• Jordan Tate | The Biggest Driver in Successful Private Equity Partnerships
    POSTED 7.27.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Jordan Tate, Managing Partner at Montage Partners. Montage Partners, based in Arizona, is a people-first private equity firm. For 17 years they have invested in established companies across North America, helping them reach transformative growth.

    Jordan tells us about his path to Montage Partners, the interesting meaning behind their company name, and how it reflects both who they are and the companies they seek to invest in, as well as:

    • Key strategies for selecting investments
    • The biggest driver in successful partnerships
    • Which questions you should ask to assure a deal is a cultural fit
    • And more



    Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority in executive and transactional liability, and 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 Jordan Tate, managing partner of Montage Partners. Montage Partners is an Arizona based private equity firm founded in 2004. They manage $70 million in capital and invest in established successful companies across North America. Jordan is great to have you here. Welcome to the show. 

    Jordan Tate: Thanks, Patrick. Good to speak with you again. 

    Patrick: Now, we don’t see a lot of private equity activity here in Arizona. So you really caught our attention. Before we get into Montage Partners, let’s let’s start with you. How did you get to this point in your career, and then maybe trace, you know how you landed in Arizona?

    Jordan: Sure. So a little bit of background, I’m 40 years old, I started my career as an investment banking analyst at Merrill Lynch, working on mergers and acquisitions, primarily with consumer and industrial companies, and what now seems like a lifetime ago. And then in 2004, I moved back home to Arizona to co found Montage Partners. And it’s been a fun 17 year journey. Over that time, we’ve now invested in 17 companies, having successfully exited our investments in eight of those companies. So we’re active investors in nine companies today, and have a ton of fun working with our partners and still view ourselves, in spite of the 17 year history, as being in the early innings of building, the leading lower middle market private equity firm in the US.

    Patrick: Excellent. Now when we turn to Montage Partners, I credit you guys a private equity, that you’re not boring, you’re a little more creative in the way you name your company, as opposed to law firms and insurance firms, that name them after the owners and the founders. But what’s the story at how you came up with the name and tell us about Montage Partners.

    Jordan: Yeah, thanks for asking not a question that we get all that often. But you’re right, we intentionally didn’t name the firm after any one individual. That is a reflection of our culture. So we’re very team oriented. And collaborative. The firm’s not about any one individual, it’s certainly not about me. And so the name montage comes from the fact that a montage is a picture of pictures with each of those individual pictures, being self sufficient, and unique and standing on its own. And that’s a reflection of how we think about the companies that we invest in. 

    So each of those companies is unique, self sufficient, successful in its own right. And together, those companies comprise the overall picture of what forms our firm Montage Partners. And then maybe the last thing I’ll share is on the partner side, that was intentional as well. So we look for a true win win relationships where it really is a partnership with the leadership teams that were backing and or the founders if it’s a majority recap situation. And while the founders cashing out significant liquidity may stay involved and continue to be an owner, what we’re looking for, are those true partners with people that we like and trust. And so that’s reflective of the name as well.

    Patrick: And the the size area that you’re looking at for your investments, I would consider that the lower middle market, correct.

    Jordan: That’s right. So in terms of size, we’re investing in established successful companies with one to 5 million of EBITDA. So no startups, no distressed situations. You mentioned across the US, we focus on four industry verticals. So business services, consumer products and services, industrials and technology. So one to 5 million of EBITDA, no startups, those four industry verticals. And then in terms of the catalyst for the transaction, there’s really three situations that capture all 17 companies we’ve invested in today. And those three are founder liquidity event. So whether that’s a founder seeking a full sale of the company, or a founder seeking a majority recap, where the founder may want to continue in the CEO role and or continue to be involved from an ownership perspective or a board perspective. That would be scenario one, and that’s very core to who we are. The second one is the management buyout. 

    So backing leadership teams with capital to buy their business from a larger organization. And there’s two examples there would be Equity Methods and Metal FX, both of which were actively investors in today, Equity Methods was prior to our transaction, a wholly owned subsidiary of Bank of America. And Metal FX was majority owned by a publicly traded utility called a VISTA Corporation. And both of those cases, we provided the capital to back the leadership teams of those companies to buy their business. So that’s number two. And then lastly, the third scenario is backing operators or independent sponsors, who have a thesis within a particular industry and or have identified a particular company and need an equity partner to support them.

    Patrick: I’m just curious real quick with with the independent sponsors your your third point there, have you seen that activity grow?

    Jordan: Absolutely. So definitely a trend, we think back over the past 17 years, there’s a growing universe of independent sponsors, for sure. And I think from if I put myself in a founder’s seat who’s seeking liquidity, I think that’s both a good thing and a bad thing, I think it’s a good thing because it provides another option. And there’s very high quality people out there in the independent sponsor universe. And then maybe on the on the challenging side, or something to look out for as a founder is not everyone’s created equally, right. And it’s difficult. When you’re getting to know somebody who doesn’t have a track record, they don’t have a portfolio of companies where they’ve been through the transaction process many times. 

    And if this is the first time they’re going through a transaction, there’s a lot of getting to know one another. And so there’s some work that goes in on the founder side to get to know the people involved, make sure that everyone understands the source of capital, and that the person sort of can successfully navigate the transaction process so that a founder who’s built a successful company, over 20, 30 years, is going to have a relatively smooth positive experience with highly emotional once in a lifetime opportunity. So growing universe, and lots of variety in terms of the folks that are competing within that space. But certainly for us, we’re very interested in doing more deals where we’re providing equity, to independent sponsors to help them close transactions.

    Patrick: I think is fantastic. It’s a nice matchup with the pooled resources, like you said, if you’ve got an independent sponsor, you’re just looking at that individuals, the owner or founder of an organization with a track record, like you have, you know, backing them up all sudden, it gives a lot more credibility to the the opportunity for success.

    Jordan: Absolutely great. So there’s a good compliment there, particularly when that independent sponsor plans to step in and take an operational role in the business. So sometimes, if I’m a founder, I’ve built a successful company, I don’t have necessarily a successor internally. But I’m seeking liquidity. I need both a capital provider to provide the liquidity but I also need a solution in terms of who’s going to step into that leadership role. And in a scenario where there’s an independent sponsor involved, who plans to step into that leadership role. And there’s good rapport between the founder and that individual. And then we can step in with the capital. So solving for the capital that’s going to provide liquidity as well as support growth initiatives, also speak to the track record, and then bring the shared services resources from our team. That’s a good combination, and it sort of rounds out the solution for the the founder who’s got a lot at stake.

    Patrick: You haven’t done this yesterday. So I mean, the number of private equity firms, you know, when when Montage Partners started was a lot smaller than that universe now. And I’m just curious as you’ve got this long track record, how are you having gone up market for bigger and bigger deals? Explain explain your preferences, staying in the lower middle market?

    Jordan: Yeah. So you’re right, we have stuck to our lane, there’s not much that’s changed with respect to our investment strategy, or size, or the qualities that we look for in companies or people that we’re going to invest in, over the past 17 years. So we haven’t drifted up market that’s been intentional. One of the reasons is, we have a lot of fun doing what we’re doing. So we like this category. It’s large, there’s a lot to do. And we love the founder transition story. We think where a founder is willing to invest the time to get to know the people and where the founder knows what market is in terms of purchase price or multiple. 

    And so there’s confidence going into the transaction that they’re going to be paid that price, regardless of who the buyer is. And once that box is checked, that they’re getting the liquidity they’re looking for, they’re getting a full fair purchase price for the business, then other things matter a lot. So for founders who really care about the integrity of the people Who’s going to be involved? Who’s going to represent the company on the board from that private equity firm? What’s the post close plan? And what resources can that private equity firm bring to bear? What’s the track record of that firm, and we’re the founder can jump on reference calls from other folks who had sat in their seat before. Hugely important, hugely powerful. And we like this this size, and the dynamic changes as you go up market, it gets a little less personal.

    Patrick: Yeah, well, I think that when owners and founders, they get to an inflection point, and they’re looking for an exit, or they’re looking for, you know, that next step, because they are either, you know, and they’re, they’re too too big for being small, but they’re too small to be enterprise. And, you know, they’re at that point, they have to make some kind of change. And if they don’t know any better, a lot of these owners and founders just default to an institution or to have some brand name out there, or they fall over to a strategic that may not have their their interests, you know, at heart. And that’s why it’s very important that we highlight organizations like montage partners, because you offer a way out that is a real positive. And the more choice they have, particularly for these people who have, you know, taken started with nothing, and then develop, you know, build great value is great to know that there’s organizations like yours out there that can get them to that next chapter.

    Jordan: As you know very well, if there’s a great strategic buyer, that is a great fit for the particular company, that could be a good option for the founder, if that’s not the case, or they’re concerned about competitive sensitivity with sharing information during a diligence process, or there’s not a great cultural fit with the organization that they’ve built. And that potential acquire, and or the founder cares deeply about that leadership team. And the folks that are going to carry the torch after they start to step out of a day to day role. aligning with a private equity firm can solve for all of those things. 

    Because if you’re doing your homework, getting to know the people at that private equity firm, and you’re partnering with high integrity, high quality people, and you can do those reference calls, the culture at your company is not going to change, there shouldn’t be renewed energy, but the fundamental culture is not going to change. Now you’ve got stronger balance sheet capital to support growth initiatives, potentially help upgrading finance and accounting infrastructure, help standing up pull based marketing initiatives. Help recruiting to round out the leadership team, if that’s helpful. And then uniquely one differentiator for a founder and choosing private equity as a path towards liquidity versus a strategic buyer is the ability to roll equity, if they’re interested in maintaining a stake in the business. 

    So for a lot of founders, you built a business 20, 25, 30 years of sacrifice, blood, sweat, and tears, and you want to take substantial cash out of the business. But at a certain threshold, once you’ve met some certain dollar amounts of liquidity, it’s oftentimes very appealing to maintain a stake in the company through that next phase of growth over the next 5, 6, 7 years. And that usually that opportunity doesn’t exist most often with a strategic buyer. But with the right private equity firm, that opportunity to maintain a stake in the business and accomplish the upfront liquidity objective is sometimes very attractive.

    Patrick: Yeah, one and also that rollover, that can happen, you could end up that rollover ends up being worth more than the original liquidity event as possible, as possible. Yeah. So that I mean, what a great way, you’ve just, you’ve just gone through just all the types of things that you bring to bear. When you come into the company, you’re showing them how to scale, bring in new talent, improve processes, probably get economies of scale, in terms of costs, and so forth. The four areas that you like to invest where you have business services, consumer products, light manufacturing, and technology. Give us on each one of those buckets. Could you give us a brief profile on your ideal target note in those fields, other than other than just size?

    Jordan: Sure. So maybe what I’ll do to try to be succinct and in the interest of time is this talk about the common threads that that we would look for that apply across all four of those verticals. So even though we’re investing in companies that might compete in very different industries, there are kind of fundamental common threads that we’re looking for. And so those include things like customer retention. So we’ll go back in time and we’ll review spend patterns and understand when customers were lost. What happened there? When new customers were won? How did that happen? How sticky are those relationships, so both on dollar revenue retention, and then the retention of the relationship that’s really important, regardless of which of those four verticals, we’re looking at. 

    Margin stability. So there certainly has to be an actionable growth opportunity, we’re not the right fit. But we’re also not chasing sort of the shiny object, the next new thing, we’re looking for companies that have a fundamental value proposition, they have high revenue retention, sticky customer relationships, ability to generate consistent a consistent margin profile. So that means when say for a manufacturing company material prices, right now are going up across the board, the ability for that company, on balance to pass through those price increases to their customer shows up in gross margins, right, and it says a lot about the value add of that company and the relationships they have with the customer base. So those things are important things like competitive position within the industry. 

