, you know, burden that’s hanging over them. Now, that’s all removed. And it’s a great win win out there. And, you know, the news about the availability of rep and warranty for deals as low as 15 million in transaction value really was interrupted and didn’t get out there because you know, of the pandemic. And usually this information is shared during conferences and stuff. So I’m just curious, from your perspective, you know, good, bad or indifferent. Tell me about any experience that you guys have had with your clients and rep and warranty?

    Ed: Yes, it’s very interesting because that that timeframe very much lines up with my experience. So like three or four years ago, none of our clients even considered it. And more recently, like, so we haven’t done a deal with reps and warranties insurance we’ve had, in the last 12 months, we’ve had a couple of clients get quotes for it, to kind of see where it kind of laid out versus the risk and then they made a determination that they didn’t need it. But we’ve actually got our first deal right now that has reps and warranties insurance. And from an M&A banker;s perspective, I would love all my deals to be done with reps and warranties insurance. 

    It makes my life a lot easier than haggling over some of the reps and warranties and the indemnifications. Especially now business around IP intellectual property is the biggest one that everyone always gets hung up on. And if you can’t have a knowledge qualifier, like, you know, you don’t you don’t know if you’re infringing someone’s patent, right, like how do you know your small Toronto based software company? How do you know if you’ve you’re infringing a competitor’s patent or someone else’s patent. 

    And when you get acquired by a big buyer, the spotlight gets thrown on you a little bit and then maybe attention from patent trolls or, or whatever it is. So this one that we’re doing right now like a few weeks away from closing and it will have reps and warranties insurance, but so far, I think I’m pretty encouraged by using it more and more. And people get more and more comfortable with that. And especially the on the buyer buyers side, like the buyers getting comfortable that they go to insurance company instead of the sellers, but I think it’s a great tool and I’d love to see more of it ,to be honest.

    Patrick: What another investment banking firm shared with me is over a year ago, but I think it’s still pretty consistent is their observation was internally if a deal is insured is eight times more likely to close successfully than uninsured deals. So I think you got all that positive momentum going there. I would also emphasize that, when it comes to the cost of the insurance is often split evenly between buyer and seller. However, I have as we’re having conversations with strategics, now, where we essentially explain to them look, you can go to your target company and say, you have this much of an escrow and this size of an endemic indemnification. Or we will get insurance which will need you to cover the costs, you’ll now have either a tiny or no indemnity exposure, and the escrow is now the deductible of the policy, which is a fraction, okay, which way do you want to go? 

    I would tell you from experience that I’ve done this many deals, but 99 out of 100 deals, the seller will take that option to be insured, they just they do that move on. It’s just nice, because there are so many of these transactions happening in this now eligible part of the marketplace. So we’re very, very excited about that. I’m also reminded as you were talking about software a little while ago about a comment that I heard where somebody said, you know, software isn’t limited to just other technology firms. In the wake of McDonald’s buying an artificial intelligence firm a few years ago for a couple billion. You know, what, everybody is now a technology firm? Are you seeing are you seeing that? And, you know, share with me some other trends that you’ve seen with regard to software since the COVID, and so forth?

    Ed: Yeah, I think, is financial and strategic buyers that haven’t historically bought software companies are realizing that everything is becoming technology enabled. So like you brought up a good point, McDonald’s, most of their recent acquisitions have not been of restaurants or anything to do with supply chain around food. They’re all around technology, you know, and they’re all about how do they, you know, serve their customers better through the use of technology. So McDonald’s is a great example. And I think, you know, we’re seeing more and more in our process is talking to non technology companies about buying our clients. And I think that’s, that’s very encouraging. 

    I would say, like I mentioned earlier, on the private equity side, we’re getting more and more calls, like every couple of weeks from private equity firm that has no, you know, we had one from any, you know, pretty much dominated energy private equity firm the other week that said, we need technology in our portfolio help us think through how do we do it? What should we buy that sort of stuff? What should our exposure be, but it’s so it’s clear that not only on the financial side, but also on the strategic side. Everyone’s very focused on tech. And I think that’s going to make tech M&A, you know, give it real tail winds behind it over the next few years as as not only technology companies buy technology companies, but non technology companies buy technology companies as well.

    Patrick: Well Ed we’re now in a new year, and I love talking to thought leaders and you’re you’re recognized as a top 20 thought leader by Axial for lower middle market. Why don’t you share with the audience, what trends do you see either on a macro M&A sideboard for Sampford Advisors?

