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  • Jennifer Mandelbaum | Female Led Ventures Changing the Future of How Families Live
    POSTED 5.3.22 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Jennifer Mandelbaum, Senior Investment Director at Halogen Ventures.

    Halogen Ventures is a California-based Venture Capital fund focused on investing in early stage consumer technology startups with a female on the founding team.

    Female led businesses represent a massive opportunity. They deliver higher ROI and deliver higher payouts on exits, but they are still having issues raising money. Halogen Ventures, led by Jesse Draper, is ready to change that by investing in companies creating technologies that are changing lives in the consumer space.

    Jennifer walks us through:

    • The key things that separate Halogen from all the other businesses out there, plus their hands-on strategy that supports the whole of every business they work with
    • The 3 word marketing strategy Halogen uses to help women portray the unique gifts they bring to the table
    • How they are jumping into women founded companies that support the changing way families live, work, and shop today
    • The trends she sees coming for the rest of 2022 and beyond
    • And more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability, and President of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Broker Network. 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 Jennifer Mandelbaum, Senior Investment Director of Halogen Ventures. 

    Halogen Ventures is a Los Angeles based venture capital firm, focused on investing in early stage consumer technology companies, exclusively those with a female founder or female leadership. Today, I’m excited because usually on M&A Masters, we’re not talking to venture capital, we’re usually talking to private equity investment bankers and so forth. But we’re going to bust a couple myths. And Jennifer, I just can’t tell you how much I appreciate you being here. Welcome to the show.

    Jennifer Mandelbaum: Oh, thanks for having me, Patrick. It’s great to be on. I’m happy to talk to you. And I’m really excited.

    Patrick: Yeah. We’ll talk about the VC stuff and all these new things coming up. But let’s, you know, let’s get down to you know, you, okay. What led you to this point in your career?

    Jennifer: Yeah. So I’ve always dreamt of being in venture capital and helping small businesses. My dad was my inspiration. He’s an entrepreneur himself. His story truly represents the American dream. He moved to America from Hong Kong at 16 years old for a better opportunity. And he moved to America with very little money and English vocabulary. He worked hard to support his family and pay through college and pharmacy school. And then he saved up his money to open the first pharmacy in West Texas, that provided delivery service to customers, substantially improving access to health care for the people in that area. It’s really admirable to see how dedicated he was to his business and how genuinely passionate he was in serving his customers. 

    And he really shaped my passion in helping others grow their businesses. And so now more about me and how I started, I started small. And we could talk about this like going back when I was really young. Summer after freshman year of college, I was looking for a summer job. And I got denied several waitress positions at a number of restaurants. And I was like, you know what, I’m going to start my own eBay business. And I’m going to, I’m going to sell a brand name workout gear for less. And at the time, the pre Lululemon height, this was way back, one of the hottest yoga pant brands was Solo. It’s an LA based yoga like, workout brand. I don’t even know if exists anymore, but I was so in love with that brand. 

    Anyway, I, I selling these pants, I really learned how to operate my own business, and keep customers happy. And coming back for more. I got glowing reviews on my great customer service, fast shipping, like kudos to my mom for doing that. I got to really understand buying patterns of my customers and to see what they really liked. And then I would message them on the latest arrivals like bit based on their preferences. So it was great. I made a few $1,000 in a couple months. And that was better than being a waitress back at that, that that time. And then post college, I worked at two fast growing family offices that allowed me to support entrepreneurs like my father, and develop critical judgment to evaluate venture backed funds. 

    I loved doing this so much I joined the largest organization for emerging leaders on the east coast in the venture space called the New England Venture Network, or NEVN. And in which I ultimately became the first female president in the organization’s 20 year history, and that’s something that I’m super proud of. And at the time, there weren’t many VCs, female VCs out there. Really, especially at the time. Still, there’s not enough. But I joined and created a female subgroup called WIN, which means Women in NEVN and I held several female only events, inviting top female VCs and entrepreneurs to dinners to speak and share their experiences. And for women in the industry just to connect and build relationships with one another. And then this is a really long story, but you know.

    Patrick: No, this is fun!

    Jennifer: And then I decided to go to business school to explore more opportunities that allowed me to build strong operational experience, which landed me at a big luxury CPG company, and I learned really what it takes to successfully launch a product, deeply know the market that we play in, closely track trends, as well as track established and emerging competitors. Now, fast forward to Halogen. I really, really love it here. This role allows me to marry many of my passions, investing in, and growing innovative startups and supporting female founders. It’s so empowering and amazing to work here. I love my super team at Halogen. And I love seeing and supporting our founders. I see how much drive and passion our founders have. And it’s so admirable and I’m just feeling really pumped just like talking about it.

    Patrick: Well, you got three things in there that you mentioned, and two of the three are not consistent with people’s perception of venture capital, because you said invest, support and grow. Okay. And when they think VC they think invest, they don’t think the other two which is contrary to what people think. And I can’t wait to get into that. But before we get into that, let’s let’s get into Halogen Ventures because unlike a law firm or insurance firm, okay, they didn’t didn’t name themselves after the founders. Okay, so how did they, how did it come up with the name and let’s talk about Halogen.

    Jennifer: Yeah, that’s a really good question, Patrick. So our amazing founder and general partner Jesse Draper founded Halogen and named it. In Greek halo means salt and gen means producing hence, halogen means salt producing. Jesse Draper believes that women entrepreneurs are the salt of the earth. That’s how she came up with a name. So now, I just love to talk about Jesse. She’s the founder, and she’s a fourth generation VC. And she’s the only female VC in her family. So like, venture investing is definitely in her genes. And she’s become the number one name investing in women.

    She is, is one, if not the earliest investor dedicated to women founders in LA. If you name a female founder chances that she’s already talked to Halogen. For example, yesterday I went to a female founders networking event, and everyone I met was like, oh my God, I’ve met with your firm. I met with someone at your firm. So Jesse founded Halogen to invest in female founders. Years ago, she noticed there were several well run amazing startups founded by women. But they didn’t get enough funding. And so she was an early believer in women founders, and she’s made such a great impact in their growth and success. 

    And, and to date, I love to brag about this, we’ve got a number of notable exits under our belt. Our companies have been acquired by Fortune 500 companies to name some. We’ve got This is L an organic feminine care products company that was bought by P&G, which actually was reported as one of the most the biggest acquisitions in recent years within femtech. ELOQUII which is a plus sized fashion company, acquired by Walmart and Squad, which is a virtual hangout space bought by Twitter. And while we’re on the subject of funding females, Patrick, I love for you to hear some shocking statistics on female VCs and founders, you ready for this?

    Patrick: This is this podcast gold. Are you kidding? Go!

    Jennifer: Um, okay. Well, it’s it’s, it’s, I’m I don’t know why I’m laughing because there are only 15% of women GPs in VC, that’s, it’s still clearly a boy’s club. And over the years, I can see a big difference in the male to female ratio at VC networking events. I do see more female VCs at events and on VC firm websites, but there’s still not enough women in the space. Like I love to see that number go from 15% to 50%. And as for funding and startups, only 13% of venture capital dollars go to startups with at least one female on the founding team. And what’s the real shocker here, Patrick? Is that the percentage goes way, way, way, way, way down. When we’re just talking about only females in the founding team. Female only founded company’s got a dismal 2% In VC funding and 2021. This is ludicrous, right?

    Patrick: Some people say ludicrous. There were other people may think you know unfair, whatever. I look at that. That’s open territory.

    Jennifer: Oh my goodness. But, what what really pains me is that female lead teams generate 35% higher ROI than all male teams. And they have successful exits. In 2021 Female founded companies made up $60 billion in exits which is 145% more than the 2020 levels. And they also have proved to have quicker exits, as they’re exiting, averaging seven years, roughly seven years versus the overall market, which takes on average about eight years to exit. So women are one year ahead of the market in exits. And so I guess the big question is like, why are we still having trouble raising money?

    Patrick: Well I think there are a number of issues there. But I think that first of all, that opens up opportunity. The other thing is that, and I like saying this, because there’s all this perception about well, for diversity, for diversity sake, no, we diversity adds value and things like that. The interesting thing is, what if you’re in sports or watching movement. The camera doesn’t lie. Okay. And with with, you know, business, the numbers don’t necessarily lie. And when you see ROIs at, you know, elevated rates and the success rate is high, why wouldn’t there be more direction in that way. And also the size of the investments aren’t as large. Okay. And so there’s just a lot of things going along with that. 

    And we can unpack that. But I think the essential thing here is that there’s recognition that it’s not too late. I mean, there are some people think, well, women owned business. I heard about that two, three years ago, that ship has sailed, everybody’s in there. No, there’s tons of opportunity. There’s lots of places in there, which is really good. But let’s go as we’re going to talk a little bit more about the whys and addressing and so forth. But let’s talk about this. Okay, Halogen Ventures. Other than your focus on women led, I’m gonna say women founded but also women led businesses, okay. And these are in the consumer electronics or consumer technology. Okay, what is it that Halogen Ventures provides and delivers separate from all the other firms out there?

    Jennifer: We consider ourselves a 24 hour hotline for our founders. We help them in every aspect of the business from PR, marketing, influencer strategy, partnerships, hiring, fundraising, and exit and M&A strategies, connections to top level executives. Jesse is very, very well connected in the industry. Yeah, top level executives and successful founders, we really boost our companies with, you know, the PR, social marketing research, competitive insight, you name it.

    Patrick: Well, you’re in the consumer space. You have to, you have to look at that. I mean, we’re in the b2b business ourselves. But, you know, that’s one of the things out there is you have to have a real robust cutting edge, consumer facing social media and influencer network strategy. So I think I think that’s fantastic. And the other thing is, like I said, unlike the old days, where the VC would just throw money at a number of investments, and they’re hoping that one or two, you know, cover the costs of all the others. You know, what do you say to the other eight? Just, well, we gave up some equity and we got to a small check, but you know, I want it to grow to get to the next level. How are you going to get me to the next level? You guys are doing that.

    Jennifer: I know and we’re so happy we’re we’re really picking and building winners here.

    Patrick: Well, there’s a there’s a three word I guess marketing strategy you guys use. And talk about the your strategy, you know, the three words strategy that you have.

    Jennifer: I love to remind them to brag, brag, brag about themselves, right. When they’re fundraising and talking to interested acquirers. I think a lot of women, what I hear a lot of these women leaders say is that they have this imposter syndrome, right? Like, that’s just the kind of thing that’s just women have. And I’m, we’re we really need to kind of beat that part down. That’s definitely not a strength for us. But we need to overcome that. And I always tell them, I’m like, I help these companies when they’re looking for acquires or they’re talking to acquirers to, you know, I map out, I map things out for them. 

    And I tell them, like, this is really your strong points. I want you to sell yourselves and these M&A pitches, right? So I’m constantly coaching them to show that themselves off. I’m like remember that you and your colleague, like, went to like Harvard Business School, like top MBA programs? Can you put that in there? Right, like, remember like that you don’t have, like all your customers in the past, I don’t know six years have stayed on and you’ve built even more partnerships. Like you don’t have that on there. Like add that in there. Or like, all the big great values that they bring to the table, I love for them to kind of really speak in detail about and really brag about. And I cannot stress enough like the importance of of that.

    Patrick: Yeah, I think discretion is the better part of valor is in polite society. We don’t want to be you know, tooting our own horn. However, in a lot of times, you’ve got investors or potential customers, and they really want to feel comfortable with you, they really want to trust you. And all they’re doing is they’re saying, look, give me a reason why I should work with you. And then if you’re just rattling these things off, you know that you’re putting your best foot forward, you’re not, you know, over talking somebody, but it’s just, it’s essential. I think that’s just one of those things. It’s just a common sense thing that people just don’t think about. And I think that’s great that you bring that down on board. As a marketing person, I love that thing. Let’s talk about your ideal target. What are you looking to invest in? Where, you know, what does Halogen Ventures like?

    Jennifer: Yeah, so, like you said, Patrick, we really focused on these innovative, groundbreaking consumer technologies in multi trillion dollar markets. We put a lot of special attention to future families, which includes childcare, education, edtech, child and youth services. In fact, family technology or what’s called famtech, which is built to provide parents and their children a path to success and well being at home, in school and work. And we also focus on fintech and femtech. Femtech is feminine health and wellness technology. So I love to talk more, more about future families. Since this is a big, big market that hasn’t been talked about enough. 

    And a space we’ve been spending a lot of time on. Future families is a $7.5 trillion market opportunity. So Halogen has recently fielded a child care survey to over 600 families across the US. And there is no denying that there is a big demand for more affordable, high quality resources. Whether that be your traditional idea of childcare or resources and tech that support flexible, a flexible workplace environment for parents. It could be more innovative ways of education, resources and technologies to help families organize and feel supported. And here’s a stat. I love giving out stats.

    Patrick: Oh yeah. You’re money right now.

    Jennifer: 60% of American families have two working parents, many of whom are trying to consistently make ends meet and juggling between work and family 24/7. In Halogen’s future of family study, we found that a surprising or I guess not such surprising 96% of parents have child care stressors. The number one being cost of child care and education. And we also found that 97% of careers have been impacted due to childcare responsibilities, and 65% of parents don’t have work flexibility to take care of their family duties, which this indicates an enormous need for support and help for parents. And then being in speaking as a mom, myself, a working mom myself, I would appreciate more resources to help me thrive at home and work. I need help, right. I, before I had my son, I really underestimated parenting. 

    And I thought it was a piece of cake until until he came in to my life. And he’s such a joy. It’s just being a parent, it was it was not it’s more than I thought. But it’s so rewarding. But today, Halogen has already invested in number of companies in the space. To name some WeCare, which is the largest in home, affordable network for children. Hop, Skip Drive, a safe, reliable transportation solution. We’ve got Binti, a software company streamlining foster and adoption process, and one that a lot of people know, Babylists, which is America’s number one universal baby registry and parenting platform. So I’m really, really, really into these companies. It’s great and we got more but just wanted to name some. I didn’t want to name them all because we had a lot of portfolio companies.

    Patrick: It’s great seeing it. And the most common stat I’m quoting, I’m presented with is, you know, women are making in the household, they’re making the majority of the of the purchase decisions. So I mean, if you’re in sales, you want to be you know, appealing to the decision maker, here you go. And as as more things are happening now, you know, in and around the home and with families. You know, what a great market and that’s the one thing that we love about entrepreneurs is they create tremendous value where nothing before existed. And then, you know, after they’ve been, you know, done the right job, I don’t know how we would have lived without whatever whatever they brought along. So I mean, it’s ideal. Is there an investment size, you know, financial profile that you’re looking at?

    Jennifer: We look at all stages of companies, but primarily seed stage companies. Our average check size is 250,000 to 500,000.

    Patrick: Okay. All right, fantastic. And now, I know you haven’t been involved. I mean, you mentioned you had had a couple of exits, but you’re entering at the very early stage. So there’s not a point where you’re making, you know, majority acquisitions and so forth. And I’m just curious. Within now there is a new market in the insurance field for insuring M&A transactions. And there is now the introduction of a new program. That is what we call a sell side policy where the seller of a business can sell their company and not worry about a hold back or the buyer coming back after them. And these are for deals that are between a million and $15 million in enterprise value. And so it helps, you know, avoid a lot of the risk that could be between the two parties. And I’m not sure because, again, you’re early stage, but I mean, good, bad or indifferent. Have you had any experience or share your experience with insuring deals.

    Jennifer: To be honest, I really don’t have much experience here. But we work closely with our legal partners who make sure that the insurance is being negotiated at market terms, and just to make sure that everything’s gonna go smoothly. Obviously, this is one big aspect of the M&A process where there could be a back a lot of back and forth negotiation. But yeah, it’s it’s a, it’s a real, it’s a real need.

    Patrick: Well, I think was great is a platform that we have here is that people don’t even know about something unless we’re, we’re having this in our conversations and so forth. Because a lot of times they think, oh, this is for the Amazon, you know, Whole Foods deal. You know, we don’t need insurance on this $2 million deal. Not necessarily true. And what’s great as as you’re going through on exits, that is a tool that you guys are probably deploying on that way. Now with you know, I when you and I talked earlier, I mentioned I’m you’ve got a son, I’ve got two teenage daughters. So I’m keenly aware of the, I would say under representation of women in mergers and acquisitions and in law in the financial sphere. My wife is an attorney, too. So we’re aware of this. And, you know, as you had mentioned earlier, I mean, you’ve been you know, breaking ground in there. Your father was a great influencer for you. And I’m just curious, give me your perspective about about what women bring perspective wise or whatever, in and how they add value. Give me, share some thoughts you have on that.