    But then at the end of the day, past all those quantitative metrics, ultimately, the biggest driver of our decisions to wire funds that close are the people we want to work with people we like and trust. High integrity is high integrity, whether we’re talking about a manufacturing company, a consumer products company, a professional services company, or a software company. So at the end of the day, there are quantitative metrics that we look for. And they’re common threads across those four verticals. But ultimately, it’s it’s the the integrity and the personal fit the culture of the company and the enjoyment working together that should be there for both sides. Otherwise, it’s probably not the right solution.

    Patrick: Well, you touch on one area, on that key thing with the integrity that I consistently see with everybody I speak with, and that’s you cannot eliminate the human element in mergers and acquisitions. Okay, there, there is not, you know, the news where Amazon buys Whole Foods. It’s not Company A, Company B. It is a group of people choosing to partner with another group of people. And if everything works, you know, one plus one equals six. And so that’s something that resonates for everybody I’ve spoken with it, that’s the determining, determining factor is the people.

    Jordan: 100% agree. And I think the best outcomes are those where both parties spend sufficient time, which doesn’t mean a transaction needs to drag on for months on end, but spend sufficient time getting to know one another, beyond walking through the line items on an income statement, but really getting to know one another, getting to know one another’s goals, and confirming that if it’s a founder that’s seeking a full exit, I’ve poured a lot of cases my entire life into building this company. Are these the stewards of my business that I’m going to be proud to hand the keys over to? Or if if somebody who’s doing a majority recap and is going to stay involved? 

    Do I like these people? Do I enjoy working with these people? Am I gonna have fun at board meetings, it’s just gonna be a fun process over the coming years, or am I just looking for liquidity at close, and I’m going to dread every conversation with my new partner post close. In those situations, we’re typically not going to be interested. So we really do want there to be a good two way fit. And that sets up a win win partnership. And the most attractive opportunities for us are those where the seller is spending as much time being selective, doing reverse due diligence during those reference calls getting to know us, and vice versa. And we confirm that there’s just great alignment, and it’s going to be a fun partnership post close.

    Patrick: One of the things that struck me, you’d mentioned through the process as your research, I would just think as your owner and founder, in most cases, your attention all your focus is on your company and getting out there just day to day, getting sales done serving customers, things like that. But then you get through go through the diligence process. And you’ve got the opportunity where somebody else is looking at your numbers and looking at him with a different perspective. And I’m just curious, when you’re talking about customer retention and things like that. I imagine if I were going through that process, I would probably have an epiphany or two about my firm, and by somebody else coming in as a partner with me, say, hey, here’s some areas for you of opportunity. Did you know this and they could be right in front of me, but I didn’t see him. I’m just curious. Have you experienced that with your investments where you just created these aha moments with with your targets and all of a sudden they were just really excited because oh, I didn’t even see this. We can do this tomorrow.

    Jordan: Absolutely, it does happen. So there are situations during the due diligence process, when that post goes plan is starting to be formulated, and everyone’s collaborating on for the areas of focus and where the investment is going to go post close. And it’s fairly common for. So we’ll do playback sessions where we’ll take our analysis, we’ve cut up the data, and we’ll play back our conclusions. Hey, here’s what we think we’re seeing in the information. Here’s our conclusions we’re drawing, tell us where we’re right, tell us where we’re off. And that’s part of our process of getting educated on the business during due diligence. But I think as a byproduct of that, what you’re describing absolutely plays out where the founders saying, well, intuitively, I knew that, but I’ve never seen it sort of quantified. I’ve never seen it presented that way. And that then leads to additional ideas. And it’s a fun collaborative process.

    Patrick: I just think that hits the ground running where and outside of M&A they’re the people say, well, somebody’s got a big liquidity event. So they’re probably just going to kick back now and stay, you know, run out their time. But I think this is just invigorates management, saying here are these new options, we never realized, and they’re right at our fingertips.

    Jordan: They can go both ways. Yeah, depending on the founder’s objective there, we have certainly invested in companies where the founder was very transparent that my goal is 100% liquidity. And I want to step away from the business as soon as possible. And depending on the composition of the leadership team that’s there, we can come up with a plan, whether it’s immediately at close or over some transition period for the founder to do that. But there are a lot of other cases where the founders objective is to take out a significant amount of liquidity. 

    But they are energized about the future, they do want to help scale the company to the next level, they want to partner to support the company with capital, but they also want a partner who’s going to be value add and roll up their sleeves and help execute on that roadmap. And both situations are fine. But certainly that situation where the founder is checking the box on the liquidity objective, but is re energized in the business about taking it through its next phase of growth. Those are really fun situations. And that’s part of why we love doing what we’re doing.

    Patrick: I can imagine, you probably have a case or two where owner was going to check out after 24 months and things are going so much funny, just you know, I’m gonna stick around a little longer. 

    Jordan: That can happen. 

    Patrick: Okay, great. With with deals down the lower middle market, you’re dealing with owners and founders, and I mentioned the human element in mergers and acquisitions. And one of the things that comes up is, is fear. And it happens to there’s a lot of stress and a lot of drama, in mergers and acquisitions, because you get a lot of money at stake. And also this is, you know, a once in a lifetime or generational event for these owners and founders. And there’s a conflict there and is created not because there’s anything bad, it’s just you have one experienced party, which is the buyer who’s going through these events many times. And then the seller where this is their first this is their first time and it’s with their own money it’s their own, you know, business online. 

    So there’s a lot of tension to make sure that things go smoothly. And just things start coming up that probably the the owner founder didn’t expect. And that creates stress and you go through the diligence process. And then you get to this area called the indemnification conversation where what the with the buyer says is look, you know, we’re making a bet on this, we just need to protect ourselves. You know, if if something goes wrong post closing that we didn’t know about, we need some way to get remedy we need some way to just you know, limit our exposure on this this is market this happens everywhere. It also we need to go through this process. 

    But what the seller hears is okay after I told you everything I know, I cooperated in diligence. And now you’re telling me that even though I told you everything I know, I can be on the hook for something I didn’t know about? Why should I pay for something you missed? So you can get attention in their what’s been nice as the development in the insurance industry of what’s called rep and warranty insurance. And it’s an insurance policy, it literally steps in the shoes of the seller that says okay, based on the buyer’s diligence of the seller reps, if any of those reps end up, you know not being accurate and that inaccuracy costs the buyer buyer instead of going to the seller to pull back escrow funds or get remedy come to the insurance company, the insurance company will come in there and pay your loss. 

    Buyers like this because they get certainty of collection if there is a breach without you know, much, much waiting time. Sellers love it because they get a clean exit. They don’t have to worry about a clawback. They don’t have to worry about a large escrow the insurance policy covers most of the action escrow or if not, you know, there’s not gonna be a further clawback beyond that. And so it’s been a nice, elegant solution that removes the tension and removes the conflict, particularly when you want to start transitioning into integration, you know, post closing, and so forth. So it doesn’t step in in that way. And so it’s been nice. 

    The news is, in the last year, this product rep and warranty insurance is available for deals as low as $15 million in transaction value. It was usually reserved for nine figure deals. And the more that parties are aware of the availability of this, the more active they can get it and engage in the perception now pre COVID was only for the big guys it’ss not for our lower middle market. Not the case. And this is right, right in your area, Jordan. I’m not sure you know, good, bad or indifferent. I mean, don’t listen to me, good, bad or indifferent. What experience have you had with rep and warranty?

    Jordan: That well, you summarized it well. And we can empathize with being on both sides of the table. Because we as a seller, we’ve been in that seat before. And certainly as a buyer, that’s what we do every day. So fully appreciate the value that reps and warranties policy brings to the seller in particular, but both parties in terms of smoothing the way to not wrangling too much within the reps and warranties section of the purchase agreement, which is where absent of reps and warranties policy, the majority of the time is often spent negotiating specific wording within that reps and warranties section. 

    So going back, so we’ve been investing 17 years now, going back 10 1215 years ago, the introduction of reps and warranties coverage was really suited towards transactions that were significantly upmarket, from where we’re investing. And so more recently, like you mentioned, it’s become more common. And it’s also become more common in our internal dialogue. So we have not purchased a policy yet. But it’s, it’s becoming increasingly common for that to be part of the discussion. And I suspect as reps and warranties policies become more widely available for the size of transactions that we’re investing in, which generally are in the five to $30 million enterprise value transactions. It’s only a matter of time before we’ll introduce that, as a solution.

    Patrick: Jordan, as we’re going through, we’re recording this right about midpoint of 2021. And I it’s safe to say we’re probably at the beginning of the end of the pandemic, and there’s activity going on and everything. From your perspective, what do you see either M&A in general or Montage Partners in particular on, you know, what are your thoughts on trends going into end of year 2021?

    Jordan: Yeah, interesting. So a couple things. One, high valuations is a very widely covered topic right now. So it’s a good time to sell if you’re a founder. But I’m not going to focus on that one. Because I think that’s pretty, pretty widely covered out there in the media, the potential likelihood of a capital gains increase is also pretty widely covered and expected. So many more, two more interesting trends that I’ll comment on are one you touched on earlier, which is the growing universe of independent sponsors. So like we talked about, that creates another option for a founder seeking liquidity, but it also creates some homework in the sense that you got to be careful. There are folks within that universe who aren’t as experienced as others who compete in that universe. 

    So you got to get to know the people and understand the source of funds. And that takes time to invest. And then the other interesting trend is, I would say, over the past 17 years, since the inception of our firm, within the lower middle market, sellers have become more sophisticated. And what I mean by that is looking beyond price. So when when a seller truly has a good sense for what’s market, how the transaction process works, whether that’s because they’ve done their own homework independently, or whether that’s because they have a great M&A attorney or an investment banker involved, somebody who’s giving him good advice. They know where companies like there’s trade on a multiple basis, they know where purchase price should be. 

    And so as long as they’re checking that box and accomplishing their liquidity goal and getting a full fair purchase price, becoming more sophisticated about that next layer of getting to know the people like we talked about earlier, so we see founders increasingly spending more time getting to know us as buyers, which is great. Doing reference calls asking for introductions to other founders who have entrusted us with their baby that they’ve built. And devoting a lot of time to talking about the post close plan, evaluating things like is there a good cultural fit so even though as a investor, we’re different from a strategic buyer that’s going to come in and integrate the company. 

    We have our own culture at our firm, and the founder who is concerned about making sure that there’s a good cultural fit among the people who are going to be on the board representing that private equity firm at their company, that that meshes well with the culture of the people who are at their company that they care deeply about, in most cases. That’s time well spent. And we’re seeing that become increasingly common. So beyond high valuations, the potential for increasing capital gains. The two things that come to mind there that are maybe more interesting are sophistication of sellers and the time spent evaluating the people who are involved, and then also the growing universe of independent sponsors.

    Patrick: That’s real interesting. This is the first time I’ve heard that with, you know, the sophistication, the education of sellers. And I think that’s probably their sophistication of their knowledge base growth is leading to more successful mergers now.

    Jordan: I think that’s right, I think there’s better information out there, it’s more easily accessed. And therefore, relative to 15 years ago, if I’m a founder who’s built a successful company in my industry, but I’ve never been through an M&A transaction before, I can learn much faster today than I think was easy to do 15 years ago, because of the prevalence of information that’s out there.

    Patrick: And also news gets out within the M&A community, if you’re an organization is making acquisitions, and they and you’re, you’re not as good at integrating post closing, that word gets around, people learn about that. And so sellers aren’t necessarily looking at the top number on on the LOI. They’re they’re looking deeper, which that’s very, very encouraging.

    Jordan: Absolutely, you hit the nail on the head, I mean, one of those areas to be cautious for as a seller is sure you get that indication of interest, you get the indicative terms, you get the LOI. And headline, enterprise value says this, you’re comparing one against another. Look at the structure, and then also get to know the people involved. And back to that integrity point. And the track record point. Does the firm you’re talking to have a history of retracing or changing purchase price or really grinding later during the purchase agreement. And some firms do and some firms don’t. 

