On this week’s episode of M&A Masters, we speak with Ron Edmonds founder and president of The Principium Group.
The Principium Group is one of the most recognized names in lawn and landscape mergers & acquisitions, or as I say, the Match.com of landscaping, one of those niches hiding in plain sight in M&A.
This is an exciting area in the industry, so listen in as Ron walks us through:
Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on executive and transactional liability, and president of Rubicon M&A Insurance Services, a member of the Liberty Company Insurance Brokers Group. 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 Ron Edmonds, founder of the Principium Group. For the past 17 years, the Principium Group has been providing M&A advisory services to business owners and investors in lawn care, landscaping and other facility services. One could say the Principium Group is the match.com of landscaping, and talk about niches that are hiding in plain sight. I’m very excited because I never would have thought about this as a specialty in M&A. Ron, it’s great to have here. Welcome to the podcast.
Ron Edmonds: It’s great to be here, Patrick.
Patrick: Ron, before we get into the Principium Group, let’s start with you. How did you get to this point in your career, and then we can talk about the focus, but let’s get right as some context for our audience members.
Ron: But like a lot of other people, I’ve my career has taken some paths and turns. And yeah, I’m a CPA by background in college education. I’ve practiced as a CPA with a national firm for 14 years, I guess. And then I was a CFO, for about nine or 10. And that business was sold. And I was, you know, 40. And looking for a new career. Career number three, which is pretty common these days, not too many people like my dad who had one job after the military, around. And I was actually kind of frantic, which seems kind of stupid now. Because I actually thought I was old, and to be hired as in a new company or something like that. And but while I was trying to figure out what to do what I want to do next, I did a little consulting. And I ended up getting a consulting arrangement with a company called True Green Lawn Care.
Most people have heard that it’s by far the largest company in the fertilization business. And they’re based here in Memphis, where I am and, and they were looking for some skills to work with them on where and making their acquisition process, more effective, efficient, and safer, actually. And they had just greatly increased what they were doing, because historically, they’ve been getting most of their new customers from telemarketing. And that was about the time the no call list had come out. And they had to pivot pretty dramatically. And so I took on this assignment that I expected to last about 90 days, and they were my primary client for close to four years, I still occasionally do some work for them. This 20, 15 years later. But that got me a taste of lawn care and landscape saw a little bit about what dealmakers looked like, and in that industry, and I thought there was a place for somebody like me with my kind of background and personality, and I could make a fit, and it worked pretty well.
Patrick: So it’s amazing how, you know, some adversity or obstacles can create new pathways. So the Do Not Call list comes out. And that’s just the door on a lot of marking and opens up something else. So that’s a great story there. Now, let’s go to the Principium Group and tell us about this. But I always like learning about the culture, you get some insight with companies because you didn’t call it Ronald Edmonds M&A Advisory, you picked Principium. So tell us about the name. And then how you, you know, are focusing here on the lower middle market.
Ron: It’s really pretty funny because I have the opportunity to talk to people about choosing names quite frequently, and actually advise people about changing their name in advance of going through an M&A process sometimes, because in the landscape industry, there’s a real issue with having your name on the door. And people, you know, really focusing on you as the individual as opposed to the business. Now, I gotta tell you, I wasn’t thinking about anything like that. When I named this company. And what really happened was, I had a partnership going that went sour. And a lot of people can relate to that. And a lot of people have had that lesson. I get to see people that have had good experiences and bad experiences with partnerships. But I had a I had to split up and I needed a name and a brand and a website and all those things just as fast as I could get them.
And I was enamored at the time of Greek words. And, you know, actually went through the dictionary looking at different Greek words that might make sense. And, and this one means, first things or important things. And to be perfectly honest, that was a little bit of a dig at my former partner. Because I thought he had not focused on the important things. And hopefully he’s not listening to this. Anyway, so we picked that name, and we’re able to get get a URL and everything. And they’ve devoted, you know, especially in the early years, and enormous amount of energy into recognition, marketing, on the web, and trade journals and, and email newsletters and all this stuff. And at some point in time, I thought, gee, what a lousy name I picked. And I said, how could you possibly, you know, I don’t know, there’s probably three or four tests of a good name.
But the first two are, they must to be easy to spell, and easy to pronounce. And this one fails those miserably. And, you know, I’ve started to change the name twice, but was convinced by people in the industry, that that would be ridiculous. Because it has recognition in our niche. And, and, and so we stuck with it, and it and most people in the industry, I think, do do recognize it, both from the level marketing we’ve done. And we’ve also were, we were doing content marketing, when content marketing wasn’t cool. And we’ve got everything we ever wrote on the web. And it’s, we found that you don’t have to spend a lot of money on search engine optimization, if you have all that stuff that’s accessible. And so if you’re going to look for information about about mergers and acquisitions in the lawn and landscape space, the odds are you’re gonna find us.
Patrick: Yeah, I mean, we’ll put this in the show notes. But I did say I was very impressed. Because you’ve got that right there on your homepage. You have two ebooks, private equity investment in landscaping industry as of 2020. And then what you need to know, when selling a lawn care business. I mean, you’ve got your how to’s right there, that couldn’t be more straightforward than anything else. And I think that I imagine landscaping, the industry is unbelievably fragmented. And you’re in the lower middle market, largely because there aren’t that many, you know, 50, 100 million dollar landscaping, or building services organizations out there.