    Jennifer: Yeah, I love to share. I love to have my team as an example. So just like we are lean mean team of three. And what we bring to the table, each of us bring to the table. I’m going to start with Jesse. She’s a thought leader. She has huge presence in the media. She has such a big big network. She’s a public figure that she constantly opens doors for founders. She’s actually recognized by Marie Claire as one of the most connected women in America. And she’s connected several of our portfolio companies to top executive executives in Fortune 500 companies. And on top of that, she has an eye for picking high potential startups with disruptive technology. She also has a great vision for our portfolio companies and provides really great strategic advice to our founders. 

    And to add Jesse has been a VC for many years and she currently sits on the board of three of our portfolio companies. Carbon 38, a leading d2c athleisure retailer, she sits on Trust and Will the first estate planning that will have everything digitalized, the whole entire process digitalized. And Preemadonna, the only at home manicure system that prints are directly on your nails. And then as for Ashley, our VP. She’s been at the firm since it was established and she’s really skilled at sourcing early stage deals and supporting our companies. She is working on building Halogen’s influencer initiative and is great on partnerships and in the business development front. She handles investor relations and manages the operations at Halogen. 

    She brings a lot to the table for our companies and works around the clock to support our founders. And she’s a board observer of one of our companies Bulletin, an online premium indie brand wholesale marketplace. And as for me as a senior director at Halogen, as mentioned before, I come from an operational background at a luxury CPG company and a decade’s worth of experience in investing so which has really benefited a number of our portfolio companies. Helping them draw out their M&A strategy. Help companies identify and connect with potential acquirers. Understand the competitive landscape and consumers even better and for our portfolio management, I spearhead Halogen’s follow on strategy and investment return strategies. 

    I monitor our existing companies and I conduct the diligence in our potential investments. And I’m a proud observer of one of our portfolio companies Live Tinted the first Southeast Asian beauty brand to launch at Ulta. And as for our founders, founder to founder. Female founder and founder for our portfolio companies, I think they bring really great value to each other. We’ve created a Slack channel for all our founders to connect and learn from each other’s experiences, what worked, what hasn’t worked. A lot of them have become buddies, and they have they have even built partnerships with each other. And they learned a great deal. And they help each other a ton. And we absolutely love that.

    Patrick: There’s a community. You’re just coming right into a whole community.

    Jennifer: Yes, and and just beyond that, right? We we see, Halogen sees about 5000 deals a year. And so we’re here to be the women, you know, girl power, we want to support you. If it’s not funding, like, how else can we help you? So it’s, it’s, it’s really great.

    Patrick: Yeah, I would, I would stress and this is why I’m so happy to have you here. I would think that if you’re a female leader of a company, and you’re banging your head against the wall, trying to get funding, you’re trying to get attention. And it seems like you’re working twice as hard. Just to establish yourself. Halogen Ventures is a sympathetic ear, they they are in your interest. And you know what, it may be a lot easier to come and talk to Halogen Ventures with what you have because they’re more open and they’re more incentivized to come because, you know, you’re both have overlapping interests, because they want you to succeed just as much as they want to succeed. So I think you know, rather than thinking about, you know, giving up control or going to some other getting acquired by some strategic. You know, if you really want to see your dreams really play out, I think Halogen Ventures is a great way to go. Jennifer, what do you see going forward for the rest of the year? Trends, either macro or Halogen Ventures. What do you see?

    Jennifer: I see. I see few things. There’s a lot. I’m going to name a few. Yeah, I see. I see an upward trend in childcare demand as more women join the workforce. You know, parents are looking for that high quality, more affordable childcare options, whether that be in home daycares, flexible hours, weekend daycares, co working space with childcare etcetera. I also see hybrid work from home model here to stay. Therefore, companies need better tools for teams to collaborate efficiently, effectively and well. Tools that ensure workplace culture is consistent, inclusive and healthy. We have an awesome HR platform, a portfolio company called All Voices that really focuses on workplace culture. And I think workplace culture really has been a big topic. And more companies are recognizing the need for these types of tools, since they’re really essential in retaining talent. Making sure employees are happy is so important. And an unhealthy toxic workplace or manager is just not okay these days. You see a lot of turnover and a lot of these big, you know, successful companies, because the culture is just not there.

    Patrick: That’s the challenge that’s coming. And there are actually companies out there. One of them I’m going to point to is ParkerGale, a private equity firm in Chicago. And what they do is they’re figuring out a way to measure culture as a measurable because it’s a strategic tool for them. And so, however they harness it and what you’re doing, I think that’s great, but I’m sorry for interrupting. Go ahead.

    Jennifer: Absolutely. Um, and then yeah, just to add, like, you know, in addition to this, like whole work from home thing, I don’t even know just to like from personally, I don’t, I’ve been working home since my I had my son. And I really don’t know how parents manage like work like pre pandemic, you know, going into the office and having to pick up your kid by 3pm from school and 5pm from daycare, especially working in these New York hours, it’s really not easy. So we really need flexible and understanding work culture so that parents can work guilt free. And there are a lot of innovative solutions out there. I’d love to see more companies adopt more working parent friendly solutions. 

    And lastly, I see an increase in consumer adoption and demand for quick commerce. Get your groceries, your products, whatever you need. Fast food super duper fast. Think like less than an hour to receive your grocery delivery. There’s a lot in New York. You know what it is? It’s just pandemic, customers, parents, I don’t know, like people have just gotten much lazier, they don’t want to leave their home. And they’re more impatient, right? So there’s just more demand here. I see a lot of these like types of services popping up in Manhattan. I think that that’s what’s really going to these like, quick, quick delivery services.

    Patrick: If they can work in Manhattan, then you got you’ve got about another 1000 very large cities that could use that kind of thing. That was a reason I had just a personal. I hate injecting myself into this but throughout the whole pandemic, my family has a lot of faith in DoorDash and a couple of those things. I never liked it just because you know, it would take hours and it was faster for me to just drive, go pick it up. And then also I could check the bag before make sure the order was correct. And then get back. But if you could improve the quality there and the timing, yeah, I can be, I can be talked into just, Patrick sit have a beer. It’ll be here by the time you’re done. Boom. So if you got that you got a buyer here. So that’s that’s fantastic. Jennifer Mandelbaum, I can’t tell you how much we appreciate this. Thanks so much for joining us today.

    Jennifer: Yeah, this was so much fun. I really enjoyed this conversation.

    Patrick: Thanks so much.

  • Renny Sie | Forging Relationships with Founders and Family-Owned Businesses
    POSTED 2.22.22 M&A Masters Podcast

    On this week’s episode of M&A Masters, we’re sitting down with Renny Sie, Vice President of Business Development and Investor Relations at the private equity firm Boyne Capital.

    Established in 2006, Boyne Capital takes a different approach to investing—one that forges lasting and collaborative relationships with companies whose founders and families are still deeply involved in growing their businesses. It’s a term they call a value cultivator approach.

    Renny says, “Partnership is extremely important to us. The fit is important because this is going to be a long-term partnership to grow this thing together and make it bigger and better for everyone.”

    Listen to discover:

    • How to propel family-owned businesses to the next level—partnering NOW to prosper in the future
    • Boyne Capital’s unique value cultivator approach to the lower middle market—building the right team through focusing on relationships, recruiting, and retention
    • Why they feel that Rep & Warranty Insurance is an important component for their deals

    And much more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and president of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Broker Network. 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 Renny Sie, Vice President for Business Development for Boyne Capital. Boyne Capital was established in 2006 in Miami, Florida, with a focus on investing in lower middle market companies. Boyne has a unique approach to investing. It’s an approach to forges lasting and collaborative relationships with companies whose founders and families are still deeply involved with growing their business. It’s a term they call a value cultivator approach. Renny is a pleasure to have you. Thanks for joining me today.

    Renny Sie: Thank you, Patrick. It’s great to be here.

    Patrick: Now, before we get into Boyne Capital and the value cultivator approach, I just think is a unique wording there. So that’s, that’s very, very interesting. Let’s start with you. What brought you to this point in your career?

    Renny: Oh, gosh, where do I even start? I guess I have what you call a non traditional background. So starting from the very beginning, I was born and raised in Jakarta, Indonesia, the oldest of three siblings, the first one to actually go to college. I came to the US to attend college at California State University Fresno. So right by you. And my major was classical piano performance. After graduating from CSU Fresno, I went on to do my masters and then audition to a bunch of different schools to try to find a scholarship for me to keep going to school, because I liked school that much. Eventually ended up in University of Miami Frost School of Music doing my doctorate in classical piano performance. So did that until 2016. And then I found myself married with a young child and then realize that, oh, my I’ve been doing this for my whole life, and it’s not going to pay the bills, unfortunately. 

    Patrick: Yes. 

    Renny: My husband told me I should go back to business school and get MBA and I told him, he was crazy. But I’m glad I took the chance, went back to business school at University of Miami did a full time MBA three year program there. Interned with Goldman Sachs in the summer, took a full time job with them in their Florida office. Three years in learned a lot from Goldman. Really enjoyed working there. But always had a knack with entrepreneurship and private equity and that world. My dad is an entrepreneur. So I got in touch with Derek McDowell at Boyne Capital. And technically I basically just asked him for a job and he gave me he gave me a chance. So that was more than three and a half years ago, I’m still sitting happily here at Boyne Capital. My primary focus here at Boyne is deal originations and LP relations. So what that means is, I connect us with the potential sellers or what we call potential partners.

    Patrick: And so you’re around that connection. Is there any, you know, the skill set you have from being a high level concert pianist, into the financial world? I just it that’s a really unique matchup.

    Renny: Yeah, I would say, you know, contrary to popular belief, people think that artists or musicians are on a creative side. Or more prone to creativity, you know, an art side. I’m not. And I think most of my colleagues in the music world isn’t either. We’re trained to like stare at tiny little notes and tiny little details. So I would say that we have really attentive to details. That’s one.

    Patrick: Focus, yes.

    Renny: And then when, focus and then the discipline, you’re used to like practicing eight, nine hours a day, I guess, without paying for, without, like actual benefits, right? Other than getting better. So those skills that like I brought over and I have found like my training in classical music has been very helpful.

    Patrick: Tell me about Boyne. And why don’t we start with this? How did they come up with the name because that usually gives you some insight into the culture and the founder.

    Renny: Yeah, so like I said, Boyne was founded in 2006 by Derek McDowell, our CEO and Managing Partner who today still very involved in all aspects of the firm. The name Boyne Capital came from River Boyne in Ireland. A very pretty river. So I’m not sure about what specials are of Boyne, I should probably educate myself about that. But that’s where it came from. We are a lower middle market focused private equity firm. We are based in Miami, there is 26 of us sitting in Miami, which is crazy, because when I joined three years ago, there’s only 16, 17 of us. 

    So we have grown a lot, which is exciting time. And lower middle market is what we define as companies with EBITDA between three to $15 million, typically revenues under $100 million. And you asked me why lower middle market space? You know, it’s because I think we can provide the most value in this space. You know, lower middle market companies, often are family owned, you know, and they usually do not have either the infrastructure or the capital to grow on their own without eating into the sellers, or the management teams time and personal capital, right. So that’s where we came in. We we like to partner with business owners management team, or, you know, I guess the sellers, in this case. 

    We do majority recapitalization and usually position ourselves as a solution provider. Because if you think about it, most business owners think about PE partnerships as an exit route, right? Is like oh a PE firm wants to buy me, therefore, I must exit 100% and give give them the keys to my house. But that’s not usually the case. Especially not with us. With us, it’s not 100% exit. And for the most part, we actually do not encourage that. We encourage them to hang on to a minority equity, because we will help them grow their business. Together, we’re going to maximize enterprise value, and then they will actually have a much bigger exit the second time around.

    Patrick: Yeah, that second bite of the apple.

    Renny: Correct. Yeah. And that’s where the value cultivator concept come in, right. We always joke internally. We’re not good at leverage buyout, but we’re excellent in leverage buy in. So we buy into those, those management teams and those owners of the businesses and really support them through their growth initiatives. And, and there are many ways that I can go into detail with examples of how we how we support them.

    Patrick: Well, I think that is very helpful, because there are a lot of owners and founders that they reach an inflection point, some of them are looking for an exit. And then it says, well, do they really want an exit? Or do they just want to change, they just don’t know how to do it. And as we’re finding a lot of owner founder businesses, where an owner can, you know, commences a process, then all of a sudden, is reluctant and starts dragging their feet there, which can get very, very frustrating, because they really didn’t want to give up something that was the core of their life. And, you know, and there are those that do want to do that. And there’s an avenue but the others that they don’t want to give everything away, they’ve spent a lifetime building something. 

    And there, as I mentioned, the inflection point where they’re, they’re too small to be enterprise, but they’re too big to be small now. And so what do they do? And they just don’t know where to go. And unfortunately, and this is why we wanted to go and meet with Boyne Capital is that if they don’t know, the owners of founders, if they don’t know about Boyne Capital, they may default to you know, partner with a strategic that may not have their best interests at heart, or they’re going to go to an you know, an institution and you know. Where, where if you go to an institution, you’re going to get underserved, you’re going to get overpriced, and you’re not going to get what you really wanted. 

    But a lot of people don’t know about this. And the thing with Boyne Capital particularly is, okay, you started in 2006. In 2019, there are over 5000 private equity firms now, okay. More than half of them look to the lower middle market. And so, you know, you have to have something unique that comes and speaks to these owners and founders depending on what they want. If the ones that want an exit, they can go someplace others that want to get to that other side and see how to cross the finish line. They can come to an organization like Boyne. You mentioned that with your value cultivator approach. There are a couple ways that that manifests. Give us a couple of examples if you could.

    Renny: So for most of our platform, investments, like I said, typically they don’t have the necessary key executives in place. Typically, like a CFO or controller, that they would actually have to go out and hire and recruiting and hiring takes a lot of time away from the CEOs from running the business. Right. So our team, our operations team in house has a team of operations people that actually work hand in hand with the portfolio company management team to do financial reporting and you know, executing their growth plans, talking through strategy, and within the team, my colleague, who’s whose title is VP of human capital, and she’s been instrumental in hiring and adding key hires to portfolio companies as they become on board so the management team doesn’t have to. 

    You save time, and that’s definitely a valuable thing to present to potential partners. And then also, of course, you know, when when you’re trying to grow by acquisition, you’re trying to do it on your own. It is a huge undertaking, right? Even if you’re doing it, not to sell your company, but to acquire companies to grow your own. It is helpful to have somebody like us, you know, with capital and more than just capital, to help you execute, identify targets and make sure that you’re going down the right path.

    Patrick: Yeah, experience helps, doesn’t it?

    Renny: Yeah, for sure. For sure. And also, like, given the pandemic, some businesses, you know, thrive, some businesses didn’t. But I bet a lot of business owners would not want to go go through that again, alone. Helpful always have a partner.

    Patrick: Yeah, I can imagine. Well, the other thing is key when you’re, you got the skill set with the human capital, particularly now, it’s not only a challenge to recruit, but it’s retain. And I think, probably what you have is a great skill set and an advantage on that front. The other thing that’s interesting is that you’re not coming in and the the procession with a lot of private equity firms from outside is that the private equity firm is going to come in, as you said, load them up on debt and do a lot of financial reengineering. You don’t do that. You’re looking at no, we want we want to go ahead, and we’re going to reset and get some operations and get people in.

    Renny: That’s right. So for from our side, partnership is extremely important, right? The fit is important, because we have the mindset of like this is going to be a long term partnership to grow this thing together to make it bigger, make it better for everyone. So it’s not just kind of like acquire and hold or like come in and clean house and put in as much as our people on the board. No, it’s not that. So every single major decision making is made in partnership with management team. So we think that’s very important. Again, there’s like something for everyone, right? So if someone wants to, like retire 100% and hand over the keys, probably not for us. Like if someone who wants to actually a partner who supports their growth and willing to roll up our sleeves and actually do the work. Like putting in infrastructure putting in NetSuite doing key hires and actually clean up everything and make it you know, better and more more professional, then we would probably be a good fit.

    Patrick: Talk about, you mentioned lower middle market, where you’ve got owner and founder involved. Fill out the profile. What’s the profile of Boyne Capital’s ideal target? What are you looking for?