    And some firms like we pride ourselves on taking a long term relationship oriented approach where we can serve up reference calls with anyone we’ve bought a business from before, because we pride ourselves on doing what we said we’re going to do treating people well. And 5, 6, 7 years post closing, we want to have a positive relationship with that founder. Because we take very seriously the fact that it is an emotional once in a lifetime event. And we take our stewardship of that company very seriously. Not everyone does. And so spending the time to investigate that I think will it’ll end up paying off in the long term because of the importance of the event and ultimately be worthwhile and make for a smoother transaction and a better partnership post flows for everybody.

    Patrick: Well, that’s no surprise that Montage Partners has been doing this for 17 years. Very, very clear. Jordan, you’ve got a great story. Montage Partners has a great story. How can our audience members find you?

    Jordan: Sure. So it’d be firstly on our website, which is So that’s www.m o n t a g e p a r t n e r s dot com. There’s a contact form there. We have team bios there so it’s easy to find contact details for anyone on our team and reach out directly. You can also find us on social media. So LinkedIn, Twitter, Facebook, and reach out that way as well.

    Patrick: Well, Jordan Tate of Montage Partners in Arizona is our first private equity firm in Arizona that we’ve met. Real pleasure having you Jordan, and I wish you all the success as we go forward.

    Jordan: Thanks, Patrick. Appreciate you having me on, and good to speak again.

  • Rep and Warranty Insurance Now Available for “Micro-Deals”
    POSTED 7.20.21 M&A

    In recent years, Representations and Warranty (R&W) insurance has become available to smaller and smaller deals.

    The eligible deal size dropped to under $20M… then under $15M. This is already quite a feat when you consider that the average transaction value (TV) for deals with R&W coverage in place is $500M. And to be honest, most insurers won’t go lower than $100M—Underwriters are already backed up on processing policies and insurance companies don’t always want to take the time to work on smaller deals that won’t generate large amounts of fees.

    Now, for the first time ever, this unique type of coverage is available for deals with a TV of $250,000 to $10M. This opens up R&W coverage to a whole new universe of deals.

    How did this breakthrough come about? As with many business ideas, someone saw a gap in the market and decided to fill it with what is officially called Transaction Liability Private Enterprise (TLPE) insurance.

    According to CFC Underwriting, the London-based insurer that innovated this new insurance product, there were 230,000 deals in which the TV was between $250,000 and $10M. They decided to create a product for this vast unserved market and came up with TLPE insurance as the first to market solution.

    Here are the basics on this coverage, which is available worldwide:

    1. It covers deals with TV from $250,000 to $10M.
    2. The policies are sell-side only. (In standard R&W insurance there are sell-side and buy-side policies, although the vast majority are buy-side.)
    3. It offers competitive terms at rates lower than traditional R&W coverage.
    4. A streamlined underwriting process to ensure both timely execution and sustainability.
    5. A deal can be insured up to 100% of Enterprise Value (EV).
    6. Policy period: six years.

    Covered industries include professional services, technology service and product businesses, transportation and aviation, and insurance brokers. CFC generally declines deals involving businesses in healthcare, financial services, oil and gas, mining, pharmaceuticals and regulated industries (such as telecommunications).

    How It Works

    Similar to standard R&W insurance, TLPE covers innocent misrepresentations made by the Seller to the Buyer.

    This provides the Sellers peace of mind because they know they won’t have to risk some or all of their proceeds from the deal in the event of a breach. On the other side, Buyers enjoy a feeling of confidence because there is a guaranteed source of funds available to cover their loss.

    Unlike the vast majority of R&W policies, TLPE is strictly a sell-side product. The policy is “triggered” only by a claim brought by the Buyer against the Seller for a loss caused by a breach of the Seller’s representations in the Purchase and Sale Agreement.

    As part of this coverage, the Seller is entitled to have their legal defense to contest the Buyer’s claim paid for by the insurer. Underwriters have full authority on the selection of the Seller’s defense counsel, which enables them to control claims costs. The insurance company will also cover any damages or settlement amounts.

    Something not in a standard Buyer-side R&W policy is the exclusion for Seller fraud.

    While no insurance policy will cover known fraudulent acts, TLPE will pay the legal fees to defend the Seller against allegations of fraud. However, they will cease providing defense costs if actual fraud is established in court.

    Important: if the Buyer sues the Seller for something not related to a breach, the insurer does not provide legal defense.

    Quick and Easy

    TLPE offers streamlined and cost-effective underwriting:

    • An application is required, but Underwriters depend on the Seller’s knowledge of their own business. Who knows the business better than an owner/founder?
    • There are no underwriting fees, which saves policyholders $30,000 to $50,000.
    • No underwriting call is required.
    • The turnaround time is just three days after transaction documentation is submitted and responses to any underwriting questions are provided.

    This quick and easy process is possible because the Underwriters are not viewing the reps. They’re not looking at the due diligence collected. They are simply underwriting the application that the Seller provided.

    TLPE in Action

    TrenData is a Dallas-based SaaS company that offers various human resources services. A larger human resources technology firm was planning to acquire them. The TV was about $5M.

    What held up the deal was the Buyer insisted that in the event of a breach of the intellectual property (IP) rep, that the target company would be responsible for any legal expenses or loss. At the same time, the Buyer would retain the sole authority for selecting their own legal counsel and determining the legal strategy.

    As the target company noted, this is like essentially writing a blank check. The Buyer could easily hire high-priced attorneys and/or drag the case on and on. They would not go for it.

    Neither side would budge on this issue, and it seemed like the deal was lost.

    However, less than a week later, the Seller reached out to my firm, Rubicon Insurance Services. We discussed TLPE coverage and how it could work in this deal. The Seller contacted the Buyer, and once they found out that the Seller would pay for the policy, that legal costs would be covered in the event of a loss, and that the deal could be insured up to the full $5M in TV…the gap between the two sides was bridged and the deal closed within a week.

    What to Do If You’re Interested in Coverage

    TLPE seems simple enough. However, there are key conditions and limitations with this new product. So it’s essential you have an insurance broker experienced in M&A handle the process of securing this coverage.

    Something to keep in mind: TLPE policies can be placed post-closing, so if you were unable to get protection for a previous deal, it can actually be revisited.

    If you’re interested in seeing if TLPE coverage could be a fit for an upcoming – or past – deal, you can contact me, Patrick Stroth, at

  • Scott Hendon | Fund Managers’ Biggest Tax Concern in 2021
    POSTED 7.13.21 M&A Masters Podcast

    Our guest for this week’s episode of M&A Masters is Scott Hendon of BDO. Scott has been with BDO for 20 years and currently serves as the National & Global Practice Leader for Private Equity. A true icon in M&A, he brings a unique perspective as he knows both the investment side and the service side.

    Today we sit down with him to talk about the recently released Spring 2021 BDO Private Capital Pulse Survey Report. The survey polled 100 private equity and 100 venture capital middle-market fund managers across the United States.

    On the show, Scott talks about the key takeaways from the report and offers his insights into: 

    • The current key M&A drivers
    • The 3 top impacts of Covid-19 on deal making
    • The biggest tax concern for fund managers
    • The biggest surprise in the report
    • And more



    Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Services, and trusted authority for transactional liability. 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. I’ve got to say just on a personal note, real quick. When you’re doing these interviews, your big dream is to have a monster guest who’s breaking some news out there. 

    So I no pressure to my guest, Scott here. But this is something I’m very, very excited about today, because we’ve got a true icon in mergers and acquisitions in America right now. Today, I’m joined by Scott Hendon. national and global practice leader for private equity for BDO. BDO is the fifth largest accounting firm in the world that generates over $10 billion in annual revenues, has 191,000 employees working in 167 countries. So it’s a special treat to have Scott here because today we’re going to talk about the newly released BDO private capital pulse survey report, which was just released. Scott it’s a pleasure to have you. Welcome to the podcast.

    Scott Hendon: Thank you, Patrick. Maybe just a little bit about myself. Well, as you said, Scott Hendon here and I just to cover a little bit about my background. I’m, originally from Lubbock, Texas, I moved to Dallas, Texas about 35 years ago. Went to Texas Tech University. I got an MS in taxation, I started my career at Arthur Andersen. And I’ve been with BDO for 20 years. I learned early on in my career that I wanted to get into private equity. So it didn’t take a brain surgeon to figure out that there’s a lot of money in motion, a lot of action. So I really wanted to get into the private equity side. 

    And once again, I realized that there’s a lot of services, and a lot of value that you could add to private equity. So as you said, once again, I’m a partner at BDO and I currently I’m the national and global leader of the private equity practice. I’m also on the board of directors for BDO USA. And I’m also on the board of directors of BDO capital, which is our wholly owned Investment Bank of BDO USA. Besides actively coordinating services and resources for private equity clients globally, I’m also an active investor. So I also invest in private equity and invest in pre spac deals, PIPEs and CRONs so I have a unique perspective. And I know both the service side to the private equity funds, as well as being an investor in there.

    Patrick: So you’ve been on both ends of the table, probably, you know, there are four, four sides to a table. You’ve been on all four of them.

    Scott: That’s right. And it’s been very good to me on all sides, there, Patrick.

    Patrick: Outstanding. So let’s talk about the private capital pulse report. How did this come about? What is it about? And give me some comments before we get into details. 

    Scott: Sure, so first of all, the we’ve been doing the private equity survey for over a decade, I will say that it used to be a lengthy report that we did every 12 months, and we track year over year, what the trends were. And once again, we interviewed 200 private equity firms, or I’m sorry, funds, 100 private equity and 100 venture capital funds. So that had been working great. And we’ve been doing it for over a decade, we had a big following. It’s covered by the press very well. Then we came into to 2020. And we did back then we’re doing one survey a year. So we did our questions in late February, early March. 

    And then we published in early April. So as you can imagine, the change that happened between February to April in 2020. The, it was really you know, once again, a lot of the data, a lot of stuff that we’re tracking, and it just wasn’t relevant, right? Because obviously COVID was the thing of the hour. So we pivoted on that and we went to more concise reports. It’s our current pulse survey. And we’re doing that two times a year. So we do a spring and a fall. So we just released our spring, and we’ve done a release for Fall of 2020. 

    And I think it’s a lot better. It’s more concise. It covers a lot of the major issues out there. But more importantly by doing it every six months, it allows us to have a better beat on fund managers. You know, it’s more frequent. It’s, we can tell what emerging trends are doing, you know, real time sense of what’s going on. So, once again, that’s kind of the history of that and once again, we get a lot of following out there, it’s when we get a lot of coverage globally in regards to what’s coming out of the survey.

    Patrick: Well, that’s a good clever name having a private capital pulse. Because if you’re doing this a little bit more, as real time as you can, you are on the pulse of thing. So yeah, you know, kudos to your marketing department to come up with with with that good title there. We can go in a lot directions with this on this because it is a big report. But why don’t we just get get a little macro first? All right. What’s the marketplace like for deals for private equity, you know, specific to mergers and acquisitions? 

    Scott: Sure. So first of all, at a high level, and then I’m going to dig down a little bit into to the survey. But as we sit today, the activity is incredible. So q1 of 2021, it’s one of the best quarters that the BDO private equity practice has ever seen. So that’s kind of where we’re at today. Now, if you roll back to 2020, not to look back, always looking forward. But you roll back to 2020. Yeah, there was two and a half trillion dollars of dry powder sitting there on the sidelines, deals were frothy. 

    This same from January to March, everything was going great. You know, pricing was good. Then COVID hits in March. And then from March, yeah, exactly. From March to June, the deals basically all got pulled back, everything came to a screeching halt. The banks weren’t loaning the private equity funds, we’re just trying to hunker down and figure out, you know, how to how to thrive and how to be resilient during the COVID crisis. So anyway, so there’s little activity from March to June. And starting in June, I think the private equity funds we’re getting a lot more comfortable and how to do due diligence, how to mitigate the risk.

    Patrick: Learn how to work Zoom.

    Scott: Absolutely. So anyway, some of the deals started coming back and banks started loaning again. So then you roll forward to the q4 of 2020. And, you know, private equity is very resilient, they figured out how to adapt. And so the deal flow, all the old deals, were coming back on the market that were pulled. A lot of new deals, a lot of people because of pricings good. I think a lot were saying, hey, are we going to have another wave of COVID or some we’re anticipating potential capital gains increases. 