So there’s, you know, when you’re in that, that lower middle market sector, if people don’t know about you, and what you guys can offer, they’re gonna default to other parties, or competitors, or business brokers or try to get into institutions. And they’re either maybe not being misled, but I think they’re going to be overcharged and underserved. So it’s very important. I’m so happy that you’re here to talk about what Principium Group can do for this segment. But you know, in the early days, okay, you were with that large company. Okay. And then and then you moved on, why landscaping? What did you see that everybody else was missing as an industry.
Ron: I like to say that I am, you know, clairvoyant and forward thinking person and saw that this would boom in a few years. But that’s not true. What I did see was an underserved market, which was clearly underserved, and big and had a lot of transactions going on. That hasn’t been as consistent as I may have hoped, at least back then it wasn’t. You know, it was just booming when I made the decision, and it slowed way down really quick. But we made some changes and broadened our scope, and have made it through pretty well, the, the downturns in M&A in the economy, which are usually in tandem, but not always.
It’s been so amazing to see the changes over the last 20 years, because 15 years ago, if you remember what was going on politically and in the economy, you know, if you talked about a government shutdown because of an impasse between the White House and Congress, no one would do anything. You couldn’t sell anything. You couldn’t. Yeah, they wouldn’t. They wouldn’t talk about it, they, they certainly wouldn’t sign any contracts. And that seems so trivial now, compared to the kind of tumult that we’ve experienced last few years. And it’s, and no one’s missed a beat. You know, I mean, it’s absolutely unbelievable that we could go through a pandemic that has been as hard and as long as this one and still have the M&A market moving aggressively forward. It is unbelievable.
Patrick: And one other thing is just to clarify this because again, I wasn’t aware of this, but you’ve got residential landscaping, and you’ve got business and commercial landscaping. The larger focus for you is commercial landscaping. And in an earlier conversation, you and I were, were having, I said, well, with the impact of the pandemic, there are going to be fewer and fewer people going back to work. So a lot of these office, you know, commercial buildings are mostly empty. Okay, how’s that going to impact landscaping? What was your response to that?
Ron: If they ever want to lease those buildings up again, they better look attractive and taken care of. And, yes, I think there could come a time when that’s an issue, but not now. You know, drive down the areas where there commercial office parks and office buildings, you’re not gonna see him a mess, or at least not on purpose. You know, they have their challenges right now. I mean, there are a lot of people in the industry that, you know, are really having a real struggle over labor and getting their work done. But it’s not because the clients don’t want it or aren’t willing to pay.
Patrick: Yeah, I we’ve got a number of shopping malls here in Silicon Valley. And a lot of the stores are shut, but the flowers are getting planted. And as you said, we don’t see any weeds growing anywhere.
Ron: Yeah, I’m not sure. I think retail is the best market to invest in. Yeah, I might add it will affect it in time, I imagine. But, but you’re correct.
Patrick: So well talk about real quick on how private equity in this case hit their radar, because that’s kind of interesting on what’s happening there.
Ron: Yeah, it’s, it’s really boomed in an amazing way. And we’ve been following this trend for, I guess, pretty closely for 10 years. And there will be a few deals that actually started publishing this annual survey of private equity activity. And it was a pretty thin report 10 years ago. And it’s, you know, so much, so involved now that it’s hard to keep up with it, it’s too much work to, to put out something like that. We still do it at least once a year. But I think part of it is the general private equity investment scenario in the lower middle market. And for service industries, they love recurring revenue models, and most of these businesses have a pretty big component of recurring revenue. But there’s just I’d like to say it’s really specific to lawn, lawn and landscape, but I’m not sure that’s really true. It’s caught the attention of private equity, but but they’re, you know, people crawling for, for deals everywhere you look, and everybody’s looking for a new idea. And then disappointed when they find somebody else has already figured it out. You have, for example, they are in some of the sub niches in landscape, one of the big ones right now is vegetation management.
You might not even know what that means, you know. And it’s not, and there’s there’s not trade magazines, promoting that. It’s a little bit easier, harder, to find them. But it’s a great big niche, with with a three, a three and a half billion dollar company and lots of you know, a good number of 100 million dollar companies and, and private equity loves that are looking for those deals. Those companies, by the way, what they do is work with utility companies, for the most part in making sure lines are clear. And so there’s both a routine service. And then when the hurricanes come, they make their real money. You can see the the big long lines of trucks running down the interstate headed in whatever direction that hurricanes caused havoc. And I’m sure I haven’t particularly noticed that with Hurricane Ida, but I’m sure it’s going on.
Patrick: You know, those of us that live out in the suburbs in Silicon Valley where you said we got all the tree care services, would that be considered part of it for for your area?
Patrick: Okay. Yeah, we’ve got lots of
Ron: That’s another hot area right now.
Patrick: Okay. Yeah, because we’ve got lots of older trees out here. If the high winds ever kick up, we don’t have hurricanes. But if high winds kick up, but all of a sudden we get powerlines get taken down from a fallen tree. You got to move quickly. So okay, you know, again, this, the more we talk about this, the more I learn about this. Now, you’ve been involved. I mentioned this, you’ve been involved in this industry for 17 years, okay, and I referenced Principium Group as the match.com of landscaping. Let’s talk about what you bring to the table as an advisor because you’ve got a nice Rolodex of not only, you know, potential sellers looking to get bought, and you’re representing them, but you’ve got a great list of buyers.
Ron: We do and we’ve networked and met people for for a long time now. And we use a variety of tools and meet new people. One of the ones that has been the most valuable to us is that that book that we put out on private equity investment in the landscaping industry, because just about every private equity firm that’s been interested in learning about investing in this area has downloaded that book. And the majority of probably, business owners that think they might be a candidate, have downloaded it, too. And so that’s one have been one our huge lead generators, I might add.