    Renny: So aside from the financial profile, three to 15 million EBITDA, revenue under 100, typically what we look for some some a business with good growth potential, proven profitability. I guess that’s probably kind of normal. But someone who has grown their business to a point that they can’t anymore, or they need help to do more, and they want to do more, right. So that’s the key. So like you said, it’s inflection point, but they want to push through that inflection point. Instead of like okay, this inflection point, and I think I’m done for the day. And in terms of industries, we’re pretty agnostic. We like business services, more acid like businesses, you know, in a bunch of different different verticals. And we have an areas of interest that we’ll list on our website, if you want to go and check it out. But most importantly, it’s a partnership. It has to be with the right management team, yeah.

    Patrick: So that’s the, that’s where the fit is. Any issues on geographical?

    Renny: We invest in US and Canada. If you look at our current active portfolio, portfolio companies or even former portfolio companies is all over the place. We have companies in Florida, California, Wisconsin, Kansas City. Officially, we are looking for investments in Canada, we just haven’t found one yet.

    Patrick: One of the recent trends has been happening in mergers and acquisitions and why we’ve had such a big growth in private equity is the successful transition that M&A transactions are having right now. They’re happening more efficiently. They’re happening, cheaper, faster, all those other wonderful terms that you have, and one of the reasons why the industry has gone from a few 100 private equity firms to 5000 today is that the transactions themselves are a lot easier to execute. And one of the byproducts of that, or one of the creators of that has been that there’s been a product out in the insurance world called reps and warranties insurance. 

    And what it has done is really elegantly transferred risk away from buyer versus seller, to a third party with deeper pockets so that if both parties can transfer risk for reasonable price, okay, deals go forward. And not only do they close, but then the post closing transition is that much easier, because again, you don’t have one party against another. And so you know, don’t take my word for it. Renny, good, bad or  indifferent. What’s your experience been with rep and warranty insurance?

    Renny: I totally agree with you, Patrick. We have had a very good experience using it as a way to take a major area of buyer seller negotiation off the table. For many of our transactions. I think we use it in about like 80% of our platform transactions now. And it removes the often contentious issue of escrow size and exposure cap for seller indemnification. And it gets more cash in their pockets at closing. And it still protects us from from unknown issues in the business that are discovered, put close. So we’re a big proponent of rep and warranty. And we will, we will continue to keep using rep and warranty insurance. And now the rep and warranty insurance market is so robust. So there’s we can typically find good coverage and options for pricing.

    Patrick: I could not have said it better myself. Thank you. Thank you so much. I think one of the great things about the platform we want to bring to people’s attention in the audience is that reps and warranties used to be a product reserved for deals at $100 million dollar enterprise value and up. They had rigorous due diligence requirements, financial requirements, all those things, and the price was still relatively good. But the eligibility criteria to get in was difficult, particularly for the lower middle market. And what’s great is there’s been a new product that’s been introduced that provides a sell side rep and warranty policy. And it protects sellers and the buyers involved in deals at a $15 million transaction value and down. 

    So you can buy up to $10 million in limits on a 10 or $11 million company and cover everything all the way up to the thing. It’s a fraction of the cost. And what’s nice is the more that organizations like yours and lower middle market are aware of this because it’s not only good for platform acquisition, but for add ons, which usually you know, you had to go bear because they weren’t eligible. Now it’s there. So it’s one of those things we wanted to make sure we pointed out to everybody. Renny, as we just turned the corner from 2021 to 2022. And I don’t see robust M&A activity dropping anytime soon. Share with me, what trends do you see either an M&A or Boyne Capital? Tell me what you see.

    Renny: So I can’t predict your future, Patrick. I don’t have a crystal ball. But what I can tell you is like I think the trend of what we were seeing in 2021 has been going to continue. Just from macro environment, the pandemic, I guess, is still here, surprisingly, right. So people still have that mentality, probably they don’t want to go through another round of difficulties alone. So that’s going to drive some activity. And some people probably have some difficult situations happen with, you know, house, or family that got them to rethink their priorities. And maybe they want to step back, retire from the business. And some people probably want to start their own business because like they quit their corporate jobs, right. So those definitely will contribute to stronger M&A environment. And things like tesco changes, also. So a lot of things that could potentially make it even more robust, or whatever it is, you know, like I see just good things, hopefully happening in 2022. We are excited to see what it has in store for us.

    Patrick: I completely agree. I mean, one of the things that I’m stealing from a prior guest is that, you know, we have economic cycles come and go. Pandemics are going to come and go and tax changes are going to come and go. One thing that is gonna be constant is time. And as you know, a lot of these owners and founders, many are baby boomers, they’re getting to the point where they’re going to reach their own personal inflection point. And that’s that’s going to be father time. So I think that there’s going to be a very large transition as we go forward. And that’s going to carry forward I believe, sincerely for the next couple of years. But, you know, we’ll keep our fingers crossed and hopefully, things things will move as they’ve been moving. So this is good. Now Rennym, how can our audience members find you and Boyne Capital?

    Renny: First place to check is our website and www.boynecapital.com. And it’s spelled B as in boy, O as an Oscar, Y, N as in Natalie, E as an echo capital.com. You can find myself there with my contact information. It’s Renny Sie, I always tell people it’s like Jenny with an R. It’s easier. My email is rsie@boynecapital.com. It’s spelled R as in Robert, S as in Sierra, I as in echo. No, I as in Italy, E as in echo @boynecapital.com and you can call me at 305-856-9500.

    Patrick: Fantastic, Renny Sie from Boyne Capital absolute pleasure talking to you in this value cultivator approach. I really, really like it. It’s very, very refreshing. It’s just, it’s this abundance thing where you take something you’re just going to make more for everybody and I think it’s just very, very positive. Thanks for joining me today.

    Renny: Thank you for having me, Patrick. Take care.

  • Laurin Parthemos | Beyond the Dress Code: The Outgrowth of Culture in an Organization
    POSTED 2.8.22 M&A Masters Podcast

    On this week’s episode of M&A Masters, we sit down with Laurin Parthemos to talk about culture. Laurin is a Principal at Kotter, a company named after Dr. John Kotter, the world’s foremost change expert. Kotter’s approach to merger & acquisition integration focuses on culture and people first.

    Laurin says, “Culture is more and more seen as that differentiator within an industry to say we have a strong culture where people want to work.” 

    Listen as she walks us through:

    • Three ways to acknowledge (and counter) the survive or thrive mindset of change and help an organization move forward 
    • The key to the path forward when integrating organizations with varying cultures—she’ll share a case study of the positive results they achieved (with long-time rival companies) 
    • The monumental shift in the talent pool—what’s behind it 
    • One of the most overlooked things most miss when planning integration and catalysts for forward momentum
    • And much more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability, and President of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Broker Network. 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 Laurin Parthemos, Principal of Kotter. With offices on both coasts, Kotter helps organizations mobilize their people to achieve unimaginable results at unprecedented speeds. And I gotta tell you it for a marketing thing, that’s a lot to unpack in one sentence. So there’s a very efficient intro right there. Laurin, welcome to M&A Masters. Thanks for joining me today.

    Laurin Parthemos: Yeah, thanks so much for having me. 

    Patrick: Now, before we get into Kotter, which is a major consulting firm at the forefront of change. Let’s just start with you. How did you get to this point your career?

    Laurin: Absolutely. So I like to say I kind of grew up in the banking industry. So I started my career off in one of those typical but no longer really exist big training programs, working on the lending side. Transitioned into M&A myself doing fundraising for startups, then working with the tier one investment banks, all their processes and operations and how to actually optimize and be efficient. And really, throughout my entire time, through each and every one of those phases within the industry, I really just found myself scratching my head as to why everything was so KPI focused and why things weren’t working, and really leaning on my previous role. 

    And what I was doing back in my college days, which was being a sailing coach, and really trying to motivate people and teaching people how to continue going, despite obstacles that you’re seeing. And I really realized that that human element in terms of change, and how you’re dealing with the day to day is just missing in so many organizations. And it’s that unpredictable factor that really can make or break an organization. So when I was looking for my next opportunity, I came across Kotter and that light bulb moment happened, where I just realized, oh, my gosh, I’m not the only one who thinks that. 

    And not only is there a whole body of work behind this, but it’s operationalized. And it’s actually out in the industry. And it’s not just theories talking about potential research, but it’s actually happening in the real world. So I’d say the short and sweet is that I just kind of was trying to find my home in terms of people who understood that change isn’t just about financial success metrics, that if you don’t have that integrated body of work underneath it, that takes into consideration all factors, then you’re not gonna be successful.

    Patrick: Well, I think that change is at the core of M&A. Alright, and the objective with a good M&A strategy is it’s it’s a situation where you’ve got, it’s not company A buying company B, and now you’ve got something, okay. It is one group of people agreeing to partner with another group of people with the objective that look, the whole is going to be greater than the sum of its parts. And because we’ve got people at the core of this, okay, that’s changed, people are resistant to change. And so it’s always fascinating to see how you address that. 

    A lot of organizations just, you know, they they muscle through that however they can, and you know, they’ve got that attitude. Well, you know, we’ve gone through this before, and we’ve done it before, we’ll do it again. And you know, suck it up. Let’s go. And it’s just so counterintuitive to what’s really happening out there. And so now we come to Kotter. And it’s Kotter with a K which was formed after Dr. John Carter, Kotter, excuse me. And he’s a leading expert in leading change, not just change itself, but leading it. And so talk about Kotter, the organization and what kind of services it’s about on a macro level.

    Laurin: Yeah, absolutely. So the foundation of our business really was John Kotter’s body of work. He’s a former Harvard Business School professor that was doing extensive research around leadership and what makes organizations successful. And in the 90s, he published an article called Why Transformations Fail. And it was 10 years of research, over 100 organizations studied. And realized that 70% of those organizations actually failed some metric that leadership had established in terms of what does success look like in terms of this transformation. Can be whatever budget win over time. 

    But the ones that were successful had this foundation of what he called the eight accelerators, and essentially these various different pieces and it’s not steps that you can kind of check off like a waterfall method but various different pieces with an ecosystem that when activated, means that you’ll be more successful. And so what we do is actually bring those eight accelerators to life when we partner with organizations, and especially in the M&A field. We work a lot on the post deal integration side. Really, really a function of that’s when people start thinking about culture, it’s not because that’s when we should be brought in.

    Patrick: They’re not running into the obstacles yet. You know, coming together, and then once you’re together, okay, now what? So, yeah.

    Laurin: Yeah, absolutely. So what we like to do and what really sets us apart, I think, is that we partner with organizations. We do not come in as a consulting firm and say, here’s our plan. Here’s what the research we did here’s statistics, plop the plan down, leave and call it a day. We work directly with people from across the organization. So that diagonal cross section there all the way from senior leaders, to those junior people on the ground to come up together with plans that will actually make a change successful. And when you’re thinking about that integration process, worst case scenario, you’re going to have a group of people who just feel a sincere sense of loss when they go through. 

    And these integrations, because realistically speaking, you’re dealing with a body of people. And this isn’t the leadership, but the actual employees on the ground doing the work and making the organization successful, that have just had their futures determined for them. They no longer have control, and they’re no longer able to have any certainty around what’s going on. Because it’s just a flash Band-Aid rip most of the time. And so that if you read our latest book that came out this summer, Change, we talk a lot about that in terms of the survive and thrive mindsets. And announcements like that really activate that survive. 

    So you immediately have a rush of cortisol running through your body. You’re not able to really think strategically anymore as an individual, and you really are just in that fight or flight mode in terms of how do you do things. So we try to not only acknowledge that that is a realistic possibility, but actively counteract it to make sure that people aren’t thrown into that. But come up with ways for your own organization, to move away from that into that thrive mindset where you can actually think creatively and be more future oriented in terms of how you can be successful.

    Patrick: Well it’s interesting, because you talked about the people, again, we’re falling back on this people are at the center of this. But it’s interesting, because there are there are other shows out there where they interview firms that merge together, entrepreneurs that sold their company and merged. And one of the common questions comes up. When did you tell your people? And and a lot of them agonized over that because you know, what was the outcome? Obviously, you’ve got that fight or flight, immediate response, particularly when this process has been going on for months. And then the announcement comes to the to the team, like within days of it happening, or in some cases, hours of it taking effect. 

    So you’ve got that natural thing. The other thing is interesting, I appreciate this is that what Dr. Kotter did was he was looking if integration didn’t go well, well, rather than than looking at the ones that failed, which is easy to do, try to pull out the what was common about the ones that succeeded. Because that’s the formula to move forward rather than, you know, Monday morning quarterbacking, you know, others of those deals. So that’s, that’s a unique thing. And this whole issue now where you guys have and again, we’re still macro, but the science of change, and there’s an awareness there. 

    And I think as more understanding happens, that’s fantastic. And that’s leading, you know, we’re Kotter’s kind of leading, leading the change. You know, the the group on that. One of the things that you and I had spoken about before, and we will get into this a little bit more, but it is a big, you know, kind of California, wishy washy kind of thing is is a topic of culture, and how you know, Kotter, one of the things that you guys look at is, you know, the importance of it. And it’s beyond this whole thing of well, these guys dress, you know, have a dress code these people don’t. It goes way deeper than that to talk about culture a little bit for me.

    Laurin: Absolutely. And I will say that one of the things that is really important is that we don’t deal with culture in the sense that that’s the only thing we care about. But that’s how we differentiate ourselves. Because there’s all we obviously care about business practices, and what are the strategies and processes behind something. But culture should always be tied to that strategic objective. And there should always be that measurement going forward. It’s just as important as how we do the work. It’s not a fun little tier off to the side. So when we think about culture, it’s really the behaviors of that organization. 

    So how are decisions made? How are you communicating with people? If you’re a people manager? What are those practices around actually growing the organization? How do you handle professional development? What are your policies around whether it be feedback or how you’re actually just going about the day? Are you a nine to five, only organization? Do you work outside of those bounds? And it’s just all those tiny little behaviors that then culminate into this larger topic of culture. And it’s not that kind of wishy washy California, as you mentioned earlier, but it’s all those little tiny practices, how much does your vision come to life in your day to day? Or does it not? If it doesn’t, that’s okay. But it’s more of an acknowledgement of how that actually is brought in. And understanding the foundations of that is really what’s important.

    Patrick: And the issue with culture also is, as you and I’m stealing from you from an earlier conversation, but it’s the importance of bringing joy and higher achievement in. This isn’t some esoteric, you know, we’re gonna have a company look, and this is it’s really, you know, performance, this enhances performance.

    Laurin: Absolutely. Culture is not just a piece of paper where someone wrote down, like, we are a technology focused firm, where we love collaborating, and then it gets thrown into a drawer and never spoken of again. Culture, whether it’s defined or not, is how people within your organization actually operate. And that’s the key of success and knowing how does that actually work? And if you change some of these levers, in terms of how do we slowly migrate people into one direction, or maybe quickly in another, in order to pull levers to improve performance for the organization as a whole.

    Patrick: And the thing in there, Kotter’s, not alone in this, you’re just at the front of the line on this, but this culture really is trying, organizations are trying to see if they can quantify it, if they can measure it, and then see if they can harness it as a strategic advantage. And and I think, you know, the dynamic of the workforce now is an unmistakable element of the outgrowth of culture. Let’s just talk about that where we had the scenario in the banking industry.

    Laurin: Absolutely. So you’ll see it easily in the financial services industry, where what used to be that exciting field of investment banking, where you had all the graduates wanting to funnel themselves in and fight for those top tier positions in banks are no longer going towards those at the same rate. They’re going towards FinTech, those various different organizations, that could be startups, they could be larger at this point, starting to get some extra funding and are really expanding. But it’s, the hallmark behind it is really, because the cultures are very different. 

    There’s the thought process behind having to work those long hours for the same amount of pay. And the same amount of incredibly high or the hierarchical demoralizing, what can be seen as demoralizing for this generation, environment, versus one where they can create their own path, and they can start defining things for themselves is much more exciting for these generations. So there’s a huge shift in the talent pool in the younger generations wanting to find something new and culture is really at the heart of it.

    Patrick: But with culture it’s also, it’s not just, you know, retaining talent and keeping people but you’ve got to be aware of it when you’re bringing one force to join another force. And and you’ve got to know the potential clash of cultures there. And you’ve experienced that. Talk about that real quick.

    Laurin: Absolutely. So we had one organization that it was two competitors, who were top in their field. Unfortunately, I can’t give the actual names. And I would love to give actual details, because the details are just 10 times more impactful, but when we anonymize it, you can’t really see that full picture. But two, huge top of the industry, competitors formed into one. Merged together. And as we were going through their integration strategy, and what really needed to come out of it, we realized really early on that if we were going to make a proof point of this integration in terms of how to be successful, we needed to generate wins early on. And I would say that’s fairly typical across the board. 