    So we just had this tremendous amount of deals come out plus SPACs, were really getting the momentum going out, they’d raise a lot of capital. So q4 was really hot. And then we roll into q1. And just like I said, not to be redundant. But you know, it’s been q1 of 2021, has been extremely, extremely hot in a good time for certainly from the deal market and a lot of activity going on there.

    Patrick: Is it safe to say, you know, because we’re still in the pandemic, but I’m going to call this post pandemic right now, for purposes. But would you say that activity and financial strength in this period right now, post pandemic has surpassed the pre pandemic levels? Is that safe?

    Scott: You know, I would say it’s right there. I will say just the I think one thing that came in is all the deals that got pulled and put back on plus all the deals coming out. So it has, you know, it certainly is right there. The as far as the banks, the lending, you know, everything’s come back with a vengeance. It’s, it is amazing how resilient and resourceful that private equity has been. And I’ll go into maybe a little bit later on some of the things we’re saying the survey, but certain things have changed out there. You know, the what tailwind companies and certainly there’s young, there’s new industries, you know, a lot of digitalization other things, but man, the the market is, is really good. I’d say it’s as good or even better than pre pandemic.

    Patrick: I would say, I would want to ask, as you get in just you could take whatever direction you want, but you had a section on there for key competitors. And one of the things I find this very encouraging about mergers and acquisitions, just the American economy, in general is just how it is constantly expanding is constantly evolving. And you just look at the number of private equity firms out there five years ago, you know, there were maybe 1000 private equity firms, or just over 1000 there are 4000 plus private equity firms now, yeah, I think it’s closer to 5000 just in the US. So, you know, let’s draw from that. Let’s talk about competitors in this landscape now.

    Scott: You bet. So I’m gonna in that I’m looking at my survey here too Patrick but yeah, so the competition now once again, we did I’m going to do a comparative analysis from the fall survey today so what what’s the we pulling the you know what I’m personally seeing I think it’s consistent what what the fund managers feedback they gave us now, the number one competitor for deals, it’s generally strategics and private equity are kind of one one and two. That’s what we generally see. Of no surprise, strategic buyers came in as what the fund managers thought in the next six months would be the major competitor for deals. 

    So that came in about 52%. It’s up three and a half percent over the fall survey. One thing that’s really surprising is is that hedge funds and mutual funds. And what the fund managers said in the survey, they said it was it came in the number two spot at 51% said that they would be a major competitor for deals, and that’s up 12 and a half percent since the fall survey. So I was really surprised on that sovereign wealth funds were in at 40.5%, it was up about 4%. And then, PE and VC funds had fallen down usually once again to one or two for what they the fund managers themselves were saying. They said that they thought the most competition, you know, what would be coming out in private equity and VC firms were coming in at the four spot or fifth spot at 35%. 

    So they dropped eight and a half percent. So a little bit surprised about that. Now, we also just added SPACs, because I think if you look at the the SPAC cycle, you know, if you go back a few years, you know, they were kind of downstream, they were a major player, obviously, today, you know, the major banks, and they’re raising a lot of capital now, they only 23 and a half of them said that they saw the SPACs as a major competitor. So once again, that was a little bit lower than I thought, and we don’t have a comparative analysis. But we’ll we will start tracking that for future service.

    Patrick: Yeah, let’s let’s let’s just, you know, focus on the SPACs real quick, because the one thing about the SPAC is, you know, for for us that are in the transaction world, you know, the a and SPAC is acquisition. And so there’s no vehicle that’s more ideally suited for mergers and acquisitions. And for the the insurance in that area, then the SPACs, and while there’s been legislation proposed and rule changes proposed as really cut off the SPAC IPO activity, you still have over 400 SPACs out there looking for an acquisition the next two years. And so, you know, I agree with you, their presence just showed up overnight. And you know, it’s still early in the game. But I mean, what are your feelings of these of these SPACs out there in the marketplace? 

    Scott: Yeah, so first of all, I think just what we’re seeing on the survey, I think it’s just the the magnitude of the site, you know, there’s so much capital out there. I don’t, I think SPACs, you said that it had slowed down somewhat, you know, SPACs, you’re right, there’s over 430 SPACs, looking for acquisitions, I think maybe 100 have been identified, but they’ve raised a lot of capital, and they’re, they’re coming out with really good prices. And if they don’t get their acquisition within a 24 month period, they have to give the capital back. So certainly, you have SPACs that are out there. And I see this long term too, it’ll continue out there that you’re talking about, the SEC came out with basically just an interpretation of how warrants should be accounted for. 

    So you had that out there cut, there’s a quite a few restatements that are going to be done. But you know, the SPAC market slowed down quite a bit in the pipes have kind of slowed down as well. But I don’t I don’t see that as a long term effect. I think the main thing is that there’s so many out there looking for deals, I think that, you know, some of the IBs, you know, once again, or slowing it down, maybe some are trying to get some people to pivot IPOs. But they’re a great vehicle an option to go public, as you said, there. You know, there’s a lot of advantages on there. If I were to have enough time on on this podcast to go through, but I like it out there, I think it’ll continue will continue to be a competitor out there. 

    I just think the 23.5% I think the only reason it’s that low is just because the magnitude of all the other players out there, but I can see SPACs still being, you know, a viable option going public, it’s really, you know, it’s a lot easier to do an acquisition related than roadshow, there’s, you can get 50% your capital back. And anyway, that, you know, there’s a lot it generally it’s faster to market than a typical IPO. So there’s a lot of benefits out there. And I will say even though they’re a competitor to private equity, there also have been a really good exit strategy for private equity. 

    So a lot of PE backed companies, we’re seeing a lot of the funds that are wanting to ensure that their portfolio companies are ready to to SPAC or get into de SPAC transaction. So they’re definitely, you know, competitor on one side, but a great opportunity on the other. And then we’ve also seen some of the private equity funds do their own SPAC raise for certain verticals out there just because once again, it’s a good vehicle to raise capital and go.

    Patrick: And you know, there’s got to be exits for somebody in and as, as these portfolio companies are getting bigger and bigger, you need a bigger fish to eat this whale that you develop, you know, from a guppy and so I think is great for the M&A ecosphere, that there’s another place for these bigger exits to go.

    Scott: Absolutely. And I will say one thing, I don’t think it had a huge impact on this. But some of the funds, you know, we had a certain number that were under, you know, 2 billion or, you know, of assets or management. The SPAC  market, obviously, is the bigger deals out there, too. So that might have had a little bit of impact. But I think, overall, the reasons it’s at 23 and a half percent is just because the size of you know, yeah, the 2.2 $2.9 trillion of dry powder that’s sitting out there. 

    Patrick: Exactly. You mentioned the reports and key drivers for M&A. Why don’t we touch on those real quick? That’s more of a macro issue as well. 

    Scott: Sure. Yeah. So great question, Patrick. Now, what we saw in the survey for the drivers of deal flow, or what the fund managers thought would be driving it over the next six months, first of all, the private company sales and capital raises. So that’s it’s at 50% said that would be the major driver. It’s exactly the same as the the fall survey. So those are exactly the same as what I’d expect to see there. One thing that was a little bit surprising was succession planning. 

    So I think a lot of them think that some of the the generational companies that typically send it on to the next generation, they’re going ahead to exit out maybe it’s COVID, who knows. But anyway, for whatever reason, they they thought that succession planning would be one of the major drivers of deal flow coming up in the next six months. And it dropped from our fall, it was at 37, it went all the way up to 48%. So there’s big a big jump there, as far as the next one down would have been trades to other financial buyers or strategics. That came in at 46.5%. No surprises there, investing in distressed assets was next. 

    And that actually, we’ve we’ve been expecting, you know, distress assets to come to the market, right, because you kind of wait for the other shoe to drop. But anyway, there, it actually dropped the anticipation on that 2%. But once again, for whatever reason, the banks have been, you know, trying to work out and in a way we’ve seen, you know, there’s maybe stimulus money and other things. We haven’t seen the distressed assets on the market yet, but that they listed that is number four out there.

    Patrick: That was a surprise. Yeah, we were, the industry was preparing for a lot more distressed.

    Scott: Yeah. And you would expect eventually that’d be the case. But I think that’s what based on what the fund managers are saying or what, you know, anyway, that that was their anticipation of the market. Also on public to private transaction or taking private transactions. They 41% said they felt that would be driving deal activity. So they’re looking for any public companies, even though I would say the public markets have been pretty frothy, as well, anyway, they’re still looking for, you know, key deals out there. 

    And that was up 2%. Corporate divestitures is, it’s up six and a half percent day. And that’s it proximately 38.5. And with that, in that that makes perfect sense. And because a lot of the company big companies out there trying to shed non strategic businesses lean and mean, lean and mean, get back to their, you know, what they do best and, and jettison out wood and have a clear focus. So whether they’re anticipating to see a lot of investor transactions and a lot of ones that can come out, take, build it, and, yeah, build it out and flip it.

    Patrick: Yeah, we’ll see. And the comment I had on is the observation is, is from a conversation you and I had earlier because we’re both old enough to have gone through multiple cycles between whether it’s 9-11. You got the .com implosion, you had the financial crisis. And then now you got the pandemic and in business owners that have gone through that cycle. At some point, I’m sure they’re putting up their hands. And they’re just saying enough. In addition to that, you guys situation is one thing about that didn’t change in the pandemic is time didn’t stop. Everybody’s getting a little bit old.

    Scott: Yep. And I think that has a lot to do with where they go back to succession planning, private company sales, for exactly what you said, Patrick, so I agree. 100% on that.

    Patrick: One of the other things I found that was that was surprising. This is just one of those being from California. It’s a nice sounding thing. But it’s now in the nomenclature in the boardrooms. And that’s ESG the environmental, social and governance, prerogatives and the issue about that, as its, you know, its ambitious and as aspirational as really good stuff out there. And everybody’s got great intents, but the rules for ESG are still fluid. And if you fall short of those rules that can have catastrophic implications. And you mentioned this, but I didn’t realize this is organizations likeBDO have a solution to that to keep companies abreast of that. Let’s talk about ESG and then what BDO does.

    Scott: Absolutely. So first of all, in our survey, Patrick, we added, this is the first time that we added an ESG questions. And what came back on that or survey showed that 94% of the fund managers said that incorporating ESG investment criteria into their investment strategies was a priority to their LPs, and only two and a half percent said it wasn’t important. So I don’t know that I’m surprised about that. But once again, it was a really large number and a very small number that said that it wasn’t important to that to their LPs. 

    And I think what’s happening out there, no one is going to help out on exits, I think that everybody’s looking at private capital fund managers are feeling the pressure from LPs and other stakeholders to think within sustainable investment framework. So ESG is about your framing decisions to include the consideration of these risk factors. And, you know, they don’t necessarily affect the financial statements directly. But it’s material to the sustainable operation of the company. 

    And then I know, many are working to incorporate sustainable investment thinking into their business models, or there’s also regulatory issues, metrics that the SEC has gotten, and they’re starting to look at, you know, certainly for public companies, but on the private equity and private capital markets, they’re starting to look at the disclosures that are being made out there. And there’s accountability. And then if you go overseas, certainly the regulators in the EU and some of the other places, you know, they have pretty pretty stringent disclosure requirements they have to do out there. As far as the services that we’re working with the funds to look at how they get system set up to track benchmark and see how they’re doing. 

    And they’re certain metrics like RPI is or whatever that they track, and they give themselves grades, and then they’re tracking hey, how well are we doing on the various SCG components. And that’s important, both, you know, for them from a business perspective, to report back to the LPS. And I think that there’ll be a premium to the extent you have a company that, you know, following ESG principles that you know, that I think the return on investment will be there as well. And certainly, you know, I think you’ll get a premium on that.