    Ed: So I think we’re gonna be even busier than we were last year. So we, you know, we, we, you know, three x three x four x our business last year did 10 deals. I think we’re gonna do 20 plus deals this year. And I think, I think there’s a couple of things that are really fueling that, right. Our focus exclusively on tech, I think that helps a lot, right, the M&A market in general is, is is pretty hot. But with it within that tech is the hottest sector and maybe, maybe healthcare along with it, right. But like most of the other sectors are not experienced anywhere, like the volume or increase of transactions. I think the other thing as well is like, really what’s fueling a lot of the mid market now. Now, as I mentioned earlier, is the add on acquisitions that private equity guys are doing for their portfolio companies, and they’re getting more and more aggressive. 

    They’re doing them at a greater velocity. And so I think you’re going to see even more private equity backed M&A deals in the software space next year, or this year. Sorry, for sure. So I wouldn’t be surprised if we, you know, hit a new record in terms of the amount of tech and software m&a this year. The only, you know, nervousness for me is just like, you know, is there a more macro shock that could change that right? You know, the the equity markets are pretty strong. Right now and the valuations, especially for technology companies or public technology companies are really high. And the IPO market is really hot. So, you know, at some point, the the, the music stops and things slow down. 

    But I would think we’ve got enough legs on this, this momentum to kind of keep us, you know, carrying on through this year at peak kind of M&A volumes. So I think that’s, that’s my view, like more of this more of the same, like, really, if you look at last year, last year was a record in terms of the dollar volume going into software M&A. But we missed a quarter like we only read like, the second quarter was a terrible quarter for M&A. Right. And so really, that record number was hitting three quarters. And so I think, like, if the volume continues at the pace that it did in the fourth quarter will be way, way ahead of what we were last year.

    Patrick: So has anything changed in in tech or software as a result of COVID? I mean, we always default and think of zoom. But, you know, any any observations you have on that front?

    Ed: I think there’s a real bifurcation because there is a whole swath of technology companies that have been impacted by COVID. So like, if you like, we know, companies that do software for airports or software for travel agents, and anything that’s been economically exposed, those businesses, even though they’re software, or technology, companies are struggling as well. And so that’s actually then taken, I don’t know, how much percent of the market is taken out. But is it 20% 30% of technology companies that can’t be sold in this this environment? 

    So it’s almost like the same amount of capital is going off, the less opportunities, right. But the good software companies are still growing, I think they did have a bit of a pause right in terms of signing up new customers and that sort of stuff in in 2020. But that seems to have recovered a lot in the fourth quarter of last year. And so good software companies that are still growing and still getting sold. And if anything because of that scarcity, and the money, the amount of money that’s chasing them, valuations have increased through COVID. Which I, you know, as I sat here last March, you I wouldn’t have expected that for sure.

    Patrick: Yeah, I would think that as people go to embrace technology that’s been around like zoom, and become more familiar, they’re more open to do other technological solutions for outsource and remote work and so forth. So I see a lot a lot of resources there that have been on the sideline that people just weren’t familiar with, were forced to learn and forced to get comfortable with. And now they’re their standard operating procedure.

    Ed: Yeah, in any of those sectors that are remote work, or, you know, cybersecurity, anything that like, touches on facilitating a distributed workforce is is so hot right now is it’s crazy. And I wouldn’t under emphasize like, even like in the background, some of the network and security and cybersecurity, that sort of stuff that you don’t necessarily tie like zoom, you can look at and say okay, I get it, like zoom’s going through through the roof, because everyone’s doing video calls. But there’s all these other applications and software companies in the background that are really benefiting from from this newly distributed workforce. And and those valuations have gone pretty crazy.

    Patrick: Well, Ed this has been real helpful, and very, very informative. I really appreciate this. And again, thanks for helping us step cross border ourselves here with this. How can our audience find you?

    Ed: So I’m very active, and so is our firm on LinkedIn. So that’s probably the best place to find us. Google Sampford Advisors, and you’ll find us remember the P. But even if you or if you Google, Canada, tech, M&A we’ll come up in a lot of different places, but it’s yeah, And then on LinkedIn, under Sampford Advisors, as well.

    Patrick: While you’re number one in Canada, let’s see what you do with your outposts in Texas and see how you can grow that area because Texas is actually considered the Silicon Valley of the energy industry. And they’re going tech like you said, so. Best of luck. Thank you very much, Ed.

    Ed: Thanks, Patrick. I really appreciate it.