    You always want to be generating wins to boost morale and create that snowball effect of moving forward. And the way that we were going to do it and be most successful and most impactful was to get the sales teams working together. Because if the sales teams could work together, who were rivals and did not like each other, if we can get them on the same team collaborating and actively working as a unit. Then that makes the proof point for the rest of the organization to say you know what, they can do it, why can’t I. So what we did is after we brought them together, we really allowed them and created a space where they can decide what that collaboration looks like and decide what their path forward is. It’s like I said, it’s not us coming in and detailing out high level plans, it’s working with the organization to create that for them. 

    So what they decided to do is that they were going to sell one product together. And it did not matter what industry you focused on. So they were selling products across a variety of different sub sectors. And they all went back and said, you know, what, by the way, have you seen XYZ in the market? Really exciting. I know, it doesn’t apply to you, but maybe look into it. Might be of some interest. And through that, and all of them deciding, we have a goal of we want to sell X amount of this product, we’re all going to do it together doesn’t matter who does it. Let’s do this as a team. It ended up being by far the largest selling product in that industry.

    Patrick: So you get the results right there. I just, you know, when you go the uber hyper competitive forces, okay, now they’re forced to work together. Okay. If they can work, then everybody else can. But what really struck me about this is not only I mean, it’s easy to see also, because we’re in marketing and sales, we appreciate this. But it’s also the, you didn’t take this universal approach, where okay, we’re going to change everything. Okay, you’re just let’s just get, prioritize a couple things and like you said, get some wins and moving forward. 

    I think that’s what happens is, everybody appreciates that, as they’re bringing on onboarding services and so forth, it’s just get those little wins to move down, let’s get those first downs and move on. We don’t have to have the big long pass because a lot of times that could delay things. And then people are just there again, in that space of they don’t know things are changing. They don’t know how it’s factoring, but they don’t see anything happening. And then you get nervous there. So I really appreciate how you guys can break that down.

    Laurin: Absolutely. I would say one of the most important things that often gets overlooked in terms of these plans is that it’s just saying, okay, we introduced you guys to each other, we’re done. High five or something along those lines. And it’s culture and the people integration isn’t taken into the same level of detail, as you see technology integration, or process integration, which does need to be considered at a high level. And if you think of Roger’s law of diffusion, when you’re regarding innovations. 

    It’s the same principle that you need to start with a group of people who are willing to accept that change, create those early wins and proof points, because as you create and generate those small wins and create momentum, you’re creating that rationale for the people who are more resistant to change and wanting to step back to say, you know what, this group did it, they were successful, I’m bought in. And then when you get those people who are partially resistant to change, you start getting the people who are very resistant to change, and you start making a movement that way. It’s not forcing it, but it’s creating proof points of success around that entire process,

    Patrick: Define or give me a profile of your of Kotter’s ideal client. Where are you looking as the ideal client where you can make these changes?

    Laurin: Absolutely. I think, realistically speaking at Kotter, we consider ourselves generalists, but what we really like to focus on are those calcified industries. The ones who haven’t necessarily changed yet, and are looking for that new generation to be that catalyst to move forward. And that’s really where we’re going to see our most success. I would say, anyone who is in a leadership position, where they are already having these thoughts and feelings around this is I want to change differently. I’ve done this time and time again, without success by going through the traditional methods. Let me try something new. That’s going to be our target audience. Because if we have someone within an organization who is willing to try some of the things that, from a traditionalist standpoint, sound a little off the wall, but are proven time and time again by both research and outcomes from our clients, that they do work.

    Patrick: This doesn’t happen unless you get buy in from the top, obviously. Now, Laurin, you mentioned calcified industries. Give us an example of a few others. You mentioned banking, what besides banking would be calcified?

    Laurin: Absolutely, I would say healthcare as a whole very much in that wanting to transition phase and wanting to accelerate phase but hasn’t necessarily gotten there yet. Very much government entities, still working on how to actually become as efficient as humanly possible within their structures. You’ll see it in higher education who are still very slow moving on various pieces depending on the cycles that they’re in in terms of their semester. You’ll see, and you do see it across the board. And you also see, you’ll see it in manufacturing at times and supply chain. It’s very much, I would say a universal piece for all the ones that aren’t talked about in the news necessarily on a regular basis, I would say the rest of them are still looking to really accelerate.

    Patrick: Talk about the onboarding process, how long it takes and things like that.

    Laurin: Absolutely. So onboarding for us, when we first start working with a client, we take a couple of months to actually do that discovery work. And discovery isn’t just kind of sitting in the background, reading some old documents. Yes, we do do that we need to do that and do our research to see what’s actually happened. But it also can consist of doing culture change surveys, and actually figuring out what that network within your organization looks like. And how ready is your organization with what are the general sentiments in your organization. Going through and doing stakeholder interviews, and not just interviewing leadership, but interviewing various different people within the organization who are doing the work to really understand what that landscape looks like, and then going into an alignment session to really define out what is your big opportunity in terms of this. 

    And that’s not saying it’s going to replace a mission or vision statement, because they do not. They supplement it. Because an opportunity is a window of time, it is a strategically held short term opportunity where you can charge towards that and everything that the organization does, should support that opportunity in terms of achieving it. And that opportunity will then flow into your mission and vision and your strategic objectives that you want to achieve for the 10 year vision, or the 30 year vision depending on what you have. 

    Patrick: Gotcha. Now I appreciate, Rome wasn’t built in a day. So this isn’t, you know, an overnight fix. But matter of weeks, months? Ballpark?

    Laurin: I would say months. It depends on after we go through that discovery phase of a few months, we go through and define custom plans and roadmaps for an organization based off of the level of need. If we’re doing a one off, you’ve purchased an entity, great, you’ve got the target company, you need to integrate it in much shorter timeframe, then building out a conglomerate where someone purchased a ton of various different entities. And now you’re trying to make one holistic unit. So really depends on what landscape we’re dealing with. I’d say about a year timeframe, we really like to work through organizations and do a lot of this work on that shorter end, not because it takes that entire year long necessarily. 

    It depends on the organization again, but more so embedding behaviors, take does take time. So you can have that switch. And if you read anything on habits, you can quickly change but then you can regress back if those behaviors aren’t reinforced. So it’s doing, making sure that that repetition is there and making sure that that reinforcement is there across the board in terms of how you incentivizes there in order to make it as successful as possible.

    Patrick: Gotcha. Well, I think that this is important. And one of the things I just pulled from you is that this isn’t just limited to strategic acquirers where they’re going to make an acquisition here or there. You could literally have this for private or private equity clients where they have multiple, very diverse portfolio companies. And although they don’t work hand in hand, the various portfolios, intermix with each other that often, many PE firms are trying to do that. That’s one of their strategic advantages is seeing how they can take, leverage strengths and to overcome weaknesses among the portfolio companies. We want to get, you know, our culture, not just within the PE firm of the investors, but within the portfolio across the breadth of the portfolio. And so I could see that being something that would be very, very helpful.

    Laurin: Absolutely. It’s something that we’ve been talking to clients about in recent years. And I would say, if you think about venture instead of PE, for example, just making all of those bets and saying not all of them are gonna pan out, we’ll have a couple of successes that are runaway successes to pay for the investments that don’t necessarily work out. But how can you actually structure your portfolio to complement each other? And actually work together as a cohesive unit? Not necessarily from going as formal as a joint venture, creating those agreements, but how can you actually work your portfolio to maximize and create cultures where it is okay to collaborate with each other?

    Patrick: So, I mean, this is great, because it’s not just culture isn’t just micro, here is macro on the other side, and that’s a great place where you can be brought in because you’re proven at that level. You’ve done it at that level as well. Laurin, we’re having this conversation just after first of the year. So we’re all getting used to change on writing 2022 now on the dates instead of 2021. So it’s going to take a little while for people to do it, but we’ll all change and then we’ll be sitting in 2023 but what do you see going forward either with Kotter or macro change M&A? And what do you see for the coming year?

    Laurin: I would say, in general, and this isn’t necessarily for 2022. But it’s been a general progression in recent years that there’s more acceptance around what’s considered the quote unquote, softer side of deals and culture. You’re not as frequently getting that eye roll. When you say culture in a boardroom, as you might have 10, 15 years ago. Where people were like, oh, it’s culture, okay, wonderful. Like, that’s not necessarily happening anymore. And, for example, we were working with a firm and within a year, they actually referenced culture at a 22% increase in that one year timeframe after we started working with them. 

    And directly targeted in their annual report, the reason behind their incredible success during the pandemic, was because the culture that they had fostered beforehand. And culture is more and more seen as that differentiator within an industry to say we have a strong culture where people want to work, and especially when you’re starting to think about the great recession. And as people are leaving organizations, when you’re doing an integration, as we talked about a little bit before doing things to people and activating that survive mindset, you have a more vulnerable employee population who is more quickly going to have that thought bubble of, if I can’t define this for myself, and I no longer have control, why don’t I leave? 

    And it’s already prevalent, but it’s even more so in these target companies. So something to absolutely be aware of, as you’re going through in the next year of how do you really retain the talent and the culture of your target, and integrate some of their best practices and their culture into the acquiring company, and create the best of both.

    Patrick: You mentioned the softer side, the two biggest developments in the last couple years. You’ve got ESG and the awareness of that. And then culture is hand in glove with that. So I agree completely with you is that going forward. Laurin Parthemos it’s been a pleasure having you here. For our audience members who are interested in this, how can our audience members find you and Kotter?

    Laurin: Absolutely. So you can find Kotter on our website at kotterinc.com. I have a lot of resources there and various different articles or background research that we’ve done. You can find me personally at laurin.parthemos@kotterinc.com. I will not go through the trouble of spelling that you can easily look on your podcast page. Check out the show notes. It will be there. And then you can also find me on LinkedIn. I’m more than happy to speak with anyone who’s interested personally.

    Patrick: Well great. Laurin Parthemos of Kotter, thank you so much for being here today.

    Laurin: Thanks for having me. It’s been a pleasure.

    Patrick: Great.

  • Samantha Ory | Strategies for Creating Organic Partnerships that Thrive
    POSTED 1.4.22 M&A Masters Podcast

    On this week’s episode of M&A Masters, we sit down with Samantha Ory to talk about choosing partnership over buyout. Samantha’s company, Ouroboros Group, is a private investment firm specializing in middle market corporate acquisitions and operations in the manufacturing, healthcare, and consumer sectors.

    Samantha says, “I found that there is this segment of outlier companies and CEOs who are looking for something a little bit different. We cater a lot to the CEOs. We always ask ‘what can we do for you?’ It builds trust, but it’s also very genuine… we really want to know.”

    Listen as she walks us through:

    • How her non-traditional background led to a unique approach for the Ouroboros Group
    • Two atypical things they focus on to take a company to the next level (post buyout)
    • The 3 algorithmic strategies they use to find deals
    • The key to developing organic partnerships
    • And much more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and president of Rubicon M&A Insurance Services. Now a proud member of The Liberty Company Insurance Group of Brokers. Welcome to M&A Masters, where 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 Samantha Ory, Founder and General Partner of Ouroboros Group. Ouroboros Group is a private investment firm specializing in middle market acquisitions and operations within the healthcare, consumer, manufacturing and distribution spaces. The firm has offices in Boston and New York. 

    And in addition to their middle market buyout practice also has a minority investment arm specializing in early stage and minority investments within the consumer vertical. And as of this recording, today, there are over 5000 private equity firms in the US. Most people outside of M&A think of private equity as a monolithic even within mergers and acquisitions. A lot of professionals think of private equity by either size, sector or region. I gotta tell you that that’s contrary to the truth really, and is no better personified by Samantha today is that when you see one private equity firm, you’ve seen one private equity firm. Their owners and founders are unique and have a great story. And this is why I wanted to do the podcast, quite frankly, is because nobody tells these stories better. And I’m really thrilled to have you. Sam, thanks for being here. Thanks for joining me.

    Samantha Ory: And Patrick, thank you so much for having me. This is wonderful, this is exciting.

    Patrick: It’s gonna it’s gonna be a lot of fun, because a lot, there’s a lot to get into what you in Ouroboros Group are doing. But before we get into all that, let’s just set the table real quick. Let’s talk about you. What got you to this point in your career?

    Samantha: Yeah, so it’s a great question. You know, I think that I’m going through a lot of different events within the financial industry, and also just kind of being molded in a very non conventional way to begin with. So many people don’t know this about me, but I actually didn’t start in finance, I started in art. And believe it or not, as the painting suggests, behind you, I actually used to do that. And I was one of the people that you know, would go take six hour drawing courses and paint in various mediums, pastels, oils, do photography, and just really be kind of that creative talent. And my path was much more towards going to the Pixar or Google or even an Apple, but more kind of a design or a tech track. 

    And you know, I was probably halfway through my undergraduate degree at Parsons that I realized that it was more of a hobby, but less of something that I wanted to pursue in a work capacity. And I had been doing all of these internships. And my last job prior to exiting the school world was Prada. And I was actually a buyer for for Prada within their shoe departments at Bloomingdale’s, and Saks and Bergdorf. And I was one of their kind of account analysts that would go in and start to barter for the different prices, and also keep track of all of the different SKUs, and even really place the items within the showroom and could go through the curation process. I loved it. But I really like the math behind it. And I like to finance behind it. And I like the idea of how to maximize your profits with in one segment. 

    So a lot of friends who they were at NYU, and they were really, really interested in kind of your typical ibanking track right thing, Goldman Sachs Bank of America, Morgan Stanley. So they got me into the finance circuit. They said, well, if you like finance so much, why don’t you give it a whirl one summer for your very last internship before you graduate. So I pretty much begged Needham & Company, middle market investment bank to give me an internship one summer. I think they looked at me and they said, oh my goodness. what do you know about finance? And I said, not much but I know something about consumer. And you know, perhaps we can kind of strike a little bit of a happy medium here where you know, I can help with the research and the consumer perspective and you can teach me how to model and teach me kind of the ropes. 

    It was probably one of the most interesting summers of my life. Juxtaposed between painting and drawing for my final classes and executing different graphic design projects and modeling and for potential mergers and acquisitions that we were doing at Needham & Company. And that summer, we actually floated Zipcar as the tertiary underwriter. And I got to be a part of that, which was fantastic. It gave me something to talk about, it was an interesting bridge between consumer and between finance. And that really launched my career into finance, and really created this viewpoint of how I felt, you know, finance should be from from the lens of someone who didn’t have that package background. So that was kind of the beginning of it all.

    Patrick: I imagine it’s just that common denominator is the number, the number speak to you. And everybody thinks of numbers on one level, and as this cold objective viewpoint, and you inject an art and and context it. That’s amazing. So then you move on, you get get out to form Ouroboros Group from this experience, okay. Clearly, you didn’t name it, Ory group, okay, you put it out there. Talk about now Ouroboros Group, but I always like to ask, you know, first of all, where did you come up with the name?

    Samantha: It’s a great question. And it’s so funny you say that, actually, because everybody asks me, well, is it your street address? Or is it is it a golf course that you like to golf at? I mean, that’s really where the, the manifestation of a lot of these company names and the hedge fund and private equity world come from, and not to knock them. Um, but given my very creative background, I said, well, you know, I have half a brand new degree, you know, from from one of the world’s best art schools, why don’t I, you know, use that to my advantage when I’m creating my own company. So I wanted to do something that resonated from an international perspective, because I knew that we were going to be looking at deals like the outside of the country given globalization. 

    And I also, you know, wanting to be a kind of a talking piece, where people would ask me, and it’s a really nice icebreaker in finance, you kind of get the same conversation over and over and over again. And I find that you really get to bring out people’s personality, when it’s just kind of a, hey, how’d you come up with your name, and then you start, you know, gabbing away and before you know it, you know, you’re fast friends. So it was it was intentional. But the name being close to my last name was not completely unintentional. So Ouroboros means infinite returns in ancient Greek, there are two delineations. One is a dragon eating its tail. And the other is the serpent eating its tail, more of the Eastern European delineation, and I went with the Asian version.

    Patrick: Okay, I just infinite returns is always a nice picture for people to have as they out there. And you’re in you’re diverse and a lot of the sectors that you’re looking at, however, you’re more tilted toward the middle market, as opposed to the lower middle market, like a lot of my guests, but you’re in more than middle market. Let’s talk about that as what is Ouroboros Group, bringing to companies in that middle market space? Talk about you know, your target size, but don’t limit it to that. Just what then are you bringing, because you really do have a unique perspective. And I really liked that approach.