    Patrick: Yeah, I think it’s along the book title, you know, the infinite game, you got a long game, a short game, and then the infinite game. And this, you know, dovetails right into that, and it’s just, you know, implementation and, and establishing systems and you know, who better than BDO to come in and monitor and help help firms adjust? So it’s not one rule for everybody, but it’s customized. So I think that’s a, that’s a tremendous value add that you have, right, we can’t have a survey like this without addressing COVID. Okay, and so, and I don’t want to steal your thunder, if you want, you had to send your report has the sentence of this whole event. And and I’ll leave it to you. But talk to me about, you know, how COVID impacted things now going forward?

    Scott: You bet. So first of all, it was in our big what you’re referring to, we had that everything’s changed, but nothing’s different.

    Patrick: Yeah, everything’s changed, but nothing’s different.

    Scott: Let me explain that. First of all, I’m going to go through what the fund’s told us about, you know, how things have long term impacts of COVID-19, especially specifically on deal making. So specifically said digital capabilities of acquisition targets, you know, once again, a key variable in the deals, importance of a robust risk management and acquisition targets. Hire long, long term ongoing valuations for certain industries, clear robust supply chain strategies, because obviously, we saw some of the weaknesses and what can happen when the supply chain breaks down, fewer in person meetings throughout the process, lower long term ongoing valuations for certain industries, and a shorter, shorter due diligence process. 

    So those are the main points that came out from the survey itself just on long term impacts of COVID. But what do we mean by everything is changed, but nothing’s different. And I’m going to throw out an analogy to you, Patrick. So if you kind of think through think of the forest versus the trees, so if you look at the trees, yeah, there’s new species that pop up, and maybe some grow faster than others. So if you throw that over to what’s going on right now, you know, some industries are faring much better, they actually thrived and grew and grew out of COVID-19. 

    So you have those, you have certain ways that how we work is changed. So you have a lot of these new industries. And so, you know, from the tree perspective, we’ve got, you know, new species or you know, once again, companies are growing, you know, there’s been a significant change out there. On the flip side, you know, if you look at the forest, I don’t think anything, the overall picture has really changed. So you still need to kick the tires, you still need to connect with leadership, do due diligence, you got to return, get generate return on investment in, you know, the the, the major theses is if you, you know, tend to or properly, you know, build out these portfolio companies, you’ll get superior yields. 

    And, you know, basically, that’s, you know, the big thing is to find quality deals, basically do smart things do add ons, hopefully you don’t overpay for it. And once again, it’s all about return on investment. I think, fundamentally, that’s what it’s all about. So hence, everything’s changed. And that a lot of the industries and how things are done is change. But nothing’s really different in regards to private equity, and how they invest and what the process is for making their investment. 

    Patrick: Sound business practices, or sound business practices. And that’s how I got. Okay, so absolutely. Tactics might but not overall strategy. 

    Scott: Absolutely. Absolutely. 

    Patrick: Well, now, Scott, this wasn’t in the report. But I do want to ask you just about because you’re with private equity and throughout M&A, what COVID has taught also in recent experience right now is having insurance on M&A transactions, specifically reps and warranties, insurance, and then directors and officers tail insurance and tax policies and so forth. The early returns that we’re getting on all the servers for 2021 rep and warranty is only getting stronger, it’s only getting better, people are buying it more often and bigger policies. 

    And it’s because the track record has been just outstanding throughout this and private equity, if something doesn’t work, they cut it off immediately. But, you know, don’t take my word for it, you know, as the head, you know, both national and global with, you know, private equity, and they’re in the business of mergers and acquisitions. What’s your perspective on rep and warranty insurance? Good, bad or indifferent?

    Scott: Absolutely. Great question, Patrick. And, first of all, the others besides rep and warranty, all all important, but rep and warranty insurance. If you roll back four or five years, you know, wouldn’t it as common and you know, it’s not on some of the bigger deals. I’d say today, almost all the deals about the buy and sell side has rep and warranty insurance. And I think that’s gonna continue and the major reason that they’re getting reps and warranty insurances, you know, first of all from the buyer side. You know, just to start out we’re generally a lot of the you want to negotiate what the major terms of the deals are price and other things. 

    And usually the indemnification escrow that’s always a non productive negotiation anyway. So we’re you have a seller that’s offering say a 5% indemnity escrow, but the buyer wants, you know, what market is about 10%. So instead of having, you know, negotiations, probably non productive on that, bring in indemnification, or I’m sorry, reps and warranty coverage. And it allows you to basically drop it down, you can drop it down to 1%, which makes the deal the package more attractive to the seller. 

    And then also, you can negotiate, you know, better better coverage, and you get out of the typical indemnification escrow. Also, it’s generally a longer period where you get a three year coverage period versus a one year so. And then lastly, which I think is really important in you know, a lot of times there’s going to be disputes, right. And it’s a lot better if you have especially a middle market companies, if you have the prior owners that have the sellers are still coming in, they still have some, you know, some rollover equity, but a real important to the business. 

    The last thing you want to do is being you know, having a pissing match or not sorry for the words, but you know, basically suits or whatever the case is with prior ownership over the indemnity versus if you have the insurance company in there. Once again, it’s not the same same issues, right, you can just negotiate with the insurance company about, you know, settling up on whatever the you know, reps and warranties were. As far as the seller, well, it’s easy, because once again, they just want to get it closed as fast as possible. Reps and warranty insurance allows it to that. 

    And if you can negotiate a 1% versus a 10%. That means that they get more of the indemnification escrow to them instead of being tied up in a low returning escrow account so they can get more of their money and get it to work. So it’s really a win win. And it’s, it’s, you know, it would be almost uncommon not to see it in most deals these days.

    Patrick: Yeah, I would if it’s if it’s done properly for the buyer, if you present the terms to the seller where you either go uninsured with a big escrow and you’re at risk for a major clawback or we’re gonna get this policy for you and your escrow goes from five or 10% transaction value down to 1%. And you can keep the rest of the money because we’re not gonna claw it back. 99 times out of 100, that seller, not only will go that direction, but they’ll happily pay all the cost. So if you’re a buyer, okay, you’ve got all the benefits, you take all the tension out of the room, you get rid of that uncomfortable post closing conversation saying, yeah, that escrow you want to get, we have to, you know, we lost it, sorry, that’s all gone. 

    Combined that that is free, because the cell is going to pay for virtually bad faith on the buyers part not to bring this up at least be open to bring it up. What’s great is rep and warranty is now available for the add ons where you’re looking at sub $50 million transactions. And those you just pump those out. I mean, and we really appreciate it just in our industry, because the the claims history, and the satisfaction rate on this product has never been higher. And I’m comparing that to any other insurance product out there. So we’re very, very proud of it is great to hear that. Yeah, it’s been embraced by private equity, which does not like spending a lot of money on insurance.

    Scott: Yeah, but once again, for all the benefits that you just relayed. And what I did, once again, it just makes sense. It gets deals done. And also it’s just a better way to get it done and get good deals done, get money back to the seller and in also have proper coverage.

    Patrick: I’m curious Scott, I know, we didn’t cover this earlier. But was there anything in the report that surprised you?

    Scott: Some of the things that I guess that surprised me the most. Well it was just I think we’ve already covered it. But you know, when you had the the mutual funds and hedge funds jumping so far, that I was really surprised about that? I don’t know exactly, you know, we don’t go back and separately interview the 200 poll participants, but that was one I just wasn’t expecting. I know that they do, you know, go out and do direct deals and some of the VC deals, but for them to be in the number two spot, that was really surprising for me.

    Patrick: Now, again, you go, the purposes of this is not only to take a quick snapshot back, but then using that data, you know, looking forward, what are some of the trends based on this? And we can find what are the trends you see going forward? You know, at macro micro, whichever you like?

    Scott: You bet. So some of the key takeaways from there, we already talked about ESG. So obviously, I think ESG is going to continue to be more important, what we asked the funds on what they thought about asset prices, and 91% expected asset prices to rise in the next six months. So almost virtually everybody thought it would raise and there was about 50%. 50% expected to raise between 10 and 24%. 

    Patrick: Wow. 

    Scott: And then you had five and a half that that actually started would rise more than 25%. And we’re talking about a six month period. So what that was, anyway, so I think the key takeaway there, the way things are going, you know, with all the dry powder, the spax out there, prices are gonna continue to go up. So it’s key to kick a lot of tires and make sure you do quality deals.

    Patrick: Just like real estate in California. My goodness.

    Scott: Hopefully, yeah. So what what happens in the, you know, in 2022, I guess yeah, we’ll see on that. But anyway, that was one of the big things out there. Also, the on taxation of digital services of product. So it actually came in higher than the concern about the rise in capital, capital gains rates.

    Patrick: Could you clarify that taxation on digital services? So you are paying tax on Saas kind of services?

    Scott: That’s correct. So it’s digital products and services. And I think the reason it’s going to be rising, probably twofold. That one, there’s a lot of, obviously a lot of stimulus money, a lot of expenses that both foreign governments as well as state governments are going to have to cover. And also I think there’s concerns with all the digitalization of products and services that, you know, how do you keep from losing your tax base, because a lot of it, you know, has been hit typically on you know, you have people or you have a physical presence and location. 

    So there anyway, there’s a lot of activity going out there. From the foreign side, there’s there’s an oecds, kind of a, they’re looking at a framework of how to tax digital services and products, they should have something coming out in the summer. That’ll give some guidance out there. Once again, all this a lot of the states are changing their policies on how to tax digital services and products. And then lastly, I’ll just mention Mexico is another key example. 

    They just implemented a 16% VAT on digital, electronic or digital services for b2b and b2c. So I think it’s a real it’s a big issue. Once again, I think the countries and states are gonna have to continue to, you know, figure out how they get their tax revenue and how they cover some of the costs. And just with the big changes in a digital environment, you know, it’s real important for to understand what kind of impact that will have on the business, especially in technology businesses.

    Patrick: The innovation doesn’t stop at the at the tax level, that’s for sure. So they’re gonna, they’re gonna keep that going. We mentioned Scott that there are now 5000 plus private equity firms out there, they can’t all be BDO clients. So, you know, for our members, the audience out there if they wanted to get you know, not only copy the report, which we will have in our show notes to link up to but how can our audience members find you and get access to the BDO private equity services?

    Scott: Well, first of all, Patrick, I would like to thank you for having me on your podcast, but anybody everybody’s free to contact me directly. My email address is or s h e n d o Or you can go to our website at Click on our industry, private equity. And there you’ll find contact information. We also there we do have copies of the current as well as prior surveys. We have thought leadership’s and we also have podcasts out there. You can also sign up for to be notified of future surveys, thought leadership or podcasts that are coming out as well.

    Patrick: Well, Scott Hendon from BDO, your private equity capital pulse report for 2021. Thank you so much. It’s been a real pleasure having you here. 

    Scott: My pleasure. Thanks a lot, Patrick.

  • Tom Wells | 5 Things Every Brand Needs To Be Successful
    POSTED 7.6.21 M&A Masters Podcast

    Our guest for this week’s episode of M&A Masters is Tom Wells, Managing Partner and Co-Founder of 10 Point Capital in Atlanta. 10 Point Capital partners with visionary founders and operating executives to build dominant franchise brands. A foodie who loves hospitality, Tom found a way to combine those by investing in such companies as Walk-On’s and Slim Chickens.

    We chat with Tom about the inspiration behind 10 Point Capital, and the meaning behind their brand name, as well as:

    • The one key thing they look for when partnering with a brand
    • 5 things that determine which brands will be successful
    • How to master building rapport with potential clients
    • Franchise investing post pandemic
    • And more



    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 Tom wells, managing partner of 10 Point Capital. Based in Atlanta, 10 Point Capital is an independent sponsor that specializes in a very interesting class of business, franchises. In particular franchise restaurants, which I’ve seen quite a bit of action in the last 18 months. So I’m excited to get into this. Tom, thanks for joining me today.

    Tom Wells: Thank you for having me.

    Patrick: Now, Tom before we get into 10 Point Capital and the work in the franchise restaurant area, let’s start with you. Give our audience a little context. How did you get to this point in your career? 