But but we’ve been real active in the in the industry and are willing to talk to anybody. And that’s one of the things I like most about it. You know, sometimes we’re not the right people to help. But we can often aim people in the right direction. But we do understand and have been involved with plenty of transactions, most of them have done pretty well, some have done great, a few have been really challenging. And we’ve got some depth of experience to help business owners get ready for a more positive experience. And we understand what their numbers look like what their businesses are doing and can can explain that to buyers and, and an often, you know, mega deal happen. It’s still, you know, particularly with smaller businesses, identify the buyers are they’re finding where they are, can be a little bit difficult. For larger businesses, the demand is enormous.
And when I say larger, I mean businesses that are basically at the very end of the lower, lower middle market. Yeah, you know, five to $10 million companies. There’s a really strong demand driven by private equity investment, and looking for add on deals. But that has flown through to other businesses. Most of the larger ones are, you know, not that there’s a lot of ones that are owned by individuals, some are owned by esop’s, that’s fairly common in the industry. Different kinds of ownership formats are out there, all of them are participating in the M&A activity today.
Patrick: One of the areas that the new tool. New relatively, it’s been around for several years, but it only really caught fire last four or five years has been an insurance product called reps and warranties insurance. And the purpose of reps and warranties is to take the indemnity obligation that’s in the purchase and sale agreement, and transfer it away from seller. So seller isn’t liable to buyer anymore and transfers it over to an insurance company. So that in the event of a breach of the seller reps, and that breach leads to a financial loss on the buy side, the buyer doesn’t have to go and try to claw back or pursue the seller.
They just go right to an insurance company. It simplifies the process, it lowers the temperature in the negotiation, particularly when we get to indemnification, which is near the end. And you don’t have this us versus them kind of conflict. They work together and go and do that is really been a boon for the M&A industry. And I’m just curious, you know, because you are in lower middle market, but you know, good, bad or indifferent without taking my advice on what, you know, rep and warranty. You know, Ron, what’s been your experience with reps and warranties?
Ron: Well, to be honest, it’s been pretty minimal. Yeah, you know, our work is, you know, probably 80% sell side. And it just really hasn’t come up too much. You know, I have been following it, listening to people like you talk a bit for the last few years. And it’s, it’s interesting to me, and I would certainly think it would play a role in some deals, especially as, as if there were products that were available that were focused a little bit smaller deals and what seems to be the case right now.
Patrick: Well, this is why this is an ideal time for us to be talking because as of July 2021, an insurance market called CFC came out with a sell side only product for the real lower middle market. These are companies with valuations of one to 10 million in enterprise value. And you don’t have to worry about a buyer. We’re not underwriting the buyer’s due diligence. The insurance company goes in sends an application to the seller, they fill out just like any other insurance application. There’s no underwriting fee, there’s no underwriting delays. And you the seller does not have to worry about the buyer approving the insurance or not, they just get the insurance and it protects them.
It’s one of the newer products out there that you know the purpose also for us talking is to make sure that the word about this available new product for this sector of the market that hasn’t been eligible for rep and warranty is now available. And so it’s one of the things that I’m very happy to have out there and I would say that given time, you’re going to see the success of this new CFC is called TLPE. Transaction liability for private enterprise, you’re going to see it grow. And then 10 million enterprise value won’t be its ceiling, it’ll probably start creeping up to 15 to $20 million, in a very short time. So it’s an opportune time to bring it up.
Ron: Yeah, I think that’s gonna be fantastic. Because one of the biggest issues that we work with all the time is fear. And when when sellers look at a transaction, where they’re selling a business they’ve created, that accounts many times for 95% of their net worth. And they look at the ways that that could come back and haunt them. I mean, that they really get really upset and worried.
Patrick: Yeah, and I think it is ideal because on a sell side product, the seller has full control whether or not the insurance is placed. Your traditional rep and warranty policy, you’re absolutely relying on the buyer to to agree to move forward, even if the buyer doesn’t have to pay for it. The seller’s willing to pay for it. The buyer has to undergo diligence. And there are a lot of buyers on the lower middle market that just don’t want to do that. And there’s there’s a good case for that. But it’s nice to have this option. So we’re very proud to be allowed a dynamic market that is meeting these new needs.
Ron: Now, I want to know more about that.
Patrick: We will definitely be talking about that. Absolutely. Now, Ronald, as we’re going through this, we’re nearing the end of the pandemic, and in the Delta variant and so forth. We’re, I mean, 2021’s closing rapidly going into 2022. Give us a picture. What trends do you see either macro in M&A or specifically for your, your segment?
Ron: Well, there certainly are a lot of people out in the market right today, who are fearing capital gains tax rates, which, no matter what we in some fashion, we’re probably gonna see, there’s hard, it’s hard to imagine scenario where we’re not going to see some tax increases. Whether they’re going to be the magnitude that the administration has proposed, I don’t know. But a lot of people assume that they will are trying to plan for that. Of course, what they can’t plan for is wins when a tax might be enacted. A big assumption that might be whether it’s actually enacted before or after the end of the year, it might be effective at the end of the year. So there are quite a few people trying to get deals done before the end of the year. It’s really too late to get started for 99% of potential sellers to get there at this point. But that hasn’t caused a drop off in interest.