    Samantha: No, thank you. I really appreciate that, Patrick. You know, I think that’s for me, and you know, going all the way back again, I saw a lot of interesting arbitrage opportunities coming from the non traditional background. You start to see things that you love about the industry, and also things that you think you can, you know, change could could be better. And a couple of things that I saw, you know, were that every private equity shop structures deals in the same way. And they will also think about their post close strategy in the same way. They also go through the acquisition process in the same way with the CEO. It’s kind of the same song and dance, and it works really well, you know, for many companies, but I found that there’s the segment of kind of outlier companies. And outlier CEOs who are looking for something a little bit different. 

    So we cater more towards the CEO, when I think it wins a lot of trust over, you know, to them. We always ask, you know, what can we do for you? And they always look at us a little stunned and they say, well, what? You’re asking us? You’re, you’re pitching us on you, this is very different. And they like that it builds trust, but it’s also very genuine, because we really want to know, because post close, our goal isn’t to put, you know, six plus turns of leverage on a company. You know, we really stay between you know, that three to four range at the very max and really organically grow this company post close. And create a very sustainable growth strategy with a surrounding of operating partners. They could be retired CEOs, current CEOs, current C suite, and you know, we give them board positions course. And they help us and guide us, you know, through their rolodexes through their experiences to help take the company to the next level. 

    The other thing that we do that was a little bit different. So typically in private equity, it’s usually 100% buyout. You’re not, you don’t always see rollover. And if you do, it’s more for kind of just a transitionary period, or you’re seeing like the CEO, you know, it basically has kind of a final exit strategy in mind. But we’re actually, you know, really going for like 20 plus percent in some cases, the more the merrier is what we say. We want the CEOs to really believe in their company and believe in that strategy post closing and kind of, you know, feel like this is a partnership and not buy out, if that makes sense.

    Patrick: Is it? Is it fair to say in that a person, you’re not necessarily looking for CEOs who want to actually you’re looking for CEOs that are at that inflection point where they’re, they’re too big to be small, but they’re too small to be enterprise? And they want to they want to stick around?

    Samantha: 100%? It’s very counterintuitive. Yeah. But yeah.

    Patrick: Okay, that’s it. I’m sorry, I slowed your roll, please continue.

    Samantha: No, no, this is fantastic. I’m glad you clarified actually, because it’s very counterintuitive. That’s probably one of the biggest things that we do. It’s a bit different, I would say from a post close. And also from kind of a diligence perspective, we’re really making friends with the CEO. We’re flying there multiple times, and really getting kind of a sound look at their company, and really just making sure that they like us as much as we like them. Because this is something that you know, you’re in bed with, with the CEO for, you know, five plus years, and it keeps getting longer and longer as the trends go on. So it’s very important. Another thing that we do, which is a bit atypical, is we source all of our own deals. So it’s not to say that we don’t look at bank led deals we we do look at them. 

    But I would say that 98% of deals and deals that we’ve done in the past, deals that are currently in our pipeline, deals were under LOI with, they come from an algorithmic deal strategy. There’s three algorithmic deal strategies that we’ve actually come up with, I used to work for a hedge fund. And you know, for me, I developed these different methodologies. I’m actually uh, unbeknownst to most people, I’m a coder. I am a used to and still do code and about six different languages. And I’m able to kind of parlay that public market experience that I had when I was at Morgan Stanley and my hedge fund into more of the private equity world. So we have these algorithms that find us companies. 

    And if I, if I go too deep, I’d have to, I’d have to kill you, if I told you all of the algorithmic deal secrets. But I would say that for the most part, you know, it’s been incredibly successful. We’re finding exactly what we’re looking for from an EBITDA perspective, from a sector perspective. We’re able to reach out to these CEOs who don’t even necessarily know that they want to sell their company yet and then we’re able to pitch our story organically. What we actually would like to do, and then post close, you know, execute on it. So it’s very atypical, because typically private equity, you know, that you bank led deals, and they don’t have their own sourcing teams.

    Patrick: So when you’re doing that, you’re you’re actually finding you’re pre empting, you know, other prospective acquirers because you’re, you’re approaching these people probably early in the stage where they don’t even realize they’re going out yet, and so forth. And one of the things that comes across in our conversations before is, it’s a thing that we really believe over a Rubicon and now with Liberty is this commitment to service. To serving our clients. And you got you’re bringing that in spades because you’re approaching the CEO saying, literally, how can we serve you, and then it’s not just some big, you know, check that they’re going to get, but there’s more to it. And I think is what resonates is the saying that I that I’ve come across that I think comes with Ouroboros too, and I tell me if this, you know, connects with you. But you know, a lot of these CEOs are going to be saying, you know, what, I don’t care how much you know, until I know how much you care. And I think that that you’re already with that attitude of service, you’re already coming in that way.

    Samantha: 100%. You know, and I think that I mean, the CEOs, usually all love us because of this and at first they think we’re being disingenuous because they’re like, my goodness, this is everything that I have ever wanted and could you know, ask for and then they get to know us and they go oh my god, this is like unbelievable. And what’s nice is that you’re developing just a really organic partnership and you know, they’re telling you what they actually need, which is opposed to just kind of giving you lip service and then post close you’re stuck with a bit of a mess. And so the LPs love it too, because we tend to get you know, much more of a quality opportunity. 

    And I would say it’s one where the LPs, you know, come to us, and it’s just, they have usually a purpose for why they want to be in the deal. They’ve either done a transaction that’s similar, they have a buy and build strategy, or, you know, a family in the family office segments, you know, has made their money in a similar way. So it’s, that’s the best, of course, because they really, truly understand what it means to be a part of this company. So and, you know, I’d say that we tend to have very fair valuations, we’re definitely not value investors, and we’re certainly not, you know, paying a premium. I would say that everyone walks away, you know, from a transaction, feeling that this has been a fair, a fair multiple, which is really, you know, how it should be done. No one should feel robbed on either side of the table, so.

    Patrick: I kind of look at it as got the multiple figures out there, and people may have those, you know, in their head, but really is going to be the long run on, where are we going to bring this you know, from point A to point B. An approach that you guys have is you are not financially reengineering, or trying to grow profits by cutting expenses. You focus on an area that’s near and dear to my heart, which is marketing. You’re improving marketing, and the sales production in that. And so we could talk about that in one aspect. And I’m just wondering, as you come on board with this with the management team, and they brought you in, and now you’re together. Tell me about any epiphanies that you’ve witnessed them have, where they’re sitting down, saying, okay, I trust you show, show us what to do, you lay out the approach, and you just, you can visually see them with the light bulbs going off. Give us some of those examples, if you could.

    Samantha: Sure. Um, so yeah, I mean, we’re working on closing a franchisor right now. And it’s been really interesting, because we’re seeing a CEO who has built this company, just absolutely organically. And, you know, he has seen decades of iteration here, and it’s just his knowledge is just so incredible to us. And we’re able to, you know, kind of share the experience of, you know, the old and the new, and you just kind of see these light bulbs, you know, flickering, you know, going oh, my gosh, this is what the next iteration of my company could be like, but I, you know, I don’t know that I have the energy at this point to do that. But I still really want to be a part of this. And this is one of the rare cases where we are bringing on a new CEO, but really, it’s gonna be kind of a collaboration, you know, post close. And you kind of see the new CEO, and you see the founder, you know, kind of sitting there, and they have just these incredible ideas for what this concept could be. But also maintaining the the authenticity, and this this kind of retro modern approach. 

    Patrick: Continuity.

    Samantha: Exactly, 100%. And I think that that is just it’s so special, to kind of see the old and the new come together. It happened again, on another transaction that we worked on, in the workwear space, you know, where we’re sitting there, and, you know, going my gosh, this is this is already a multinational company. But let’s start to kind of hone in on specific sectors that maybe could be complementary, you know, and a CEO is just going well, we tried this, and this didn’t work, we tried this. And that didn’t work. But maybe if we did this way, this could work. And then we’re bringing in our ops talent who are like, well, I did this with my last company, maybe we can try this. And just seeing this think tank come together. And I personally have learned just a tremendous amount. And what I love most about private equity is that you’re never done learning. It’s one of those, those those industries, where you have to just be prepared to always be humble, because you are never ever going to be a master of this craft.

    Patrick: Why I kind of look at it as if you’re in construction, and you just have your head down, you’re banging on a nail, you know, all day long. And you just, you know, you can get down on yourself saying, I’m just doing this little thing, but then you step back at the end of the day. And there’s something larger than when you started. And I could just see the same thing with you guys where it’s just not another deal. We were building the, we’re building something from nothing, but there’s something there but even more. So that’s got to be gratifying. And and, you know, as we go through that. As I mentioned in the opening, you are in the healthcare, consumer, distribution, you know, you’re in a lot of different sectors. Okay. And so they could, but they could spread you out a bit. But, you know, give us an idea about, you know, where you are in terms of what’s an ideal client for you. Ideal target. Explain what that is because I think anybody is listening that has a mid market company, they’re already getting a little bit, you know, interested.

    Samantha: Thank you. Yeah, absolutely. So I would say you know, ideal client is, um, you know, CEO who, you know, basically built this company. Typically, if there’s some family edge too, we love that we love, you know, multi generational families. We love family businesses. I myself came from a family business background. So I certainly emphasize and, and know what it takes. So family, family business, you know, CEOs, you know, organically creating the company, you know, typically, you know, they’ve been doing this for, you know, 10 plus years. You know, and a CEO who’s looking to stay on and really taking another bite of the apple, and is maybe looking to roll call it 15 to 20% equity. 

    And also, as you mentioned, within the healthcare, consumer, and manufacturing and distribution spaces. We are completely geographically agnostic. So we will look all over the world for interesting opportunities. And I would also say that we’re looking, you know, mainly for for strategies that, you know, can be, you know, a three plus year, sort of hold, buy and build strategies, and just in general, you know, really compliment our operating partners’ skills, too. So we’re coming in from that angle.

    Patrick: Okay. And in terms of value size, what kind of range are we looking at?

    Samantha: 5 million EBITDA and above.

    Patrick: 5 million EBITDA and above. Okay, excellent. One of the things has happened with that particular class of businesses help the transactions move a lot more efficiently is how risk has been able to be transferred away from the parties so that the, the deals can actually go forward without, you know, the big downside. And what I’m talking about with that is, there’s an insurance program called reps and warranties, which has been in that middle market space, even more so than ever, in the last five years. And you know, it’s done wonders for the middle market, not just the billion dollar but down, but don’t take my word for it. Samantha, good, bad or indifferent, what experiences have you had with rep and warranty on your deals?

    Samantha: Well, we love reps and warranties. I mean, I would say that the ideal candidate, at least from our perspective, for reps and warranties are deals that are a little bit bigger, you know. The reps and warranties are tough for smaller deals, I would say just because you know, it’s expensive. But I would say that when you’re doing bigger deals, it’s almost a must, especially if there’s any sort of risk. Anything that you know, has any sort of, you know, pre close, post close risk that you’re kind of identifying, you know, anything distressed, that has kind of that economies of scale already, you should certainly know reps and warranties and insurance. And I would say that, you know, in general, especially in this really frothy market, it’s really important to definitely consider it. You know, when you’re buying out a company.

    Patrick: I would say one of the great things about the platform for this podcast is also to get the word out that reps and warranties was originally the prime domain for 100 million dollar plus transaction. And now that has gone down market to where, you know, a transactions in the you know, $25 million valuation realm can be eligible. There are costs associated, which is why now there’s a brand new program out there for the micro market, and is called TLPE. And it insures deals from half a million transaction value to 10 million, which is a little bit below Ouroboros’ threshold, however it could be for add on. So it’s one thing out there for the guests to consider is that just because you’re not a $50 million, you know, transaction, there may still be alternatives out there. So I appreciate you know, your comments on this. And it’s great to see I’ve seen a consistent response here where, and it’s good for the insurance industry that we actually have a tool that is helpful as opposed to a hindrance for deals happening. Now, Samantha, I’m a father of two teenage daughters. 

    So I’m keenly aware of what’s happening with you know, women in the presence of finance sectors and so forth. And I really wanted to ask you this, because you also have a unique perspective as a background of a non finance person who came from the art sector. You know, in your background, as you came in you from the surface, it looks like you had no hindrance whatsoever, or barrier to entry getting in as a woman into the finance world. But share with me your thoughts because I believe still that women are underrepresented in finance and in M&A. And I’d like your insights on this because you bring something to the table that the standard, you know, profile doesn’t bring, but talk to me on that on that area.

    Samantha: I appreciate you saying that. Thank you, Patrick. You know, I think that um, I was acutely aware of it just you know, switching industries, um, you know, at a young age and you’re aware of it, I think when you’re at the beginning of your career. And then as you mature, and you build your toolkit, as I like to say, where you know, you have more and more skills, whether it be kind of the front ends, you know, bizdev, to the, to the modeling skills, to doing IR to doing admin stuff, and you kind of get that suite ability to just kind of wear all of these different hats. You kind of get so busy, you kind of forget, you know, that you’re a woman, honestly. Because it’s such a male dominated industry. 

     

    And when I was younger, I was much more aware of it. And it was a little bit stifling to me. And I, you know, I came off a little awkward, um, you know, at times, but then kind of as you mature, and as you, you know, build confidence, you think of yourself just as a person, and that makes it just, from kind of a, an aura standpoint, just more palatable. You know, when you’re in a room at a conference and, and one on, you just don’t think of gender anymore. And you’re more kind of thinking of, you know, oh, how can we collaborate on this and partnership. And I think a lot of that does come from the fact that, you know, so many males are in this industry, that you just kind of have to shut it off at some point. And everyone else is aware, you’re a woman, but you aren’t. 

    And I think that that really is truly an advantage. Because a lot of women tend to have a chip on their shoulder, you know, is they’re like, huh, well, I’m a woman in this industry. And I used to be like that, too. And then, you know, you get older and, you know, it doesn’t serve you very well. And, you know, I think it is changing slowly, you know, kind of as we go into things, but I think that, um, the industry is just really, it’s a grueling industry, you know, and it’s one where, you know, you kind of, as you get older, it leaves everybody out. Men and women, and they go into different segments, so.

    Patrick: Okay, yeah, I just think that as, as you know, the numbers in your view, and numbers and love numbers and so forth, transcended, you know, the the barriers that would have been there with finance and in art, and so forth. I think just in the nature of mergers and acquisitions is just, if you’ve got a better idea, the world’s going to beat a path to your door. And I mean, coming from Silicon Valley, it didn’t matter where you come from, you do not have to be a blueblood or someone that’s in the club in Silicon Valley to do very, very well. And that is, you know, infectious out there. And I think it’s the same thing. And what’s nice is, you know, money is going to go where success is. And so that’s, that’s one thing that’s, you know, you can’t deny it is just great seeing, you know, professionals like yourself out there serving it, you know, while you didn’t intend to be you are role models for the next generation coming on through and I really, really do appreciate that.

    Samantha: I agree. And thank you.

    Patrick: Yeah. So, you know, Samantha, we’re coming up on 2022. And, you know, this 2021, blinked right by. The pandemic is less of an issue now, it’s not gone. But it you know, we’ve, we’ve adapted. What trends do you see going forward, either in the middle market, or any of the sectors that you’re in, because you are also in the entry level in the consumer vertical. So talk to that, if you could.

    Samantha: Absolutely, I think you’re seeing gigantic paradigm shifts, and almost every industry honestly, and COVID, has really sped up these trends. And you’re seeing it, especially in the consumer sector, where already we’re kind of seeing the death of brick and mortar, if you will, and more of these experiential concepts coming up and more ecommerce. And I mean, it just completely, was ravaged and COVID and became much more cyberspace driven, less brick and mortar, even more experiential, just to kind of get the client in the door to buy the product. You know, I think that you’re really seeing the trends too, and healthcare and telemedicine and no longer needing to go to your specific doctor, but kind of having more of this fragmented branch out of going to an urgent care or having the televisit online first, to just kind of determine whether or not you should, you know, go to your primary or, you know, be triaged somewhere else. 

    And in manufacturing and distribution, you’re seeing just massive supply chain disruptions right now and everybody you know, you didn’t even have to be in the sector to know what’s going on. When you go into CVS and you can’t find the Advil. It’s really striking. You know, and it’s gonna probably go on for another six months to a year as things normalize. But I’d say the big, overarching trending scene within private equity and white collar jobs is work from home situation. It doesn’t seem to be going away, it seems to actually be becoming more of a hybrid situation where maybe you go into the office two to three days a week, and then you know, the rest of the time, you know, you’re at home, or maybe you’re working remotely, permanently, you know, in a different area of the country or a different area all together. It’s really fascinating. And they think that it’s going to create a really ferocious talent pool, where suddenly you don’t have to move to one of these cities, you can be top talents, you know, working from, you know, Asia or working from, you know, Texas if you’re based in Boston. So it’s really striking. You know, what’s happened. And I think it’s just going to continue to increase within the next year.