    Tom: Yeah, so as you mentioned, I’m based in Atlanta, I actually grew up in Atlanta. But lefting left for a while, a long time and came back here. And I’ll give you that sort of path of how I got back here. After college up in the northeast of Boston College, moved out to California had always wanted to live out there. I was fortunate to work for a great investment bank out there called Harris Williams and company. Learned a lot about just middle market transactions, first exposure to private equity. And what that was prior to that had no idea. After spending a couple of years doing sort of the standard banking thing landed at a private equity group down in LA called century Park capital. Nice, very nice shop down there. 

    Spent a few years there, got an MBA in Chicago, and sort of came out of that first part of my career going you know, I really enjoy working with sort of founder led companies. Really enjoy high growth businesses as opposed to getting in and having to deal with turnarounds or any sort of challenges. And that actually led me to what was a bit of a hybrid venture capital and growth equity world down in Atlanta. Came to work for a firm called VIP capital, a great venture capital and healthcare investor in Atlanta, where my current partner was, had been a founder of in spent a handful of years they’re really doing a lot of growth equity deals. But it led to the forming of 10 Point Capital. 

    I know we’re gonna talk a little about that. But my founder, my my partner in 10 Point Capital, he had been a founder of VIP capital, but he was really passionate about the franchise space. That had been the bulk of his career. He had worked for franchise brands at points in his career, he had been a franchise investor back to being a work capital, which is a big firm in the space. In a few years ago, probably four years ago. Now he and I just started decided to form 10 Point Capital to focus on one thing, which is just investing in franchisors. And so we decided a few years ago to spin out and go go do that. And that sort of got me to where I am right now, I don’t know that I ever expected to be investing in franchisors. 

    I think that this sort of consistent thinking about what I was passionate about from early on, and I always had the desire to go figure out something that I could be an expert in. And that was something that I just wanted to do for fun. One is just this, this intersection of just being a growth investor. I love working with companies that are growing, it’s certainly much more fun to be growing and adding locations and hiring people. And that’s just much more exciting. But secondarily, like, I’m a huge foodie. And I love hospitality. And it has always been something that was just more like a hobby or an interest and sort of to be able to mix those two things together and work on restaurants and branded concepts and things that are tangible to people is super fun to me.

    Patrick: Well, when we turn our attention to 10 Point, and I always made the mistake of saying 10 points, it’s 10 Point Capital, and you didn’t name it Wells Capital. So you have more imagination than most insurance firms, law firms out there. So before we get into 10 Point, why don’t you tell us how you came up with a name because it’s not good insight into the culture of a firm.

    Tom: Yeah, it’s funny. I mean, it is fitting when I people try to brand stuff, it’s really hard to come up with a name, it seems like every name or in particular, every domain name for websites taken. But as we were working on coming up with a name and starting the firm dedicated to this. We one of the things we’re big on is culture, is people. And so we had sat in a room and we had talked about obviously the types of deals we were going to do and the criteria, what they were going to look like. But we talked about who we wanted to be as a firm and what our culture, what sort of culture we wanted to set. And we came up we had 10 values, that we created at the firm. 

    And so what was what was fun, and I could go through them all but I generally hit on the big ones like the ones that stand apart from me or like creativity and that’s we approach deals in a very flexible, creative manner. Relationships being another core value of our firm, it sort of ripples, all the way from the obviously the leadership and management teams we partner with but franchising is an industry and I’m sure we’ll talk about this too. Franchising is a very relationship driven industry. I’m not sure there are many industries that are more relationship driven. And then there were a couple other values integrity, and just doing the right way. 

    And determination, I mean, we are, we do not like to ever give up, we are very determined gritty people. But there were 10 values. And so we sit in a room and this took, I don’t know, it must have taken a month or two. I mean, seriously, we’d spent hours and hours trying to think of a name. And finally, one of our operating partners, who’s Charles Watson, he’s the CEO of Tropical Smoothie Café, which we used to own. Charles sat there and was like, you know, what, we have 10 values. Why don’t we just be 10 Point Capital? 

    That’s like a great name for the firm. And you Google you like sit there and go Google the domain name. And oh, yeah, that’s, that’s available. And it’s just, it’s funny, it fit. It’s a brand like if we’re you think about the segment, we’re in with consumer brands that stand for something. And we felt like picking our names was kind of a cop out, we wanted to have a real brand behind it. Later on, I noticed the benefit. We didn’t even think about it at the time. But the benefit is at any conference or event you’re at, 10 Point Capital shows up first on the list, because it’s in number.

    Patrick: Digit. Yeah. 

    Tom: Secondary benefit is everybody sees us first. But but that’s where the name originated from. 

    Patrick: Okay. And now in when we spoke earlier, okay, you made a conscious decision. 10 Point Capital is not a private equity firm it’s an independent sponsor. So let’s talk about what you bring to the table as an independent sponsor, and then segue into the focus on franchises because that’s very, very interesting.

    Tom: Yeah, so it’s interesting, we formed 10 Point is an independent sponsor, which means we raise capital deal by deal, we don’t have a committed fund, we’ve certainly had that in the past where we’ve had committed capital. But for us, we like the flexibility that being an independent sponsor allows. There’s a few things we like that are really unique about it. One, we’re able to, sort of, we don’t have a set pace, we have to go deals that we don’t have a bunch of committed capital, that we have to go find deals and put capital to work our. Our approaches, we’re going to go spend a lot of time in the industry, getting to know founders and entrepreneurs, and ultimately, hopefully find a deal that we like, and we want to invest our own capital. 

    And so when we get to that point, then we’re gonna, then we’re gonna go get a deal set up with the founders and go talk to our investor base in what’s interesting is, and we find, it forces you to underwrite those deals more deeply than if you were out of a committed fund where you had total discretion. One of the things I really enjoy is you go put this on paper, you work through your thesis internally, and how it all makes sense, you’ve got to sort of figure out how to convey to your investor base. But then you go talk to 100, smart people, or however many people about this deal, inevitably three, or five, or 10, really interesting insights are going to pop out. 

    There’s going to be risks that you didn’t even process or think about, for whatever reason that pop out from some of your investors. And so having to on the front end, just apply that amount of rigor to it, we really, really enjoy. I think the other thing we like is, we do one deal at a time, and I’ll get into 10 point of what we do. But we’re never gonna have a ton of deals, we may have three to five companies at a time. And we’re deeply involved in them. And so the approach lets us keep our core team very lean and focused, but also just do the deals we want to do with the people we want to partner with and enjoy working with. And so that that’s worked really well for us. 

    We have wait, generally we’re trying to do one deal a year, and so you can be very methodical about it. And we like that sort of one deal at a time. I tell investors of ours when we do a deal, they’ll always ask what do you think the next deal is, and I generally always say, I have no idea. I’m not even thinking about it. I’m gonna do this deal. I’m going to spend six months or a year or whatever it takes to feel really confident in the deal. And then I’ll think about the next deal. And I think our investors enjoy and appreciate that that like, we just go heads down and try to work with the companies to get them. Get them going.

    Patrick: I think I’m sorry to interrupt, but I can imagine some of these investors because you’ve been successful, that you’re at this nice slow pace. Do they ever get anxious saying, wait a minute, yeah, this was really good, get going, find another one. Or do they say call me first?

    Tom: Yeah, it’s interesting. I, they certainly appreciate being on like, we go out to our existing investors and talk to them first. And really, it’s it’s a little unique right now, like, especially where the economy is, I mean, we get more inbound from our investors going, hey, what’s next for us? And we’re we closed on a deal. And we’ll talk about it a closed on a deal six, seven months ago. I’m just starting to think about what’s next. And I sort of joke with investors, like I told you, I wasn’t going to think about anything else. And now I’m starting to think about it. So maybe this year, we’ll have something for you. Maybe we won’t. We feel good about our companies. But that’s it. 

    So yeah, it’s um, we definitely get some inbound, but we just we go at our own pace. And we feel like we can get good opportunities that way. And I guess I we haven’t really dove in, but diving into what we do at 10 Point Capital, because you asked that also. So we are really simple people as I talked about. So we invest in one area, which is franchisors, and oh, spend a second talking about what a franchisor is, because not everyone fully appreciates it.

    Patrick: So I think this is really helpful because this isn’t the procession everybody has is a couple of brands that they know and you’re not picking up into the individual units. So get into that because that’s very helpful.

    Tom: Yeah, so we don’t we generally aren’t gonna own many units and so at the franchisor level is the way it works in franchising is founder goes and creates a brand they generally open the first few restaurants or if it’s services, we there are a lot of things you can franchise. They go get their first few open and they start franchising. And what that means they’ll go find franchisees who will come and they’ll pay them some sort of fee to sign up for the system, and then they’ll pay them an ongoing royalty to go open and build their own units. I think what people naturally go to is McDonald’s or Taco Bell. 

    But there’s a hotel franchisors, their services franchisors like roto rooter and Mr. Sparky, so you can sort of franchise anything that’s replicable and process driven. And so we like investing in the brand, the parent company who’s going to collect the royalties and run marketing and sales and training. And our skill set is more tied to how do you go scale these branded concepts. And so we will invest in franchisors, they have a bunch of sort of similar criteria, because they all look a little bit the same in our mind. In terms of when we want to get involved. Generally 30 to 300 units. 

    They’re, they have past the point where they can prove that it’s one thing to be the coolest restaurant in Atlanta, or Nashville, or Los Angeles or whatever. It’s another thing to have open 30 or 40 of these things across a bunch of markets and gone, well, when I go to Birmingham, Alabama, I learned I need to be in this real estate or I need to have this type of franchisee or, or this is how I get customers in the door. And so we’re looking for those proof points and multiple markets at that point. We want the franchise infrastructure to be set and we want them to have sold franchises that sort of shows that they can go put it together, get people interested and get that pipeline going. 

    Patrick: So sustainability.

    Tom: Exactly sustainability. The other thing that’s really important to us and you start to see it at this point, and I think it gets glossed over occasionally in franchising it the unit economics have to work for the franchisee. That really just means they got to make money. And they have to make a good return on their investment. And it five units or two units or 10 units kind of hard to see that. But you hit 30 and 50 and 100 units, they might not all work, there’s some painful lessons that get learned along the way. But you know, you figured out if it works and what it generally needs to look like. And then finally, for us people like yeah, at the end of the day, people drive every outcome in probably every investment industry. 

    And so, for us, we want a founder that’s going to be involved and we our pitch to founders as we help create dominant national brands, we’re going to help you take a great concept and take it national and scale it out. And so we’re looking for that you don’t need the whole management team. But we do want a core leadership team that we can work around. And so those are those are the ideal situation for us. And then I think we’re very flexible. I mentioned this being an independent independent sponsor. My pitch to founders is like a funny pitch, which is you really founder you don’t need us, like you’ve built this great franchisor and they take a long time to build. But you’ve built a great franchisor over 10 or 15 or 20 years, you’re cashflow positive, now you can look five years out and go holy cow, this thing’s gonna grow from 5 million EBITDA 30 or 40 or 50 million of EBITDA. 

    But we think we can help you grow faster. And oh, by the way, you’ve probably never taken any liquidity. So why don’t we give you a little bit of liquidity now we’ll take a minority position, we won’t, we don’t need to control your business. We’re partnering with you. And we’re backing you as a founder. And that’s resonated really nicely and oh, by the way we can if you need money for growth, too, because you want to invest here and there that works for us. And it’s funny because we do get the question a lot from investors coming in it’s like okay, you gave these founders some capital what is what are they going to show up for work? 

    Does that how does that motivate them going forward? And the types of brands that we’re partnered with that the founder they’re all in on this this is who they are. They’re here to fight it out every day till the end of this thing and that’s really a consistent across the leadership of our teams. Is that this is they’re not going anywhere. But it is strange it is it is to give them that liquidity gives them comfort. Like they can go home to their family and say, you know, if anything ever happened to me, you’re my family’s taken care of. And oh, by the way, I have a little money in the bank now not enough that I’m going to be happy long term but enough in the bank that yeah, if you if I need to go invest in scaling the business or take a little risk because the upside is huge. I’m comfortable doing that. It’s not like my bag could fail.