There’s lots of activity in our sector and lots of other sectors. And you know, I can see next year being is probably as big a year as this one. Barring some sort of economic event that would that would stop it. It’s beginning to feel, of course this makes me feel potentially stupid. But it’s beginning to feel like there’s it can’t be stopped. Because or the economy is structure itself. And we’re where the money comes from. There’s so much money that needs to be invested, of course, that might change of interest rates rose dramatically, or something like that. But right now, there’s a lot of pressure to get deals done. And that’s been favorable to sellers, because prices have have been pretty, pretty nice. In our segment. We have a lot of people that are, you know, retirement age, the baby boomer sell off of businesses that were built by baby boomers is feels like it is becoming a reality. Yeah, people have been talking about that for years now.
Of course, the baby boomer generation is pretty big, that you better get out while the getting’s good before everybody else gets the good deals. I suppose or some might be some truth to that. But I don’t think a lot. You know, in the consolidating industry, it’s fascinating. There’s been all this activity in landscape over the last, especially the last five years. And you know, you really have to look pretty hard to see the impact of it in terms of the industry as a whole. Private equity firms asked me if the industry is picked over. No, you know, it’s a regenerating thing. There’s always new companies going in. You know, and I noticed not long ago in some studying I was doing that, despite all the transactions that have happened, the size you have to be to get into to be one of the top 100 landscape companies in the country is not going up every year. It’s not that much bigger than it was five years ago, and one year it went down, even though industry revenues were up.
And there’s new young people, leading businesses and, and and creating new things. Yeah, it’s nowhere near all picked over. And that’s before you can start start looking at some of the new things that are happening. Yeah, you know, there’s no doubt this industry is having as big a labor crisis as anything other than perhaps restaurants. I mean, there’s some similar reasons, and some of them are different. But it’s a it’s a big problem. So, you what we have today, we have people really seriously looking at things like robotic mowing.
Patrick: Ron, would you say that you know, if somebody wanted to try to get a deal done before year end, the seller? Could they come to you? Is it possible to pull something off?
Ron: It’s possible if they’re the perfect candidate. And highly desired one, are there people out there like that, but, but it would be it would be a big challenge. I you know, I would talk to people and, and make an assessment of what the best opportunity is, but, but it would, it’d be pretty tough.
Patrick: Ron, how can our audience members find you?
Patrick: And I would tell you, ladies and gentlemen, if you wanted to get established as an authority, it’s always nice to have written the book in a particular discipline because if you wrote the book, you’re sharing your knowledge with the community and the community should come to you for all of that. And you have that like you said. You’ve got two books on your website, they’re ebooks, you can download immediately. I strongly encourage them. Ron, thanks for your generosity there with the community. And thanks for being guest today. It was just a real pleasure talking to you.
Ron: Well, thank you for having me on. I’ve enjoyed it very much. I wish you the best.
On this week’s episode of M&A Masters, we speak with Skip Maner.
Skip is a General Partner of NewSpring Capital and founder of the firm’s dedicated buyout strategy, NewSpring Holdings, and was recently featured in Mergers & Acquisitions Magazine.
For over 20 years, NewSpring Capital has been seizing compelling opportunities and offering a fresh approach to building businesses in the lower middle market. There’s a lot more to them than meets the eye and we have just the right person to walk us through it, so listen and discover:
Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on 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 Skip Maner, general partner of NewSpring Capital. Based in Pennsylvania, NewSpring Capital for 20 years, has partnered with high performing lower middle market companies and dynamic industries to catalyze new growth, and seize compelling opportunities. Recently featured in Mergers and Acquisitions magazine, Skip is the founder of NewSpring’s dedicated buyout strategy NewSpring Holdings. And so then there, you’re going to find there’s going to be a lot more to NewSpring than meets the eye. And we have just the person to walk us through this. So Skip, thanks for joining me today.
Skip Maner: Thanks, Patrick. Happy to be here. Thanks for having me.
Patrick: Now, before we dive into all things, new spring, let’s give our audience a little bit of context. And we’ll start with you. What led you to this point in your career?
Skip: Well, it’s I guess, I’ve been in private equity for about 26 years now. So it’s been quite a ride. And I guess I think I started when I started my private equity journey when I was in college, when I started two companies. I wasn’t I wasn’t the Elon Musk of the time, but it was enough money to pay for beer and a couple of books, maybe. But, uh, you know, after I graduated from college, I started two additional companies. And I really think, again, that’s where I started in private equity, because I’ve always, you know, really, I think, taken a highly operational approach to the companies that I’ve ultimately invested in, in my, in my career. I was 23 years old, when the bank called me and told me, I wasn’t making payroll. And I had to figure it out. So I’ve sat on that, that entrepreneurial, and that founder side of the table. I went back to business school after selling two of the companies.
And, and really, part of the reason I went back to business school was to, you know, you know, small business owner oftentimes feels like the world, you know, the world revolves around them. And it really, it was far from the truth. And there were things happening in the macro environment that I really wanted to understand. And so graduated from Wharton in 95. And got into private equity, really in the in the mid 90s. So I’ve seen a lot of the the cycle and a lot of the maturation of the industry. I think when I graduated from Wharton, you know, probably less than 10, 5% of us went into private equity. You know, that’s probably closer to 25-30% now. So it’s, you know, it’s been, it’s been a great ride, again, seeing many, many cycles, and, you know, thankfully around to talk about the cycles.
Patrick: Well, contrary to its name, okay, NewSpring I mentioned in the intro is not new to private equity, you’re one of the rare firms out there that been around now for two decades. So, as we get in, we talk about NewSpring, let’s kind of open it up with I always like finding out, you know, the culture of a company or the insight, if you figure out, you know, how they came up with their name, specifically, because it’s not named Maner Capital. So we’ll start with the name. Tell me about NewSpring.