    Patrick: And I didn’t want to bring my own personal life into these interviews and everything is about you. But as somebody who had to wait seven weeks for a replacement refrigerator when ours died, yeah, those those, you know, supply chain, things are going to be something going in. I also agree with you, I think that not only in this but in mergers and acquisitions. As more innovations happen, as more collaborations happen. Mergers and acquisitions are only going to continue at this pace because of demographics as well. Because you’ve got CEOs that want to make a final change, whether there’s an exit, or it’s either now or never, we got to get up and change change what we’re doing. And they’re looking to organizations like Ouroboros to do that. And so, you know, we’ll we’ll see what happens but it but things are all positive, which I like, which which is always fun. Samantha, how can our audience members find you?

    Samantha: Via my email. Um, Patrick, you’re more than welcome to share my email, to share the website, you know, would absolutely love to connect. We’re in the business, it’s a relationship business, so please don’t hesitate to reach out to me for any purpose. It’s just always nice to make new contacts in the industry and find new ways to partner and work together either now or in the future.

    Patrick: We’ll have everything in the show notes. So we’ll have that all set. Samantha Ory from the Ouroboros Group. Thanks so much for being a guest. It’s just been a lot of fun.

    Samantha: Thank you so much for having me, Patrick. Such a pleasure.

  • Lorraine Wilson | Novata: Your On-ramp for the ESG Data Evolution
    POSTED 12.14.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Lorraine Wilson, Chief Impact Officer and Head of ESG Methodology at Novata.

    Novota’s mission is to empower general partners in the private market to collect, analyze, and report relevant ESG data.

    Lorraine says, “ESG is evolving. Novata offers a standard process for analysis… using metrics most applicable to the private market.”

    As ESG begins permeating the private sectors, it’s becoming top of mind for investors and in the boardroom. Listen as Lorraine walks us through:

    • How Novata assists general partners and private companies in collecting, analyzing and reporting relevant ESG data
    • The reporting on-ramp Novata has created – a technology platform which includes a library of metrics and guidance, where GPs can select the most relevant disclosures for their portfolio companies
    • What she believes will be the biggest focus of data analysis for 2022 (Hint: ESG isn’t going away)
    • And more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability, and President of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Brokers Network. 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 Lorraine Wilson, Chief Impact Officer of Novata. Novata is an ESG platform built specifically for private markets. 

    Formed by unique consortium of leading nonprofit and for profit organizations, Novata empowers general partners and private companies to collect, analyze, benchmark and report relevant ESG data. And as an approach for investing ESG has gone from fringe to core top of mind, both among investors and in the boardroom. So I’m very excited to have Lorraine here to talk about Novata and ESG for an entire new segment of the marketplace, because ESG is permeating everything. Lorraine, welcome to the show. Thanks for joining me today.

    Lorraine Wilson: Thank you, Patrick. Really glad to be here, joining on the show.

    Patrick: Yeah, this is this is gonna be one of these topics. That’s just it transcends mergers and acquisitions to everything. So I’m excited about this. But before we get into Novata, and ESG, in general, let’s start with you. Why don’t you share with us, what brought you to this point your career?

    Lorraine: It’s a great question, one that I keep revisiting. What was my earliest influence that I think I brought me here? I’d say it started at home. So with my parents, early life lessons, responsibility, giving back to the community, but also this general awareness of what was taking place outside of our town. In my case, I went to school in Washington, DC for most of my schooling, you know, what was taking place outside of this politically charged arena, and what were others experiencing around the world. So paying attention to, particularly, you know, world events at the time, but also traveling outside of that bubble and doing community service, with Habitat for Humanity, for example. So early, early lessons for me both at home and in the classroom, in terms of thinking of others and responsibility.

    Patrick: Well, as we get into ESG investing, this is the environmental, social, and governmental view of companies, not just you know, how they look on spreadsheets, but also how they are as a corporate citizen and a player in the world. All this focus up until now, and I fell into this when we started our conversation together was that this isn’t applicable to publicly traded companies. And now is being brought down toward the private markets, because you got through private equity, mergers and acquisitions, and everything, all kinds of capital raising, and private investments for private companies. So talk about the bridge for ESG coming from the public to the private.

    Lorraine: Absolutely, you you nailed that. So it did start out as an issue that large public companies were more aware of. And I don’t mean issue. I mean, just the the the act of reporting, disclosure, investors looking for answers your your performance on these ESG factors. And so it absolutely started in that space. And you ask any asset manager today, and they are wrangling with how to tailor their disclosure, their reporting for just about every asset class under the sun. Your infrastructure, your municipal bond investments. So certainly, the work is underway as large investors asset managers think about what what ESG disclosure means to them and their portfolios. Our focus at Novata is the private markets. We know that the bulk of the economic activity globally takes place within the private markets. 

    And so you’re certainly public equities, just picking an example. They are light years ahead of us in terms of disclosure, there’s still a lot of fragmentation. So they are ahead but the question of standardization, particularly as it relates to disclosure on social issues, say human capital. There are some improvements that could be made. And so what we see ourselves doing is taking from what’s worked well in the public equities. We’re not trying to compete with these leading standards organizations. 

    You have SASB and VRF completing a merger. We are not competing with the likes of SASB or GRI or I could go on in terms of the leading groups. Rather, we’re borrowing from the metrics they’ve set out. We like the the example of a common core common application for college, where we believe that the set of metrics we’ve identified or highlighted are an on ramp. So you could go in, you could be a novice in terms of being a GP, looking to disclose on ESG topics, factors, and using our approach where we’ve distilled it down to a set of metrics, you could, you know, then start your reporting and your conversations with your portfolio companies.

    Patrick: As we get kind of a broader just conceptually with ESG. You know, it is this way where it’s how management teams and investors can work together to move companies and their behaviors and their practices in a way that’s in the best interest for all stakeholders. And so it’s the old saying of doing well, by doing right, okay, that doing these things, not only is good, ethically or PR wise, but there’s actually competitive advantage for, you know, having these standards, higher standards than just financial performance. So why don’t you share, you know, what are the benefits to companies and management teams and investors by pursuing good solid ESG formulations?

    Lorraine: Right, it’s it’s an important question, and one that we’ve been engaging with GPs on. You know, be, I’d say, in a lot of cases, this request for disclosure is coming from your LP, your investors. Here’s a questionnaire, we’ve heard these stories of GPs receiving forty questionnaires in one week, you know, various, you know, different flavors of the same questions, and you’re having to react in that sense, but really asking these questions about your emissions? Where might there be hotspots in your portfolios? What in your portfolio companies, what are some changes you could make, you might just be changing the geography of where a supplier is, we’re talking about energy costs. 

    So there may be some small changes you could make, as it relates to the E, the environment. When we’re talking about social, looking at things like worker turnover, injury rate, questions that your organizations and some federal organizations are asking for this information, we may find some of these details in a corporate social responsibility report, depending on the metric. But largely, a lot of this information on your workforce demographics, for example, is unstructured data that an ESG analyst will have to go find. So it’s released in different places. It’s voluntary disclosure. And it makes it challenging for investors to compare apples to apples the performance of a company on these different areas. 

    Again, just moving down the list, you know, some of the questions on governance could give a management team a better sense of potential risks and areas of opportunity, you know, what maybe they didn’t know about the composition of their board, or their senior leadership. If you’re outside of the US, one of the questions that a lot of investors will ask is, what’s the representation of underrepresented groups on your board? Maybe zero. And so it’s just for us that feedback loop, what you do with the data is is important. And we believe that you starting with the disclosure, the measurement, you can’t manage what you can’t measure. And and that’s certainly where we come in.

    Patrick: I think by following this, you can uncover some solutions that are hiding in plain sight. 

    Lorraine: Exactly.

    Patrick: Environmental and on one side, you have cost issues, efficiency issues. With the social with the biggest strain right now being labor, and how critical it is getting people and finding ways to get, retain and improve not only not only your your labor force, but your customer base and so forth. And that’s all people. And then you go from that to the governmental, where there are opportunities and things out there that both both sides can leverage for the benefit of all. And I think that’s just a great open minded approach that’s out there and it and it will literally pay for itself.

    Lorraine: Right. Right. Another thing I’d add, Patrick, and maybe it’s not the most exciting announcement, but we do see some some conversations coming out of Washington, DC. We know different agencies are looking for data, wanting to know about some of these different non financial metrics and how companies are performing. But then there’s the SEC that is thinking about mandating disclosure. In this case, you know, for private public companies, so on on the 10k. So we we expect to see some some changes some some events taking place as it relates to climate disclosure and human capital. And I think everyone in the industry is just waiting patiently to see what they come out with for public companies, and how that might impact those of us focused on the private market.

    Patrick: And if you want to see a leading indicator with the, you know, for the private markets out there, privately held companies, just look what’s happening in the public sector, because those practices and analysis and, and things they filter down. And so it’s a great way to get out there. They’re the testing agent out there. And I just think it’s just, you know, as with sports analytics has become very important. Here’s another source of data that, you know, business owners, not only investors and business owners and leaders can can learn from. And one of the things that happens with ESG, the criteria is is developing, it’s a moving target right now. 

    And that’s where you can, I think, have some suspicion out there where people have different criteria for, and different measurements, and so forth. So there’s no real set rule, even though, as you said, this is evolving, and there are beginning to be some standards out there. Let’s talk about Novata, because that’s one of the things that you’re bringing to the table is you have a set of, a process for analysis that bring some standardization and some consistency. So share with us that.

    Lorraine: Sure, our approach was to be an on ramp. And so we looked at the major standards organizations and frameworks and and looked at what they were doing and picked what we felt was more applicable or most applicable to the private markets. We’re starting with a set of metrics that’s focused on cross sector disclosures. So across all sectors, what are the set of questions we recommend? It boils down to 10 categories. So there are 10 categories across  E, S and G, where you could disclose. If we’re talking about E, it’s your GHG emissions, for example. Or do you have a net zero target waste and water management. 

    So you know, a lot of companies for them, this type of disclosure will be new, but for others, they’ve been gathering and releasing this data for a long time now. And so those 10 categories, we feel are approachable, they cover all industries. And then next quarter, we will be launching more industry specific metrics and guidance so that companies that want to focus more granularly on a specific industry on very industry specific topics and issues and can do so.

    Patrick: With this, I can imagine that, you know, a privately held company, I think you want to be proactive and have this reporting queued up because it’s, you’re going to get it well received. And if you’re used to doing it before you have to do it, I think I think that that’s in favor. And so you’re going to guide organizations that never consider this information. And you can literally hold their hand. And if they haven’t been measuring things, or they haven’t been tracking, you’ve been kind of guide them through the process.

    Lorraine: That’s our intention. And so we are in beta testing. Now we are gathering some great feedback. Turns out if you ask a private equity investor, the year our company was founded, that’s a conversation. And so we are incorporating all of this wonderful feedback. We have a coalition of GP investors that have signed up with us early that have offered their their advice, and we are certainly using that. And so testing the approach, the act of actually disclosing, reporting is really important to us. And so that’s an example right there of what the process looks like, in real time.

    Patrick: And then, I mean, would your client be the, I mean, the the target where the services are would be a portfolio company, but it would largely be your private equity firm that has a you know, several portfolio companies, not unlimited, but.

    Lorraine: They could have dozens, yeah. And so that type of support, you know, I was talking about feedback on the questions themselves, but actually going through the reporting, we’re staffing up our sales team and client service. And so we will have dedicated support, someone you can call to ask questions about whether it’s the tool itself, maybe something that doesn’t seem very intuitive, or the metrics. And so that type of support was important to us, because we do know that this type of reporting will be new to many, and we’re we’re staffing accordingly.

    Patrick: And I apologize if we haven’t focused on this, but there are some companies doing this but for the publicly traded companies and the the large, extended networks and so forth. And where Novata’s coming in is your unique offer is that you’re going to be doing this with the privately held companies and helping them more hand holding and entry level, right?

    Lorraine: That’s correct. And another distinction, or just a point I wanted to make about Novata’s approach is that we are not looking to rank or rate the companies. We also are offering a set of tools and benchmarking down the line as a, you know, an additional feature that the platform. And so that’s important to us. The key feature that GPs like is the ability to permission the data. And so they will be able to permission the data to users that they feel comfortable sharing the portfolio company information with. We can also Novata’s company can share anonymized data, which will help with benchmarking. You know, we’re looking to institute public company comparisons, for example. But also we’d like to share with academics anonymized data for their use. So we see that as a public good, that anonymized data.

    Patrick: I think that I didn’t realize this, but I guess, you know, if if you decide to go the route with ESG, and begin getting that, you, you know, you can’t turn that off. So I guess there’s a risk out there where oh, gosh, we’ve got to be all in. And some organizations are like, well, can we do this on a step by step basis? So that we’re not completely committed and out there? And I think also, you know, like you said, who wants to go out there, if you’re not ready and all of a sudden get ranked? That would be, that would be a PR disaster. So you give them that kind of like that, you know, safe harbor I would call it.

    Lorraine: That’s right, Patrick, we’re also building in a feature for GPs to customize. Maybe there’s a question they’ve been asking for years of their portfolio companies. And they like to keep that consistency. It might not live within, you know, an industry leading standards organization or a framework, but it’s important to that particular GP in their process. And so we’ll have a feature where they can input customized questions and send those out to their companies. And then another feature that that we like, is the ability to actually check off the metrics that you would like your portfolio company to respond to. 

    And, you know, goes back to your comment about different companies, starting from different places in terms of their ability to report. Maybe staffing levels have something to do with it, maybe you’d like to them to see a question, but think about gathering the data to disclose next year. And so that feature of being able to check off which metrics you’d like for this particular, you know, whether it’s a quarter or calendar year, is an important one.

    Patrick: So I think that’s great, because there’s no harm no foul for prospective organizations that want to dip a toe into this, that they’re not passing a point of no return. So really favorable. Lorraine give me a quick profile, who would Novata’s ideal client be?

    Lorraine: Sure, I’d say I’ll change the wording slightly. You know, our day one user, we believe is a buyout, private equity investor, sending this to, you know, five or 30 portfolio companies that they’d like to report across different ESG metrics. So that’s our day one user. That’s who we’re set up for currently. We will be adding more metrics. So you know, keeping keeping an ear to the ground, adding more metrics. Maybe some that are mandated, in terms of, you know, mandatory disclosure, but others if we see a lot of investor consensus around certain topics or metrics, we’ll also keep that in mind as well. So to give you a sense of how we imagine this evolving, you know certainly accommodating other types of users, but also accommodating just changes in the ESG measurement space.

    Patrick: Okay, great. Now, as we’re going into this now, we’re just coming up on 2022. I mean, boy, this last year just flew. What do you see trend wise for ESG in the private sector, you know, in terms of embracing or any other, like, big metric or something that we didn’t think about that was going to come out?

    Lorraine: Sure. I think, you know, fall of 2020. So basically, a year ago, an interesting poll came out from Edelman that said, social issues you the social dimension went from third, you know, dead last as it relates to ESG for institutional investors, to first place and there were so many events that led to that change. I think it’s hard for anyone to ignore the environmental issues in the spotlight right now, especially with different government agencies, you’re talking about disclosure with cop26. And the commitments made there. And so I’d say we continue to see that focus on social. A lot of organizations have, have promised to measure, to manage, to disclose more on social. A lot of investors at particularly in the public equity space, whether it’s a proxy campaign or a request for disclosure, maybe a letter that they’ve sent over. 

    And personally, personally seen some of those those conversations take place with the Russell 3000 companies for disclosing on their workforce demographics. So I think we’ll continue to see movement there. And we certainly have commitments from some of the large asset managers that they will continue those conversations. But on the environment, I that’s an area where it’s particularly within the private markets, we’re starting to have a lot of conversations, Novata, and just generally private companies and private equity ownership and, and how they can disclose more and manage on the environment.

    Patrick: I think this is just something that’s not going to stop. I mean, there are a lot of challenges in the world that aren’t gonna get settled ever, as people are still here. And so I, between the E the S and the G, I think each one is going to take a priority surprisingly, over the other two sometimes, but they’re all there. And I think, with innovation, technology, and and real commitment out there, I think that you’re going to see everything moving toward the good. And organizations like Novata, that provide tools for companies to do this. 