    Patrick: Well, I think you’re I think your message is is different from some others out there because I really like that genuine approach where hey, you don’t really need us. But we’re here. I can imagine because this this does happen in a lot of professional services too. I can tell you an insurance it will happen where you’ll have somebody from a larger institution going up to a prospective target saying you know what, you’re never gonna get over the hump unless we can carry you. And it’s just absolutely tone deaf and I like the the approach you have and also just the concept that you have. You’re looking for people that want to stay in the business. They’re not looking to exit out as in other cases. And so, by the way your model is set up. I mean, you’re kind of strapped to the to the masthead with them, which is got it got to help with the rapport.

    Tom: Yeah, it’s interesting. The other thing we talked to, I would spend a lot of time on is like, you’ve built your culture, you’ve built your brand, and the restaurant, like you sell X, Y, and Z product. I don’t want to touch that the lease like that works all day long. So like, my job is to protect that, like I and it’s important to founders, like, I want to protect your culture, because ultimately, going from 100 units to 1000 units, culture is probably the biggest thing of date that will dictate success for them. It is good is that is it a lot of ways and so telling the founders, look, we’re not here to tell you what to do, we’re here to help you grow faster. 

    And oh, by the way, you’re there’s probably 10 mistakes you can make between now and then and hopefully, we’ll help you eliminate, prevent some of those mistakes in you know, and not only that we bring a network of companies that we have leadership that just sort of the best practices across the portfolio. And so it’s resonated really well with founders. And we, we get excited about the potential. And usually most of the founders are used to, to your point, the big PE groups come in and go, this is great, you built a great business, I would love to buy all the business. 

    The founder is sitting there going, but if I just wait to get more like I, I’m not ready to get off, and I get to control it. And I have a ton of upside. And so it’s been, we sort of approach it and I talked about relationships earlier. It’s a partnership industry, it has to work for everybody. And so we try to come with flexibility and creativity to create deals that work for for both sides. And we haven’t really touched on the brands. And that’s probably cool, too. So I can I can tell you a little about that.

    Patrick: We’ll get into brands. One of the things as great as when we talked before, I think one of the you’ve mastered a great way of building rapport because of your experience with this. And also as a foodie, you know, the attraction you have to toward the restaurants. But one of the things you’ll ask them or just in conversation is every one of these organizations has a has a you know, troubled stepchild unit talk about that. 

    Tom: Yeah, it’s what’s fun is so you get these dialogues, and I’m never going to go, what’s your EBITDA? How fast you’re growing? What’s your unit count, that’s like every other person in the segment. And we know the businesses well enough to sort of have a good proxy for what it looks like. What we spend a lot of time on is talking to them like an operator, because that’s how we view the world. And so a lot of the times I get in and go, you have what how you dealing with with, I’m sure you got a couple of operators that are causing you headaches, right now, they probably don’t listen, they probably do whatever, you know, what, which ones are those how you feel about that. 

    And in it, it really takes their guard down. And I do it in a way that’s like, hey, we’ve got these other brands, I could tell you which ones don’t, you know, mistakes we’ve made or who the operator that we have some challenges with are and how we’ve worked to resolve it and create a partnership with them. And I think acknowledging that there’s always challenges and issues is just it’s such an interesting way to approach it with them. Because it’s not like, okay, these guys are gonna come in and tell me what to do. It’s like, I know, they’re gonna get in the business. And they’ve seen everything. 

    And they’re going to get alongside me and try to think about it the same way as I do. The other thing we really spend a lot of time trying to do is is getting into your point is like, okay, what problems do you have as a brand? Where are you? Where are you running? Where are you stuck right now, like, chances are, I can get that pert that get the team connected to a leadership team at a different brand. That’s that solved that problem where I’ve got a vendor in the space that can be helpful. And those are things we do before doing the deal. 

    And partially because we like seeing the transparency from the teams and getting to know the teams, but it’s an industry that likes to help each other. And it’s one of the things I love about it is generally even though that yes, I’ve heard there’s competitors within a segment. People work together in the franchise space. And it’s a really special unique thing. And I think you see people in restaurants in particular, like, they don’t view the restaurant down the street is their competitor. There’s a real community around the restaurant operators. And so we like to take that approach to these deals.

    Patrick: Now, before we get into we’ll talk about trends, you know, later on, but just as interest for my audience right now, everybody wants to know, okay, of the restaurant sector, you know, and you were involved with restaurants, you had this desire pre COVID. Why don’t you talk about just the sector right now pre and now we’re mid top, you know, approaching post COVID.

    Tom: Yeah, and just I think it’s helpful for reference like where we sit. So with three, three, really two restaurant concepts today and a third concept is non restaurant. So right now we have investments in Slim Chickens, which is like a Zaxby’s type competitor for people who know that chicken tenders segment. But drive through sort of premium chicken tenders. So sort of I would call QSR quick service brands. We have walk ons, which is we just invested in walk ons and now it’s a sports restaurant. There are about 50 of them in the southeast and middle of the country. Their big boxes are full service, sit down boxes. I joke and I know we’re talking pandemic a little bit it’ll naturally come up but we invested in October in the middle of the pandemic, a few months ago. 

    And then we have a non restaurant brand called Phoenix Salon Suites, which is like a we work for beauty professionals. The professionals are able to come into a strip center and rent a space out in our locations and run their own business sort of fully independently. The other brand was a restaurant brand we just exited last year was called Tropical Smoothie Café. All different scale, the smallest brand being Walk Ons with 50 locations. Tropical Smoothie was about 900 locations when we exited. The others are in the 100 to 300 unit range. But really runs the gamut of type of brand. But in terms of industry trends, and where we spend our time I think what’s what’s interesting to us in the restaurant space and COVID had a bit of an impact. 

    But we had a we have a heavy convenience focus so the consumer and really look at what the consumer wants over time that we order with our phones. Now we we like drive throughs we like things that are sort of convenient to our lifestyle. It’s interesting, we did a casual dining deal because that’s natural with with Slim Chickens. It’s a drive thru. It’s the most convenient thing in the world. You look at like a Walk Ons, which is a full service sit down restaurant. You can go haven’t that doing the pandemic, and how does that do with, you know, consumers not going to full sit down stuff anymore, and you look at, you’ve got to supplement with third party and carry out. And just create reasons for that customer to come in the restaurant. And so, yeah, then you’ve got to have a convenience component to your business with takeout and third party delivery. 

    But also, you’ve got to give consumers other things, you’ve got to use technology to engage with them. And to get them to come to you versus other people, you definitely in the restaurant space, have to innovate, I think what’s what’s fun to us is, if you stop innovating as a restaurant, there are very few chains that keep their menu the same forever. And like you can think about McDonald’s or I don’t know, whatever it is, but you look at if people go like Taco Bell changes its menu all the time. You look at just sort of anything else in the franchise space or the restaurant space, you’ve always kind of got to go to what’s next and innovate. 

    And so we spend a lot of time thinking about just the trends and what could happen over time in restaurants. And so like for us, we when we get involved at the core, we’re like data and analytics driven focus. So we’re going to spend a lot of time helping put technology in place to go figure out what works and doesn’t work and what the analytics are and how to how do how are the customer trends going over time? And what can we do to impact that. But we’re gonna spend a lot of time on consumer facing technology too. I want my I want the consumer to be able to pick up the phone and order it as seamlessly as possible and come by and get it regardless of the restaurant type in I think I probably would have said pre COVID you know, look, you look at drive thru concepts, maybe you don’t need as much technology. 

    But chick fil a has a great, incredibly good app, our chicken brand ton of the orders are coming now through technology through order ahead and through third party delivery. And so I think you just have to stay aligned with where the trends are going. I think if you step back like we when we like to invest we also look at the industry trends. 

    So Slim Chickens like people love chicken that segments growing like crazy. I look at like the Phoenix salon suites business salon suites is an industry segment are growing 15% year and that brand is the number two player in the market. It’s it we have natural talent, you look at walk ons, and I think people go well, casual dining is you know, people don’t go out as much. But if you go into secondary and tertiary markets, which is our bias, so not not the big cities, not New York, Chicago, LA. But you go to like Birmingham and Toledo and Tulsa, Oklahoma, just great markets with a lot of people. 

    And you put a really high quality restaurant in there that’s consistent and treats them with great service and great food and a cool culture around it. People come back all day long. And so I think it, it can surprise people that are in big cities that brands like Olive Garden, Texas Roadhouse, it just do incredibly well in these markets. But it’s a great growing segment. And so then our goal is okay great brand great culture, like let’s think about what the brand what it looks like, in five years, how’s that consumer going to evolve? And what are the trends going on? It’s very fun.

    Patrick: I think that’s what you’re that’s the real value you’re bringing in is you’ve got that that broader perspective as owner founder, they’re, they’re busy running the units, menus and the day to day stuff, and maybe looking for new alternative opportunity here or there. And you come in with big picture, particularly with the technology view, I think is very, very helpful. Because you could just see it, I mean, Silicon Valley learned that that you know, brands would live and die based on the user experience on the website. And you know.

    Tom: It what’s interesting is like in the technology world has figured out there’s a lot of restaurants and a lot of franchised restaurants. So the amount of technology coming into our in our segment is, is interesting. And you have you talk about restaurants and like it traditionally has been a buyer that’s not as sophisticated on technology, right? You’re like, I’m gonna fry chicken or i’m gonna I’m going to make hamburgers or I’m going to do whatever I do, and I’m going to replicate it over and over again. In technology is very limited impact in that. And that’s changed a lot over how you advertise over how you run all the systems within your restaurant over how you integrate into third party. 

    And so it’s been really interesting to see the amount of kind of SaaS base products that come into the space selling. And you have the restaurant operators going, I can’t even parse this together in the brands, that evolution and five years later, over the last five years, if you had told me our brands would have Chief Technology Officers five years ago, I go in, that’s kind of crazy. Having a little bit of a technology investing background, I go, Hey, we don’t need those. Every brand needs a technology Chief Technology Officer now. And that’s been a huge evolution here. I think the other thing I would say, and so helping them focus on like, alright, how do we get the right partners in place, and you can, what’s great is the flip side of having all this technology coming into our industry is you don’t have to custom build anything anymore. 

    So you can go off the shelf, and you can piece it together. And everything integrates with API’s. And so it is nice that you don’t have to, you don’t have to custom build software, but you do need someone who knows how to integrate and sort of deal with data management to be your technology lead. I think the other thing we spent a lot of time on with these companies is just focus, like a for those who deal with entrepreneurs every day, part of why you’re an entrepreneur is you have a lot of ideas, and you’re always running around trying new stuff. And I could never do it. I just that’s not my personality. And I have tremendous admiration for someone who can start a business from scratch, especially in the franchise or the restaurant segment and grow it. 

    But there’s a point where it helps them to have focus. And so a lot of what we come in and if building out the team is like what do you not like to do as a founder? Well, let us help you hire some people that go do the things you hate doing anyway. And two, how do we help you focus on what moves the needle? So founder, if you ask that we and we love doing there’s going to ask what are the big things you’re working on this year? Generally, you get a list of like, five to 25 items they’re trying to do to do in one year. 

    It’s like we’re going to we’re going to change this system, we’re going to do this we’re going to do the new menu, we’re going to add in should change our prototype, you know, it’s 50 things long, it’s just a ton of stuff. In helping that founder go, okay, it’s great. But you can probably only do three of those big things like your whole team has a day job. And so we’re gonna let them do their day job in but we’re gonna help you focus on let’s get three things and let’s do them well, in over a five year period or seven year period, if you do three things a year, you’ve transformed that whole business.

    Patrick: Yep, 15 to 20, out of the 30 to 50 are done. Yeah.