Skip: Yeah, well, I think it’s all about, you know, we’re all about growth, and we’re all about formation. And I think, you know, just the combination of really that, you know, ideas springing forth. And, and, and, you know, and surrounding them with, you know, with this idea of how to take companies to the next level. NewSpring seemed like an appropriate name, I can’t take credit for it. Some of my partners and predecessors yeah, could have been, again, I think the the culture around again, we focus on the lower middle market, and again, so that could be companies in our definition, between 10 and 100 million in size. Those are even at 100 million. It’s still very small companies in the whole scheme of the world. And I think that the notion of NewSpring really helps. We want to take a fresh approach to, you know, the company building experience.
Patrick: Right, and it sounds like you’re on the beginning of a cycle, you’re not at the end of a cycle. So, you know, you’ve got that emphasis and as being, you know, experienced at 20 years ago, is really impressive, but 20 years in this space, you’re not doing just one thing, NewSpring is a series of a number of silos. Let’s talk about those for a moment.
Skip: Yeah, and it’s look, it’s it’s a fun story to talk about because again, the longevity of the firm, you know, again, I can’t take credit for it is really really Impressive. So, you know, when I guess I’m you know, proud to be a part of it. We just invested our $2 billion over that 20, 22 years that we’ve been involved in 184 companies. And what’s really interesting, and this is, you know, talks a little bit about the maturation of private equity, it took us 17 years to invest the first billion. And then it took us five years to invest the next billion. And we do that through we have five investment strategies, again, each focus on a different segment of what a lower middle market company might need.
So I’ll get to my my segment last, but we have a growth strategy that invests in software and tech enabled services companies. They just closed their their fifth fund, and they do minority capital, minority equity capital, onto the balance sheet of companies that really need a last round of capital to get them to profitability. They’re averaging, I think company investments such as maybe 20 million in revenues. Our health care fund, which they’re closing their third fund right now, is focused on again, similar growth stage companies with tech enabled services companies all around the healthcare space, especially pharma, and niche clinical providers. And then we have a mezzanine fund. Our mezzanine fund is closing their fourth fund, and that is focused on subordinated debt, and really supporting other private equity sponsors into buyout transactions. And then we recently founded what we call NewSpring Franchise.
NewSpring Franchise is a group started to really buy into compelling and interesting franchise and multi unit businesses, consumer oriented businesses. And then what I run is what we call NewSpring Holdings. NewSpring Holdings is is our buyout function that we started in 2015. And what we do is, do control buyouts into founder and family run businesses. We really like to find companies that have, you know, been on a journey for, you know, five to 20 years, but, you know, may have a transition issue or a desire to grow to the next level, and want a partner to do so. So again, it’s with those those five strategies that we kind of look at the lower end of the market. And, again, it’s a nice broad horizontal approach, where really, you know, a lot of the you know, the need that a middle market company might have a lower middle market company might have, you know, we can solve in this building.
Patrick: Well, that’s something because, and I’ve got a real soft spot for the lower middle market, particularly because you’ve got owners and founders that started with nothing and created tremendous value where like I said, nothing existed before. And they don’t know how to get past that inflection point, there’s some their content to stay where they are, but there are others are wanting, you know, the they either, you know, by just their success, they’re a victim of their success. So they either get to the inflection point by becoming, you know, they’re too small for enterprise, but they’re too big to be small. And they, they need some outside force, outside assistance to help them. And if there aren’t, you know, experienced owners that have gone through that process multiple times.
They don’t know where to turn. And but you know, and if they don’t know anybody, they get by default, they go to an institution or a brand name, or something is out there. And they really are left short. And what happens is, unfortunately, they’re they’re underserved. But they’re overcharged. And that’s why it’s helpful to have firms like NewSpring out there that are really committed to this segment. Talk to me about the issue where you’ve been around again, I keep hammering on this, but you’ve been around for over 20 years, and you did not scale upstream in terms of deal size. Why is that?
Skip: Well, you know, I think it’s because we love the opportunity at the lower middle market. I mean, again, you have, that’s where most of the companies are, and if you look at where, you know, where we are in, you know, in the in the cycle, you know, the oldest baby boomer right now is 75 years old. And we’re in the midst of what’s going to be as the baby boomers age, you know, the largest transfer of wealth in the history of the world. That’s something like $10 trillion is tied up in, you know, family run businesses. And you know, we want to be we wanted to be a part of that. So that’s why NewSpring chose to stay and keep our fund sizes small, so that we could continue to to really be experts and build a preeminent firm that focuses on these lower middle market companies. And you’re right that you know, the needs or the needs are very different.
You know, I Patrick, you hit the nail on the head, which you know, when you we find a business owner that’s, you know, as a $40 million business and they’re making $5 million in EBITDA a year, you know, and and they had their, they’re at a point of inflection and what in order to grow the business, they may have to take the EBITDA backwards or you know, go on a hiring spree or do things they haven’t done like go international. What we’ve done is build our firm to serve all those needs. And really what, you know, it starts with being able to apply a different risk profile. An owner, all their eggs are in one basket. And when we do a transit transaction with an owner, you know, we’ll go in and we’ll say, look, we’re going to provide you with a with an ample amount of liquidity today.