    They intent, they have good intentions. Sometimes they just don’t know how to do it. I think you guys are there for that. So I think that this is something that’s going to be not going away anytime soon, we’re never going to run out of the need. So this is just essential, and is great, because you’re among the first ones in this space, so I wish you and Novata great success. Could you tell us how can our listeners find you and Novata?

    Lorraine: Sure. Our website is up. We are posting more and more content. novata.com. Engage with us on LinkedIn, we’re posting resources and we’ll be launching a webinar series to help educate. That’s important to us. So website, LinkedIn, reach out, send over any questions. Thank you, Patrick. It was really nice chatting with you and sharing about our work.

    Patrick: Lorraine Wilson, Chief Impact Officer, Novata. Thank you very much for joining us today. 

    Lorraine: Take care.

  • Kresimir Peharda | Cannabis: Advice for First-Time M&A Buyers in the Market
    POSTED 11.16.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Kresimir Peharda, corporate and M&A attorney with YK Law. Kresimir is the Chair of the firm’s Cannabis Practice.

    As federal legalization inches ever closer, we invited him on the show to discuss the ins and outs and the rise of M&A in the world of cannabis. 

    Listen as he walks us through:

    • Improvements are happening and usage is up, but what challenges lie ahead for M&A in the cannabis industry
    • How cannabis regulations affect deals and why buyer/seller trust is everything
    • What trends he sees coming in the cannabis M&A market for 2022 and beyond and his advice to first-time buyers in the market 
    • And much more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and president of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Brokers Network. 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 Kresimir Peharda, partner and chair of the cannabis practice at YK Law. With offices in New York, Texas and California, YK Law describes itself as the gravity and prestige of big law with the flexibility and efficiency of a solo.

    And I asked Kresimir to come on today because in the news, we’ve got legalization on a federal level with cannabis that’s imminent, it always seems to take a little bit longer. But I thought now’s the time before that federal federal stuff gets passed, that maybe we start looking at the ins and outs of mergers and acquisitions in the world of cannabis. So Kresimir, great to have you. Thanks for joining me today.

    Kresimir Peharda: Well, thanks, Patrick. Glad to be here. It’s definitely an interesting and ever changing topic.

    Patrick: Yeah. And you know, in certain places, it’s, you know, top of mind with a lot of folks. So I’m glad you were able to come and join me. Now before we get into cannabis and specifically M&A and cannabis, let’s set the table for our audience. You know, why don’t you talk about you real quick, what led you to this point in your career?

    Kresimir: Yeah, it was actually really organic. Just clients or potential clients coming to me in the first case was a landlord years and years ago, probably more than 10 years ago, way before legalization in California, or I think anywhere, for that matter. Who wanted to rent space to a dispensary. Yeah, in the in the real estate that they held. And so they came to me asking for advice. And at that time, really, I had no good advice to give them which was super frustrating. You know, I had explained that I understood real estate leases, and I could help them with that. But I had no idea what would happen if the police heard about it. Or if the neighbors complained, or somebody came in. I really that was uncharted territory.

    So I had to unfortunately tell them to go to talk to a criminal defense attorney. And and that experience kind of snowballed from there. We had other folks, we had people looking to invest in cannabis business. And same thing I can tell him look, I understand securities, and and investments. But because this is illegal, it’s really uncharted territory. But you know, the whole subject matter of the investment is illegal, technically. So how do you how do you manage risk there, there, there was no playbook. And then, of course, companies looking to grow, cannabis companies started coming to me. So I thought it’s time to really, really get into it, and learn about it understanding that it is ever changing, complicated and multi subject matter.

    Patrick: We had talked about the the real challenge that you just talked about it here, where you’re taking an industry, which is pretty large, that’d been up until now in the shadows, and now it’s coming into legitimate business. And that’s a real awkward transition, because, as you know, you have a lot of the first legal advice they got was on the criminal side exclusively. And there was no other business, you know, availability or resources there to bring it. So talk about, you know, that challenge on going from shadows into now your operating?

    Kresimir: Yeah, well, it couldn’t be more of a contrast, right? Because, you know, 10 to 15 years ago, the only people advising cannabis companies were criminal defense attorneys. And of course, their job is to keep their clients out of jail, you know, limit the prosecution, minimize the evidence that the state can use against their clients. And so their their mandate to clients was always to not have any documentation, make everything oral, everything verbal, handshake deals and all that. Well, now in 2021, we’ve we’ve come really full circle to the opposite situation. The the regulators in California and other states require license holders to provide documentation of almost every major deal.

    Not only ownership and financial interest holders of people financing, but any significant really deal that involves any measure of control or significant share of revenues, is going to have to be disclosed and regulators. So the world is flipped on its side. But yet many of the people running these businesses have come from the gray world, the world where they were told for years and years not to have any documentation. So it is a little bit of a battle, to to get folks to understand that the times have changed. And now you really do need to have everything on paper, because it will only help you and it’s expected.

    Patrick: Well, I think also the issue is that you’ve got this overwhelming moral view one way or the other with cannabis as a product, you know, virtue or not. And, you know, as we look at it, a lot of us have come around to the belief that look, if if cannabis is no different than, let’s say, a pharmacy, and, you know, pharmacies have, you know, controlled substances, and they and they are regularly putting those out to the public, you know, with prescriptions and everything, but there are controls there. So, if cannabis can go ahead and have guidance, policies, procedures, like a pharmacy, then they should be looked at no differently than Walgreens. And that’s the process I think, you know, people like you are bringing, bringing along there. So, tell us, what does your practice, what are you bringing to the table for cannabis now. And talk about, you know, investors, growers, however, however, you’re structured.

    Kresimir: You know, so personally, I come into this industry, having been in three startups, two in real estate one and healthcare. So I understand regulated industry, but, you know, regulations here are kind of at another level. And what I would say my personal view is that, really, cannabis is going to be really kind of like alcohol and should be treated like alcohol in the future. So I think that’s the direction we’re headed in. As a brief aside, having the one of the challenges we’re gonna have, you talk about legalization, one of the challenges we’re gonna have in the future is, what happens if the federal government if Congress decides to, you know, tomorrow? And I’m not saying they will, but tomorrow legalize it, what happens to all the state regulatory regimes? Right, because my clients and clients out there throughout the states have spent a lot of time and money preparing for and complying with the state specific rules.

    So if the federal government tomorrow were to say, okay, it’s now federally legal, I think nobody knows exactly what what that would do to all the state by state licensing systems. So that is, that is one thing I would say. In terms of what we do, you know, so our approach really, or I should say, my approach is one coming from also representing a lot of public companies. NASDAQ and NYSE companies. And understanding that they have, you know, tremendous burdens, which actually, there’s some parallels to what cannabis companies have to go through, of course, they’re doing it on budgets that are a fraction of the size. But it’s, it’s really, you know, they’re forced to do regular reporting one way or another.

    And the way we look at, you know, the business is it has to be multi specialty. It has to go through a corporate lens and a regulatory lens, at a minimum, but then you you layer in employment, because there are very specific labor laws that apply to cannabis. You you layer in IP, where cannabis companies basically cannot get trademarks on their key property. So they have to do workarounds. You layer in taxes 280E and some of the complexities and structure. And so the point is, we have a kind of a multi specialty approach to the industry, because there’s so many different areas that impact even a relatively small player in the business.

    Patrick: Well, and and I can only imagine that with with the confusion from state to state, I, these companies aren’t multistate, are they?

    Kresimir: Well, so you know, some are, and you know, that that means that, that we’re working with either people who are licensed in that state or within our firm, or we’re partnering with folks who have local licenses throughout various states, because we certainly don’t have don’t claim to have a person in you know, every single state out there. But, you know, once once you have, I think, a very in depth knowledge of a state that is, let’s say, a little more challenging like California, I think it’s a lot easier to then work with a local partner in other states to help clients reach their goals.

    Patrick: Well, when when we talk about regulations, there are a lot of people that if they’re not in a regulated industry, it’s a full time job, stay on top of that. And it’s really unique because regulations do have a lot of impact, particularly with people who are investors or don’t realize their investors? And so why don’t you talk about just some of the impacts that regulations have on cannabis companies.

    Kresimir: Sure. Yeah, they’re massive, really. They’re massive. So in California, as an example, and this will vary, Colorado is different. But in California, the regulations will control the type of structure you use on your M&A transactions. You’re basically limited to stock purchases, and mergers. Asset purchases are not allowed. You know, the visibility. So you know, if you’ve ever tried to do timetable for a deal in M&A, you understand this, this this issue, it’s extremely difficult to come up with, with any kind of reliable timetable, or calendar and you know, list list of items to do. Because everything is so new for the regulators. 

    Now, now, this is getting a little better. But you know, drilling down a little bit, you have to keep in mind that even with with a single target, so let’s say you are the buyer buying a single target, they may have locations in multiple cities, and they may have multiple licenses. So each city is a stakeholder in your M&A transaction. And each administrative agency at the state level is also a stakeholder in your transaction. So you can imagine if you have multiple targets, multiple licenses, multiple cities, the level of complexity that you need to manage, that’s just on the regulatory side, not not even having to do with the M&A transaction itself.

    Patrick: Well, and on top of that, if the regulator’s this is all new to them, if they haven’t made determinations, is this something akin to tax, where, you know, they’ll they’ll decide it later. So you may be on the hook for some violation after the fact?

    Kresimir: Well, haven’t seen that. But But the challenge is that, you know, a client will will understandably say to me, well, how long do you think it’ll take to get through the approval process at the city? And so in some cases, we can say, well, based on our past experience, you know, it’s been, it’s been this long. But sometimes, you know, it’s a new city, or sometimes it’s a novel transaction, or, or, you know, there’s additional complexity. And so, past experience is not going to be a guarantee of future results. Now, having said that, the development in California that, hopefully is going to be positive is three state agencies have merged into one, which in theory is going to reduce the variability in the process. 

    But I was just on a webinar last week, put on by the LA County Bar Association, and they put out the question to the panelists, and, you know, basically everybody, you know, are they are they still seeing variability between different clients and different analysts at at the state level, specifically? And the answer was, absolutely. It’s, there’s still a lot of variability. And that is challenging, right? Because your clients will want to know, when, how long, how much? And those are difficult questions to answer just for that reason. And that’s not really obvious from the outside. It’s difficult to appreciate that an analyst within a state agency is going to differ from another analyst. So that makes it difficult on everybody on the deal.

    Patrick: Also, just another challenge here, because banking is not possible. You had mentioned this earlier with without a structure. These have to be stock purchases, or mergers. What other elements of an M&A transaction is unique to cannabis? I’m just thinking one where they’re not getting, you know, any bank loans for this. 

    Kresimir: Right, right. So, no bank loans until relatively recently, normal, insurance was difficult to get, that’s changed, I think, and is changing. I mean, there are a lot of things, one thing that comes to mind is, you know, the and we talked about this, one of the challenges you have is that with so many stakeholders in your deal, oftentimes these stakeholders will literally control your deal. They will tell you what to do, when to do it, and how to do it. So you know, the the case that really comes to mind is when you have a condition of precedent, for the for the buyer to sign off on a deal, the obtaining of governmental approval. 

    Well, we’ve had the regular tell us that our client has to waive that otherwise they will not even proceed and in approving the deal, and they will not even tell us how long it will take to potentially approved the deal. So you have a regulator who’s not just a you know, kind of signing off on the deal. They’re literally controlling how you structure the deal. The timing of it, and the risk that the buyer has to take, in this case.

    Patrick: In your in your experience, how large the transaction value size, are these deals that you’re seeing?

    Kresimir: Oh, I mean, you know, we’re seeing anything from the low seven figures to to, you know, up to about 50, 60 million on the higher end. So, you know, I think the way I look at everything in cannabis is probably about a 10th, the size of what you would see in CPG. And that’s just the nature of the industry by by its, you know, relative youth and being relatively early in the process and relative lack of access.

    Patrick: With, you had mentioned also with insurance, which is an industry and you know, the property and casualty insurance market is coming around, and there are resources there to ensure product inventory, crime, trip, just your basic business trip and fall, work comp, all that’s out there. I would caveat that until now, rep and warranty, which is the backbone insurance for mergers and acquisitions. They haven’t signed on yet. I think there there’s still a lot of unknowns out there that they’re waiting for, which is why, you know, we can’t draw on any experience that way. 

    And it’ll be it’ll be a US company, largely that steps into that. I anticipate Lloyds of London, they still have a very traditional view and look at this as a vice, and they don’t want to promote a vice. And that’s just a cultural thing. That that we will see what happens. But aside from insurance coming around, what other improvements business wise, you know, for operating a cannabis company are happening? I’m sorry, this is off script. But I’m just curious if you’ve seen other evolutions, because the law is obviously evolving.

    Kresimir: Yeah, well, so. So one thing would be banking. There definitely is more banking available. Certainly I know of banks locally and regionally that are providing banking. So that is definitely a positive. And then for the MSOs, the multi state operators and and the larger private companies, you know, that they actually can get institutional debt. It’s very new, kind of brand new, but it does exist at the top end of the spectrum. So that is an interesting development, we’ll have to see if that trickles down to kind of more of a mid mid market and lower market in the cannabis industry. But but that is a hopeful sign of, you know, interest rates below 10% on institutional debt, which is, you know, surprising because that, you know, a year ago, that would be unheard of.

    Patrick: Wow. Okay. And I can just see that we’ve got I mean, by any metrics, usage is up. And so it’s it’s a growing industry, it seems like now is going to be a little bit easier to conduct business as as things go on. There are more business services and resources being brought to bear. You know, Kresimir, what kind of advice would you give a first time cannabis M&A, you know, buyer? I mean, that’s targeting something, what advice would you give?

    Kresimir: Well, so a couple of things. Don’t underestimate the regulatory complexity. You know that that’s going to drive that’s going to drive a first time buyer crazy, because the level of uncertainty that you’re going to have is much greater, I think, than any other space. Really think about the tax liabilities that you are taking on. Assuming you’re, you’re you’re actually buying the business via stock or merger, because we found that most of these targets have tax liabilities of some sort. And then you have to remember that if you’re taking on this business, you take on all that liability. So that means the principal, the interest plus penalties, so those liabilities very quickly become seven figure, even in smaller deals. So that’s that’s a huge, huge issue. And that’s a tough one for the buyer to suss out because really it requires them to really do some forensic accounting, to try to get at that, try to at least scope it. So that’s, that’s another one. 

    And something that they probably didn’t think about is, I think it’s critical in all deals, but but in the cannabis industry, it’s actually more important that you have a reasonable relationship with the buyer. And the reason for this is until such time as that there was an actual transfer of the license, the state, specifically the state and oftentimes the city will will not even interact with buyer or buyer’s representatives. So the buyer is completely dependent on the seller or the seller’s representatives to make progress in the transition process. So if you have a seller that’s unmotivated, or becomes ill, or the key person, you know, flies out to Hawaii for six months, you’ve got real, real logistical problems in your deal. And that’s not something you see in other industries to this degree. 

    That last point, to to the advice to buyers is understand that in many states, you have to work very, very carefully with the buyer to structure the transition so that the business does not close down. Historically, in California, the regulators would would say, if there is no person from the seller side that’s staying on in any capacity, then the business would have to actually shut down and and the buyer would have to start anew essentially. File a new application and begin the process. And obviously, that is devastating for a buyer who’s thinking that they can just continue the business to have to shut down even two or three months, makes a material impact in the financial projections and the whole deal. So I would say that’s, that’s another key point.

    Patrick: I mean, the question out there, I asked all my guests is what, you know, what trends do you see going forward? Pull out your crystal ball. And you know, if you’re right, you’re going to be a genius. But where do you see legalization going on a federal basis?

    Kresimir: I think what I see is very likely is on the banking side, that we get some movement, that’s probably the safest. I would say within the next year, I, I believe that we’ll see some movement on the banking side, because that’s a lot easier to swallow, then an entire deregulation decriminalization of the whole industry. And partly because the banking industry is behind, and law enforcement tends to support it. And it just makes sense from a crime and practicality standpoint. Nobody these days wants to be dealing in cash, not even the tax authorities. So that is one thing. 

    I think we’re gonna see some changes, probably on rep and warranty insurance coming, you know, whether it’s next year or the year after that. I think we’re gonna see more and more banks provide, you know, accounts. It’ll get easier to bank and, and my hope is that, you know, within a year or two, we’ll start to see more debt be available at more reasonable terms, so that these companies can can do it in a way that makes more sense. And they’re not paying, you know, hard money lenders exclusively. They’re not paying, you know, 15%, 20% to try to grow and expand these businesses. 