    Tom: Yeah. And so we spend a lot of time there, because I think it is being not so in the weeds, you can step back and help them have a framework around. Yeah, you need to do this. But oh, by the way, does it drive your revenue? Does it drive your franchisees profitability or does it help your brand? And there’s a lot of stuff that just gets pushed off that list? 

    Patrick: It’s not an issue of discipline with them, it’s just bandwidth. And so get getting the focus there works out really well, I think the other issue that’s, you know, critical for people to understand with that your structure as an independent sponsors, you don’t have a fund, so you can’t afford to have misses. If you’re making an investment or you’re, you know, investing diligence on on a target, okay. You can’t afford to have something in the margin. So you’re spending more time looking at these things. And, and you’re you’re, you know, tied to tied to that investment a lot more directly than somebody who has a fund, and this is one of 30 portfolios, so you got to get it right. 

    And I bring this around, because, you know, you had mentioned earlier that this with a franchise is a big relationship oriented business. You cannot remove the human element from mergers and acquisitions transactions and doing investment and so forth. And as you’re going forward, you know, these deals involve risk. And there there is risk, these don’t, don’t happen in a vacuum. And you’re dealing with owners and founders that haven’t gone through an M&A process before. And you’ve got a longer diligence period. 

    And there’s always the potential that some disruption or distrust can build up from beginning to end the process, because you’ve got the diligence, you then get to the indemnification wording in your purchase and sale agreement that what the seller hears when you’re talking to them about this, it’s essentially, look, I know, we put you through all that due diligence, but you know, just in case, we the buyer missed something, and it cost us money down the road. You have to pay us so but don’t worry about this standard business stuff. We’re used to that. Okay, that’s what the seller hears. And the seller’s response is gonna be, I answered all your questions. You can’t hold me responsible for something I didn’t know about. 

    To which an experienced buyer is gonna say, yeah, but we’re making a bet on you 10s of millions of dollars, that your memory is perfect. And this is the process of just go forward with us and trust us. And, you know, the seller can forgive the process over time, but they’re never going to forget that. And if the the tragedy of the situation is it’s not, you know, being taking advantage of somebody is just an experienced party versus a less experienced party. In the whole process, the beautiful thing is the insurance industry has a way that that process or that that inflection can be avoided. And that’s ensuring the deal. 

    Okay, the product out there is called reps and warranties insurance. And essentially, it’s designed to step in the shoes of the seller. And in terms of the indemnification obligation, just essentially they look at the reps that are in the agreement. They look at the buyers diligence to make sure that they looked over and vetted the reps. And essentially, they make a statement for a couple bucks. If a breach happens post closing buyer, you come to the insurance company we will pay your loss don’t go to the seller buyer come to us buyers like that because hey, they’ve now they’ve hedged the risk. And if there is a loss, they can have no guarantee that it’s going to get covered and they don’t have to pursue the seller, seller comes out with a clean exit. 

    They usually have very little money that’s held back in escrow because the policy attaches at a lower point than most escrow. So the escrow being lower means seller gets more cash at closing. More importantly, they get the peace of mind knowing that, hey, in the event, something does happen, I get to keep my money, there’s not going to be a clawback. Now, this product rep and warranty ensures is being used throughout private equity right now. However, it was pre pandemic, it was reserved only for $100 million plus transactions, okay had to be up on the big ones with the big diligence and the big firms and everything. So smaller targets like these franchise, franchisors weren’t eligible. 

    That’s changed. Now, because of competition in the insurance market deals. The rules for eligibility for deals to be insured have gone from $100 million threshold down to as low as $10 million threshold. You don’t need audited financials and extensive diligence. You do need diligence, but you need simplified stuff. And so the more we can get that word out to organizations, the better because I will tell you from personal experience, if a buyer gives the seller an option saying hey, well we can do an escrow and uninsured the deal or will insure the deal in your escrow is now a fraction we just move forward with that, how about that. 99 times out of 100, the seller is willing to pay the entire cost of the policy. Just to get that release. 

    Okay. So if you’re a buyer, I mean, this zero cost to you. And you know, we see this as a real positive effect. Because I mean, private equity is already in place it on the larger deals, it’s now down to the smaller ones. But you know, you don’t have to take my word for it. You know, Tom, good, bad or indifferent. What experiences have you had with rep and warranty?

    Tom: Yeah, it’s funny, like you mentioned, it was harder to access on the smaller deals in the past. And so we have used it it generally, we want to grow these businesses and obviously sell them for a large amount of money. And so we’ve used them on it’s been in play on exits, and we’ve had it on the on the sell when we’ve been selling a portfolio company. It’s great to have it sort of to your point, it really simplifies that process on the back end, because you realize there’s really no or minimal exposure to you as a seller for to your point, things you didn’t know about or didn’t weren’t diligenced properly, or whatever. 

    For whatever reason. You know, we have not used them going into any transactions. I think is you talk about that where the you can get the policies is come way down market now to smaller deals. And some of the deals like we do, which typically are we’re a minority shareholder, I think about the types of deals we do. And it sounds incredibly interesting and helpful to those types of deals. So you like you put ourselves in our shoes. So we’re a minority partner, we come into your point, these are founders that we’re investing in, there are a couple things in the purchase agreement that actually matter in sort of this is one of the contentious issues that really matters when you’re giving a founder the first liquidity and they’re going, wait, you’ve come clawback 20%, or whatever he put up of the capital in and so that’s scary for them. 

    And then you think about it for us. So we’re a year into a deal. And this this happens from time to time. Things pop up. Maybe there’s some sort of basket or some sort of threshold you’ve got to meet before you can go collect. But you go okay, well, I’ve crossed that now. It’s like I got about $100,000 of claims. We might have invested $15 million. It might be or 20 or $30 million, you may have $100,000 or $500,000 worth of claims on stuff that you know matters, but it’s not a ton of money. Now I’ve got to go back to the founder. I’ve got to say I need that money out of your pocket. 

    Oh, but by the way, we’re still partners in this I promise you we’re still partners, and we’re going to be in this for a long time together. It’s a really uncomfortable situation to be in from us because we’re a minority shareholder, they’re still in the deal. The relationship is what drives these deals for us as minority shareholders and so that having the ability to go put something in place like that, that now that it’s sort of moved down market to where we’re investing, it’s something something we’re gonna look at on our deals. 

    Because it If you don’t have it, then you’re otherwise making a business decision, like, I’m going to chase this. I’m either going to chase for this money to get back from the founder that’s going to jeopardize and potentially ruin the relationship. Or I’m going to somehow have to give that money up. But hopefully that I can, you know, keep the relationship and that drives better returns, and it becomes really much more of a business decision for us. So yeah, being able to take that off the table would be really interesting and helpful in our deals. 

    Patrick: I’ve heard here in Silicon Valley, because we’ve got a lot of aqua hires in the tech sector, where the business doesn’t have very many assets, they’re just bringing over the team. And that’s a real dilemma that that the buyers face because all of a sudden, they bring in this coding team or programming team and great talent and everything, and they’re rock stars. And they’re waiting for their $2 million escrow return. 

    And the you know, the the buyers just sitting there saying, okay, how do we break it to them that, you know, we just had a $1.4 million loss? Yeah, that that’s a real tough pill to swallow on why he says business decision, if you’ve got an insurance company on their net, you  report it. So, it makes it makes it a lot more elegant and say it’s it saves the sizzle relationship. Now, Tom, we mentioned before that, you know, as we’re recording this, we’re, you know, thankfully on the back end, I’m confident to say now on the, I guess the beginning of the end of the pandemic. What trends do you see for the rest of the year going into 2022?

    Tom: Yeah, it’s really fun where we sit, so we get consumer data every day, right? We have consumer facing brands, and you see what the consumer is doing every day versus the prior year, and the years before that. And the week, and you can compare to past weeks. What’s crazy to us is over the last call it five, six weeks. So we’re coming out of the back end of the pandemic, there’s vaccines, there’s obviously with stimulus money that went out earlier this year. We are seeing record days across all our brands from from a spending perspective. And granted, our brands are concentrated more in, like I said, secondary tertiary markets. So we’re not in cab, we’re not heavy. 

    In California, we’re not in big cities, that still may be a little shut down. We’re in southeast middle of the country, smaller towns in there, our people are out spending. And that includes our walk ons, which is just sit down all the way through slim chickens, which is more of a fast food restaurant we have seen across the board. And I sort of expected going into this that we’d see from a consumer perspective, okay, restaurants are open, I’m going to stop going through the drive thru or picking stuff up or doing a pizza or whatever I’m going to do, I’m going to shift over to sit and back down on a restaurant. And they’re absolutely going to sit down on the restaurant, but they continue to order go through drive thru and do delivery pizza. And so I think the rest of this year, we are going to see a lot of consumer spending. And I think we’re already seeing that, right? 

    Like you’re seeing supply chain disruptions just with the amount of spending going on. But I’m really bullish on what the rest of the year looks like for people where we are. It’s really interesting on the franchisor side. So we spent a lot of time thinking about how do you go sell find good franchisees basically sign franchise agreements. And what we’ve seen at this point in the cycle where you get this, you had an economic disruption, people were a little nervous about where they their livelihoods came from and how much control they had over their own income. It’s actually great for franchising, people go say, you know, I’m gonna go into business for myself as a franchisee. And so what we saw sort of coming the last half of 2020. And we’ve seen that continue into this year, franchise, interest is way up. So all our brands sign more franchise agreements with new franchisees than ever it wild and last year. 

    So I think from our industry perspective, it things are really positive. I think from a consumer perspective, I would expect a lot of spending this year. You know, it’s it is a foodie, and someone who loves independent restaurants is really sad to see all the carnage that happened last year. I mean, there are a lot of independent restaurants and small businesses that didn’t make it. There is in the restaurant industry in particular, but all retail like a little bit of organized chaos, and that those in those failed, but now you’ll see a new wave of restaurants reopen, it may, we may all be eating a lot more chain food this year, until that they all get open. 

    But in about a year, you’ll see these restaurants open back up and in the cycle happen again. And what’s cool is okay, the local spot closed down and it’s it’s, it’s awful. And it’s really sad. But another chef is going to come around and go I’m going to raise a little bit capital from people I know. And I’m going to maybe I’ll get that second generation restaurant space cheaper. And I’ll go open my restaurant finally. And the landlord will cut me a deal because they need someone in there. And so you’ll see new stuff pop up and keep going and that and that’s when new concepts get created and new brands get created. 

    And so it’s unfortunate This is sort of how it happens. But on the on the back end of that I think we’ll see a lot of obviously economic growth and we’re already seeing that in the consumer spending. And then we’ll see new brands and new cool things grow. It did this the restaurants and retail that opens on the back end of any sort of economic hiccup. tend to be the best investments to get made. They just tend to cost wants to get into and they do really great volumes.

    Patrick: Yeah, I that’s a great observation. I think that there are there’s a rumbling out that a lot of people in the labor force of at least the executive force and so forth, are not going to be as dependent on an employer for their livelihood, they’re going to take matters into their own hands. And I think that’s a great, you know, observation you have there because we’re seeing that another little, little things as well. But, you know, real real alpha Wolf. Tom Wells of 10 Point Capital. How can our audience members find you learn more about 10 Point?

    Tom: Sure. Our website is It’s the number 10 point p o i n t. 

    Patrick: No s.

    Tom: No s. 10 point capital, you could probably google it with the s and I bet you we show up still. Hopefully and or you know, I’m available. I’m always around via email. So, T for Tom Wells, w e l l s @ I always love hearing from people who like the space or new brands or and talk I can talk franchising all day.

    Patrick: Look, you and I could talk restaurants and you combine two things I love which is sports and and fine dining. So it’s just too bad, too bad California may not be an ideal market for you at this time.

    Tom: Yep, yep. No, but we’re the we’ll get them spread out. So when you’re on the road, you can go to one.

    Patrick: Outstanding. Well, Tom Wells of 10 Point Capital. Thanks for being a guest. Really enjoyed the talk today. 

    Tom: Thanks for having me.