So you can diversify your wealth. But then we’ll ask the owner to, to roll in 20 to 40% of the of the ongoing transaction. And, you know, frankly, as an owner, that’s like having a, you know, a, you know, somebody manage your wealth for you. But it’s just in your private equity asset, because what we’re going to do is apply our approach and what we’ve done at NewSpring Holdings is really build this go to market strategy, where we’ve surrounded us, ourselves and our eco sphere with very senior executives who have built businesses. Again, we’re not former investment bankers we’re former operators. My partner, one of my partners, ran a two and a half billion dollar business that he built organically and through 100 acquisitions over over a 30 year career.
And we’ve surrounded that team were of functional operating experts where we can go in and if we get involved, these are experts that help, you know, take a company and position it then for different organic means that we might bring to the table or a significant amount of M&A. We’ve done we have four companies in our in my portfolio today, we’ve done close to 30 acquisitions in the last five years into those four companies. And we really think you can create an exponential outcome by by doing both organic and acquisitive tactics.
Patrick: I think it’s just a competitive advantage that I hear you have one of the questions I asked was, you know, what do you bring to the table. But I think, clearly, this operational approach and grow through operation is a huge advantage over other firms or investors out there that are more financially guided. And I think that by doing this, I can’t imagine just putting myself in the in the shoes of an owner. I want to grow, I want to change, I want to do this, but I don’t want to bet the company on it. And there’s no margin for error. And so you not only need the expertise from somebody outside, and that cares and wants to partner with you, but you want to be able to diversify, you know your wealth so that you aren’t betting your entire future on a change that you need to do anyway. And so I think it makes it a lot easier.
Skip: Yeah, we call it we call it a different lens of ownership. Again, you know, it’s an owner is gonna make a certain decision that we would all make a rational decision, you know, if they own 100% of one. And, you know, this really allows you to expand and put a different lens of ownership on. Again, we’re, you know, we’re not an ATM, you know, money isn’t free. But again, if an owner is able to diversify their wealth, they could make different decisions. And then then again, by sitting next to us, you’ve got the former CEO of $3 billion company, you’ve got, you know, we’re gonna put board members on the company that are industry experts here. And on our, on our boards today, we have the former CIO of Comcast and the former chairman of NASDAQ, and other really preeminent individuals that are going to be the industry guides. And then we’ve got the functional guides that can fill in holes, if there’s holes at the companies. Or that can be strategic advisors to those companies as they embark on what is, you know, what is a new kind of op tempo and a new kind of way of looking at the business.
Patrick: The other advantage I see for private equity over strategics, and other you know, M&A investors out there is that you mentioned this with the role of equity is the opting for a second bite at the apple for owners and founders, which I think is great, where they go ahead and agree to, you know, a hold on to a 30% minority stake in their company. And that 30% in five years could be worth more than the 70% that that they that they got to closing originally. And I think that’s a formula for success. How could anybody turn away from that?
Skip: Well, and I can promise you that we work every day to make sure that happens, because that’s the way that we’re going to make money. And, you know, look at the example is this that if you know, the four companies we own today, the aggregated revenues, when we got involved in them were about $50 million dollars. Today, they’re over 700 million in revenues, and about, you know, close to 60 million of EBITDA. So, you know, those owners and the stake that they’ve rolled in and retained is you know, is benefiting from that. And for me, you know, losing sleep every night over how we’re going to make them all successful.
Patrick: And of course we put it in a disclaimer right now that past performance is not an indication of future results and all that good stuff. I mean, you’re seeing this, because you’ve got a lot of, you know, very smart people. And they’re all committed, which, which I really appreciate too and then part of the passion with the lower middle market, is that trust, that you’re all kind of pulling in the same direction. And that’s outstanding. As great as all this sounds, I’m sure, you know, some listeners are sitting there saying, how do we get in on this. Give us a a profile of your ideal target. What is NewSpring Holdings looking for?
Skip: Yeah, so again, this is the NewSpring Holding segment of NewSpring, but we look for companies, let’s say between 10 and 15 million in revenues. What we do is like to get started with, again, it’s a term everybody uses with a platform, and what we will have done prior to that is really, you know, try to take a deep look at an industry where we believe there’s a decent amount of fragmentation, the companies that we target are all profitable. And because we do use a small amount of debt, you know, in all of our transactions, you know, we’ll come in, again, when we get involved, we buy a majority stake, give an owner a nice payday today, but let us, you know, move into the driver’s seat with that owner as a partner, that, you know, we can create the best outcome together.
And so then what we’ll do is, we’ll we’ll launch into a, you know, a program where we, again, if we got involved with, we think there’s a lot of fragmentation, and then we will try to aggressively not only work the 100 day plan, where we’re putting the organic growth tactics in place, but then, you know, do a significant amount of M&A around that. And so, you know, really, it’s, it’s an owner is who would want to get involved with us. It’s an owner, that’s saying to themselves, my gosh, I know, there’s something better out there, but I don’t want to do it, as we talked about. I don’t want to take that risk, but it’s its owner like that, it’s an owner, that they may have, you know, may not have a way to you know, trans transition the business may not be like, you know, stated succession plan. And so, you know, those are places that we can, you know, that we find that we can, you know, really, really maximize.
Patrick: Gotcha. with and in terms of industry, because you got a healthcare group, and you’ve got the franchising. Industries, geographies, any kind of limitations or anything?
Skip: Yeah, primarily US based. And then, you know, we tend to look at the world through a horizontal view. And that means we look for tech enabled services companies. And so we look for a type of company. And that puts us in different vertical markets. In our four companies today, we’re in FinTech, government services, last mile logistics, commerce, etc. And, and then cloud. So again, different vertical markets, but you know, the types of dynamics, we find that our companies really pervade the vertical market. Again, what we’re usually find when we go into a company is that they, they haven’t, they don’t have a big salesforce.
They haven’t focused on marketing. The finance organization is usually used as a way to, you know, how much cash they have in the bank and and how much their taxes are. And so what we try to do is turn each one of those functional groups into a strategic weapon, and really help position for growth, that again, when we deliver the company, you know, to the to the next level, it’s, you know, we’ve scaled it, we’ve de risked it because a lot of times companies have customer concentration or supplier concentration or owner concentration. So what we would have done is diversified all that and that that should mean that we deliver to more than the middle market, that a company that is significantly less risk attached to it.
Patrick: Well and I would think on the exit side for this, you know, the firms out there are getting bigger and bigger and you’ve got SPACs, and so they’re all these bigger entities that are buyers out there for your lower middle market that when they’re ready to graduate, there’s there’s a whole you know, very eager marketplace looking looking to make the acquisitions. You, you sparked the thought that I had, tell me about a an epiphany that you witnessed with one of your portfolio companies where you mentioned the 100 days where you come in, you do the analysis and you’ve got the game plan and you have laid out a plan of action. And tell me a time where in that in those early months, you just saw that owner and founder all of a sudden see the light bulb come on, say, I never thought I could pull this off. Anything like that?
Skip: Yeah, look, it’s and this is why I love what I do. Because we really think that we create fundamental value where, again, there’s a lot of ways to make money and, you know, financial engineering, and in levering companies up and cutting costs, that may be one way. The way we make money is through growth. And so it’s really fun. Again, a lot of the companies we get involved with, you know, I’ve not I’ve not been in growth mode, again, for the reasons we’ve talked about. And so, I think one of the most fun things is when we come in, and, you know, again, I’ve heard this many, many times, you know, from from founders, well, we tried to hire a sales force, I had a sales manager, you know, I went through three of them in two years, and it just wasn’t working out. So we just gave up.
Patrick: That’s painful, yes. Those are painful comments.
Skip: And, and so you know, it’s, it’s really hard to grow a company unless you, you know, again, turn sales into, you know, a real function with real strong people. And so I think one of the most fun things is, is to, again, you know, we have, we have the experts here to, you know, to start to bring in and build that sales function. And it starts with better defining the customers better defining who, you know, you don’t want to do business with as well as who you do want to do business with, because again, a lot of things we find are, you know, again, any revenue is good revenue. And that’s not always the case when you want when you want to, to grow. And so, you know, really the most fun epiphany is when you, you start to see the effect of bringing in an institutional quality sales team, and you start to see those growth numbers tip up, tick up, because organic growth is oftentimes, you know, far cheaper than then, you know, any other type.
Patrick: Okay, I just a lot of fun, particularly that because I think, you know, either labor, personnel, or sales marketing are those very nuanced types of types of practices that are really tough, and they’re very scary. And that’s, that’s something you bring on. Now, you’ve had over close to 200 acquisitions throughout this whole tenure. Let’s talk real quick about how that process has changed, because it’s gotten a lot easier for the whole M&A process. And one of the ways that it’s gotten easier is to reduce risk for the parties involved. And you know, that’s being done now by a product brought in by the insurance industry called reps and warranties insurance.
And the purpose of the product is essentially, it takes the indemnity obligation between seller to buyer, transfer that away from the seller for a couple bucks for premium to an insurance company. Therefore, if there’s a breach of the seller reps, rather than a major escrow or fear of a big clawback by the buyer who’s been financially harmed, because even though they did the diligence, something was missed. And in a perfect world, nothing would be missed, but that happens. And so this product has become a very elegant, elegant, elegant tool that’s now available for the lower middle market. But you know, don’t take my word for it, you know, Skip good, bad or indifferent. What’s been your experience with rep and warranty insurance?
Skip: Yeah, look, it’s for perspective. I remember the first time I used it was maybe 15-16 years ago, and trying to find somebody to underwrite, you know, rep and warranty insurance, you know, there was sagebrush rolling through the streets. It was a very different market. And, you know, so I think you’re right, it has increased the lubricity of getting a getting a transaction done today. So we use it in 80-85% of our transactions today. It really takes I mean, it works just like insurance instead of one owner, you know, basically having all of the risk of, again, having made a mistake, or having some warranty claim come up from, you know, five years ago, it’ll again, allows the pooled interest to underwrite to that and it’s only the exception where we don’t use it in in the trend, and again, in the significant amount of transactions we’ve closed in the last five years.
Patrick: Yeah, I think I think the nicest development, and the success of rep and warranty has been eligibility has increased, not tightened. The claims haven’t hurt the industry. And you know, very much at all, so rates have been low, they’re beginning to rise solely because the demand. Demand for the product has gone way up. And and that’s what’s driven it. One of the things I did want to point out because it’s just not broadcast that often is that rep and warranty was originally reserved for deals with a transaction value of $100 million plus. Pre COVID, just pre COVID, that threshold dropped by a couple of markets down to deals as low as $20 million in transaction value. There is now as of July 2021, a market out there that has a product that can insure M&A deals with transactions from 1 million transaction value up to 10 million and insure the entire transaction.
Slightly different product it is for sell side deals. But what we think is important is that as you know, the market grows, that there are just different options available out there. And what we like is just the sheer number of add ons that are happening. And so there may be preferred destinations for platform investments, there are going to be way more add ons. And if you have tools that are now available for those add ons, all the better. Skip as we record this right now, you know, we’re passing through the pandemic, and now we’re dealing as Californians would almost call the aftershocks with the Delta variants. So things are kind of hanging on. But we’re coming in now we’re racing into end of 21, looking at 2022 what trends do you see going forward? Either, you know, macro or just NewSpring yourself?
Skip: Well, it’s I mean, first of all, you know, again, the dealing with COVID. I think we all know that, you know, we thought the vaccine was a total panacea. I think it’s definitely helping but I think, you know, COVID is now becoming more, you know, perhaps a longer term part of our overall lives. And so, you know, that op tempo that COVID has created, there’s no, it’s not going to go away anytime soon. So I think we’re, you know, we’re, we think we’re going to deal with an economy economy that is, is, you know, is affected by that. You know, at the same time, you know, there’s a lot of dollars sloshing around in the economy.
You know, with what the Fed has done, and what the tray and Treasury slash Congress has done at the same time, you know, there’s, there’s a, there’s a lot of capital out there. And, you know, thankfully, you know, the quick action, you know, that the the government and Fed did, back in March, April, May last year, I, you know, served its purpose. You know, I think 2022 is gonna be a great year. It’s, you know, I do worry about, you know, going further out that, you know, we’re going to see, you know, some issues in the economy, you know, our companies are already seeing wage inflation, you know, you can take price hikes away, but, you know, you don’t take wages back.
Patrick: No. Yeah, that’s true.
Skip: You know, with, you know, with a lot of the things that happened with COVID, which some of which are good, some are bad. Number one, you know, a lot of people decided to retire and are not coming back to the workforce. So that takes a significant pool away. You know, the lack of immigration over the last five years. You know, we need immigration to grow our economy. You know, on the good side, you know, a lot of, I think, the most business formation in the history of the country in the last year.
Skip: So that’s a good thing. So, look, you know, there’s a lot of good and bad, you know, I think the key to founders and other people in private equity is you always have to assume that the, you know, again, I’ve been doing this 25 years, I think this is my third downturn, you know, and, you know, I guess we’re in an upturn now, but, you know, things go in cycles. And so you have to, you have to invest and run your businesses thinking that, you know, you know, take advantage of what you can but but know that you’ve got to architect for the downside.
And, look, we’re doing the same things, you know, today that we were doing, you know, last year. It’s a seller’s market. It is not a buyer’s market, because there’s all those dollars out there. So it’s a great time to be a seller. We have to be disciplined. And, you know, I guess our thought is that if we do our the right things by picking the right companies, and then running our game plan, that we can create the growth dynamic, that, you know, that allows us to kind of, you know, succeed in upturns and downturns.
Patrick: Skip, how can our audience members find you? How can we find NewSpring Capital?
Patrick: Great, well Skip, a lot of fun. It was a pleasure speaking with you today. Thanks so much.
Skip: All right. Appreciate it, Patrick. Take care.
We’re well into the second half of 2021 now…and Representations and Warranty insurance is more popular than ever. Given the protection it provides both Buyers and Sellers in an M&A deal that should be a good thing.
However, that popularity, based on the trust both sides of the table have placed on this coverage, has also brought about an unintended consequence that has resulted in PE firms and Strategic Buyers scrambling to get their deals covered.
Here’s the deal: insurance companies are declining to cover otherwise great risks due to bandwidth. In other words, they don’t have the teams of Underwriters they need to research and understand the deals and then determine coverage and terms for all those parties wanting coverage.
As a result, if your deal is under $400M in transaction value (TV), you can’t go to one of the major nationwide insurance brokers. They’re just stretched thin and are concentrating on the deals that will bring in the most substantial fees. They’re no longer looking at $100M or even $200M deals.
So, at this point, if you come under that threshold and are interested in R&W insurance, you must find a boutique firm to secure your coverage.
Why is this happening… and why now?
There are a few factors:
More M&A activity = more demand for R&W insurance.
Who Is Behind This Trend?
M&A activity is at record levels right now, across the board. Driving demand are:
3 Steps to Take Now in Light of This Trend
Despite these trends, all hope is not lost to secure R&W coverage this year, even if you’re deal is under $400M in TV. But you do have act quickly and put in some extra effort to make an insured deal happen. (And you should still prepare yourself for waiting until 2022.)
Here’s what you should do now:
1. Line up all your diligence experts right now, e.g. lawyers and accountants.
R&W policies right now are being placed on $400M TV deals and up. If your deal is smaller than that, look for boutique broker. Go to solid, experienced regional boutique firms in law, accounting, and insurance to get response you need. If you need a Quality of Earnings report, the big 5 nationwide accounting firms won’t touch you at this point.
Contact these smaller firms and get on their calendar now.
2. Engage with an experienced, boutique regional R&W insurance broker now. The sooner you get your engagement lined up, the better, even if you are at the Letter of Intent stage.
In both cases you want to avoid the backlog at bigger, national/international players.
3. Expect and plan for increases in diligence costs, insurance costs, and R&W premiums. The sooner you act, the better as costs continue to rise. It’s simple supply and demand.
To give you an idea, the total cost for a $5M Limit R&W policy was under $200,000, now it’s running $225,000 to $240,000.
But also remember that the protection and peace of mind these policies offer is well worth even the increased costs… and all things considered this coverage is cheap.
As you can see, there is real urgency here.
If you’ve got a deal in the pipeline and are thinking of using R&W insurance to cover it, we should talk now so I can help guide you through the process.
You can contact me Patrick Stroth, at email@example.com.