    Patrick: Wow. Why would you think that also, maybe there’d be a little more efficiency on the regulatory front too. Usually, you get regulators that really like to cling on to their rules, and and their standards, but you you reference, you know, three, three organizations, consolidating in California. Do you think the state regulators might ease up on some of this stuff?

    Kresimir: Well, I’m hoping that the experience level will will improve. That there’ll be more standardization. I mean, the thing that makes it tricky is this variability, every analyst having a different understanding of what the regs are, and that makes it difficult. You know, a lot of times when they’re pushed on that, they they just regurgitate the regs so they don’t take kind of any responsibility, kind of for the enforcement side of it, or the interpretation side of it. So I think that will improve. Hopefully, the cities will have more experience. Just working through transactions, transfers of ownership, transfers of locations, so it will get easier, but it’s going to take time.

    Patrick: Okay. This has been fascinating. There’s gonna be I mean, there’s more to come down. Kresimir, would you, would you, because I got you on tape right now. Would you agree to come back as as things change? You could update us?

    Kresimir: Sure. Absolutely. Just throwing another thing out there. Another thing that kind of hit the industry is the US Postal Service now formalised the ban, basically on on mailing vapes through the mail, and that’s going to have an impact, I think a negative impact on the industry. And it’s not clear to me that that was really the intent Congress had, but that’s where we are so basically THC, CBD is is no longer going to be able to be mailed through the mails with very few exceptions.

    Patrick: We’ve got, things are changing constantly. So the story has not been, it’s been written but it’s still in progress. 

    Kresimir: Oh, very much very much. 

    Patrick: Great. Well Kresimir Peharda of YK Law, how can our audience members find you so that if they have a deal coming up they can they can, you know, avoid some of these pitfalls?

    Kresimir: Sure, pretty easy. Our website is yklaw.us. So it’s dot US as the ending. And my email is kpeharda,  k p e h a r d a @yklaw.us.

    Patrick: Great. Kresimir, thanks so much for joining us today and just a lot, a lot of great insights. Appreciate you being here. 

    Kresimir: My pleasure, Patrick.

  • Michael Kornman | Navigating M&A Deals with Founders and Family-Owned Businesses
    POSTED 11.2.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Michael Kornman of NCK Capital.

    NCK Capital acquires controlling interests in lower-middle market companies and takes them to the next level with “right-fit” capital structures, inspiring management incentives, and nurturing support.

    Michael says, “We love the lower middle market. It’s a great place to build value…” Listen as he walks us through: 

    • Why NCK Capital loves the lower-middle market, their unique perspective and target markets
    • Three rules to ensure success in lower-middle market deals
    • Their secrets for fostering organic growth, and (long term) focused wealth creation
    • And much more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority in executive and transactional liability, and president of Rubicon M&A Insurance Services, now a proud member of Liberty Company Insurance Brokers, a nationwide network of specialized insurance brokerages. 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 Michael Kornman, managing partner of NCK Capital. Based in Dallas, NCK Capital acquires controlling interests and lower middle market companies and takes them to the next level, with right fit capital structures, inspiring management incentives, and nurturing support. Michael, I’m really looking forward to this conversation today. Thank you for joining me.

    Michael Kornman: Thanks for having me, Patrick.

    Patrick: So, Michael, before we get into NCK Capital and what you’re doing, which I think is next level, with transitions and so forth, which our audience is really going to enjoy. Let’s set the table, we’ll start with you. What brought you to this point in your career?

    Michael: Yeah, so I you know, my brother and I founded in NCK Capital in 2014. And before that, we had built and run a number of lower middle market businesses, and a few different industries. And so we felt we were well positioned to, to add value to the you know, lower middle market companies. And also had a unique perspective where we, you know, walked in the shoes of a lot of founders. We’ve we’ve dealt with the same issues they they’ve dealt with and understand those on an intimate and very personal level. And so we, we thought we’d be we’d stop building companies, you know, from from a dead stop and start start investing in the lower middle market.

    Patrick: And now, as we transition to NCK Capital, I always like to find out about companies, you know, how they’re named, because NCK Capital is not necessarily your initials. So give us that background, then walk in and tell us about NCK Capital.

    Michael: My last name is Kornman with a K. So everybody assumes that it’s something something Kornman, but that’s not it at all. Grant and I have three daughters, Natalie, Claire, and Kate. And we were originally going to name the company, oldest to youngest. So Claire, Kate, Natalie, we got the URL, we were building out the marketing materials, and it kept looking like Chicken Capital. And so we just, we just couldn’t deal with that. So we rearranged the letters, we got the NCK. And it’s our daughter. Grant does have a son. He came after we founded the firm. He’s still he’s still, you know, a beneficiary. So it’s okay.

    Patrick: Well, yeah, he will, we’ll find something separate for him down the road, that’ll be something, it’s amazing, you’re not the first guest to, you know, share with us that getting the URL had a big role in how the name ultimately came out. Si it’s just one one thing for the new age. Now you’re focusing on the lower middle market, you’ve been around for a little while. Explain why lower middle market? What is it about that, and your thought process?

    Michael: Yeah, we love the lower middle market. It’s a it’s a great way, it’s a great place to build value. You know, there’s, there’s so many lower middle market companies, and there’s so much capital in the middle market, that need folks like us to grow these companies to the scale that they need so that they can invest in them. And so we’re generally the first institutional capital not always, and we have, we have two portfolio companies that we acquired from other private equity firms. 

    But generally we focus on family or founder owned businesses. And we love it because it’s just, the market seems endless and, you know, our story, we’re a family. You know, Grant and I built the firm. There’s other people here now, but you know, it really resonates with sellers. And so we’ve, we’ve had, we’ve had good results.

    Patrick: Yeah, I think that in addition to having the lower middle market, where it’s is a vast market out there. I think that’s where you can really make big change because so many owners and founders out there, they work hard, they’re very successful, but they can only get a company their company to grow so far. And then they get to that inflection point where they’re, you know, they’re they’re too big to be small, they’re too small to be enterprise. And they don’t know how to take that next step. 

    And it gets scary because it, without organizations like NCK Capital out there, you know, they may default and either go with a very large institution or a brand or go to a strategic which may not necessarily have their best interests in mind. And so the more options that are out there and the awareness that we can we can bring to the lower middle market is our way of serving this market. Because if they don’t know about this, they’re at risk of being underserved and overcharged and we can’t do that to the owners and founders out there. 

    Because they’re, they’re the back backbone out here. A big distinguishing element of NCK Capital is that you do, and you mentioned this on your site, you target family owned businesses, as opposed to a startup and so forth. Talk about that focus a little bit more. Why that’s so personal? Is it just because you guys, you and your brother are family?

    Michael: Yeah, we walked in their shoes, we’ve dealt with the issues that that small business owners deal with. And these are, I mean, make no bones about these are small businesses still. I mean, we we invest in companies with two to 10 of EBITDA and our sweet spot is really like two to six. So these these companies definitely are in the early stages of their of their lifecycle. And you know, we have we’ve, we understand what it’s like to have invested personal capital over a long period of time. 

    We understand what it’s like to, to build out an organization where you where you have real issues with people and challenges and you know, you’ve you’ve you fought in the trenches alongside those people for a long time. We understand what it’s like to build a culture, and develop that culture, and how important that culture is to founders. And, you know, so we’re user friendly, that’s really important to us. And I think that’s, that’s one of the reasons we’ve been successful.

    Patrick: One of the things I think is really exciting, because you’re coming from an operating background, so you’re not trying to kind of financially engineer these these organizations, you know, from maybe, you know, performance to great performance, just by cutting expenses, and moving moving around numbers. I think you got an operational tilt. I’m just curious with some of the things that you’ve experienced, have you ever had an experience where you’re sitting with the the portfolio company, the management team, and they put their trust in you. And you talk about well we’re going to try doing X, Y, and Z, and you just see this epiphany, where they just look and they just like, I didn’t expect that, wow, we can do that. Did you have any kinds of things, this is kind of off script, but you know, that those things happen.

    Michael: It happens, it happens regularly, and it’s really fun to see. I mean, so our focus in NCK is, is in addition to buy and build, which is obviously a common common strategy in private equity. We really focus on companies that where we can, we can get organic growth. And we think that that, you know, that’s, that’s really important. We like businesses with high cash flow conversion, that, that we can, we can grow organically. We like businesses that we can deploy, you know, whether it’s a digital marketing strategy, or, or a more sophisticated sales and marketing marketing strategy, or, you know, or, or some, you know, some of the more traditional people process and technology and operations. 

    You know, we like businesses that we can grow in a way that a founder would understand. And so those conversations are do happen, and it’s, it’s fun to, to riff and collaborate with, with founders and sellers and oftentimes, you know, sellers are rolling over a substantial amount of equity. And, you know, that’s, that’s an important part of our process is educating them on kind of how how we approach the world. What we’re going to do post transaction and explain to them you know, kind of our excellent returns and, and that that helps us win deals as well.

    Patrick: Well I think one of the scariest things out there for anybody, I just from personal experience, I’m getting emails constantly about marketing, lead list strategies, all these things, and I can imagine, you know, if you’re the owner, or the founder, you’re you’re operating your business, you need to get sales up, you don’t know how, and it’s such a gamble. I mean, it can be very expensive. If you don’t know what you’re doing, it’s really really scary. So I think that your experience there on helping them bridge that gap on you know, opening marketing channels, sales, bringing in people, those are all the scariest things for owners and founders, because they have so much to risk and you give them peace of mind because not only do you have the resources, you’ve got the experience and you can just walk them through that.

    Michael: I mean, some of these founders want to stay on and continue to run the business but want to take a substantial amount of money off the table. And you know, their analysis up to this point is hey, I can grow this business but I’m gonna it’s gonna reduce my distributions. And you know, I’m gonna have to go it alone, where, you know, we come in and we’re, you know, we, we’re a team. So it’s a lot of fun to collaborate with these, with these folks. And the the leverage you get is, is huge.

    Patrick: Now I’m gonna go back to something we talked about, at the very beginning about, there are a couple of elements that distinguish what NCK Capital does, again, as a Californian, it’s like the software approach with business. But you are doing a couple of things here. If you could just give us a sentence or two, just how you mean it. And we’ll start with right size capital structures.

    Michael: Yeah, I mean, that’s a really great, great question. In the lower middle market, these small in the, in the lower end of the lower middle market, when you start to start to grow these businesses, there’s definitely a J curve. There’s definitely a dip in EBITDA. And so you just have to make sure that, that you’re, you’re planning for that. Because if you if you in generally it’s through over equitizing the business, but if you use that, or the wrong kind of debt, or or too much debt, rather, we all use debt. But it can be it can really be painful and disruptive in the in the early part of the investment period. 

    So we just like to make sure that that you know, we’re set up for success and you know, there may be a, you know, period where things things are a little less smooth than you’d like. I mean, generally, the inflection point in our experience is two years. The first few years you’re investing, you’re growing and you know, it really takes about 18 months to two years for the EBITDA to really really be able to grow to materialize.

    Patrick: That’s a term that a lot of people tie in with family offices, they call that patient capital. But you know, if you know that out front that you’ve got this time window, don’t panic let’s just go through it and I mean at our age now 18 months goes by really quick. You’re gonna get to the other side. So you bring that on, and I think that’s very helpful because it also brings the temperature down. Especially following you know, the closing, I’m sure management is they roll over they want to hit the ground running and they’re they’re very stressed. They want to make a good impression. Relax, you know, you want that so that that’s a great way to ensure success. The other thing you mentioned is not just management incentives but inspiring management incentives. So talk about that a little bit.

    Michael: Yeah, so a lot of times we’re we’re recruiting managers from outside the business and and that’s where you experience a lot of a lot of growth just hiring fantastic people that you know, some of these businesses just haven’t had exposure to people of this quality and sophistication before. And so, you know, our focus is we really we really view those management teams as partners and a lot of people say that. You know, we’re really focused on wealth creation for them, and that is we want to make sure that they’re they’re focused on the long run, they’re focused on you know, ultimately the exit and you know we we get really excited when when when our our management team partners build considerable amounts of wealth in these in these deals.

    Patrick: Kinda fun, kinda fun when you watch that. The, it ensures just everybody everybody’s interests are aligned and what why wouldn’t that be. Because I’m personally have an abundance mindset. So if that’s being passed out that just only inures to the benefit of all which is which is fantastic. And it also speaks to a track record for future investments down the road. I think I think that is just credibility, that can’t be questioned. 

    The final thing you talk about again, as as Californians, we look at this, we’ve talked about nurturing, and culture and things, which I there are a lot of people that look at that sideways, maybe 5, 10 years ago. But then the book, Infinite Game came out with Simon Sinek. And you’re seeing a change in mindset with management, looking at things like culture, where they’re, they’re, like, grading it, they are measuring it, and so forth. Let’s talk about what you do when you’re talking about nurturing.

    Michael: Yeah, well the first thing we do when we talk about culture, well, we provide a lot of support to our management companies. I’ve never walked in I’m sorry, to our management teams. I’ve never walked in to a company where people were sitting idle, and they were they had a lot of extra capacity. But we you know, they’re they’re dealing with, you know, day to day issues running a business. And we all agree as a as a, as a team, there are certain initiatives that can can add a lot of value that that may or may require outside resources. It may be us at NCK Capital. 

    It may be it may be the right consultants, but we like it could be something like, sourcing the right vendor for additional marketing initiative. It could be selecting a new site for you know a new location, geographic expansion. It could be really, really anything that an executive team member would do, that they may not have, have capacity to do. So we will parachute in, we’ll help will work alongside of the management teams. And, and, and get those high value initiatives completed. But we also back to the culture discussion, we we really believe it’s important to understand the culture of the business and understand the people and no matter how much diligence you do, it’s really hard to, to understand that completely pre acquisition. 

    So when it comes to culture, which we think is an incredible accelerant for, for value creation and growth, we take a I wouldn’t say a passive approach, but a more patient approach in stepping back and observing and learning. And that’s, that’s just, you know, I think there’s a lot of everybody’s pressured to move fast in this business. I think that’s one place where you just can’t move move that quickly.

    Patrick: Yeah, I think that’s everybody mistaked culture for well, we’ve got a very formal dress code, you know, attitude versus, you know, relaxed dress code. No it’s how you do things. There are some some organizations that are comfortable, just do putting as much, throwing as much on the wall as possible, see what sticks. Then others don’t want to go step by step on a process, and you’ve got to get that kind of synched up. And and and you do this. And I’m remiss, are there particular industries that you target?

    Michael: Yeah, so we really like services, businesses. And that could be any service that provides an essential service to another, any business that provides an essential service to another business. Could be tech enabled service, it could be environmental service company, it could be a we have a building services company in our portfolio. Really, we like healthcare services of certain types.

     We really like all all all sorts of service businesses. We also kind of what, it’s a little bit different and not in everybody’s investment criteria is we really like for-profit education. We have two, well, we just exited one, we have two vocational schools in our portfolio. And, and really, really like education, businesses of all types. Not just schools. Specialty distribution businesses, we’re working on one now. And then niche manufacturing, where we, those are our four buckets.

    Patrick: Okay, fantastic. When we talk about mergers and acquisitions, in the lower middle market, we’re dealing with, you know, two parties. We got a one party that that’s experienced, that’s almost always the buyer. And then the less experienced is the seller where they don’t sell their business every day, this is usually their one time. And when you have situations where you have a deficit of experience, fear and distrust can come in, where you know, once I say we’re going to do X, Y, and Z, and this is market, this is how it works. And then the unfamiliar side is just like, wait a minute. 

    I didn’t see this coming. And so there’s always the real danger for these deals happening. And they look good on paper, but when you’re dealing with people, okay, we’ve got those elements of fear and greed out there and you can’t get around that. And so as you go through the myriad of the process with due diligence, and everything else, and all these things can side track a deal and sometimes it comes down to the people. What we’re very proud about in the insurance industry is we found ways because with fear, it’s fear of risk and fear of loss of money, and so forth. 

    And what’s been nice is the insurance industry has come in with an insurance product called reps and warranties insurance. The buyer suffers a financial loss as a result of a breach of the seller reps. Now the seller is looking, saying wait, I’ve disclosed everything to you. You’ve done diligence. If I didn’t know it, I didn’t know it. And the buyer says I’m sorry this is market we have to do this. We have to you know put this little backstop on, it’s what everybody does, and we just have to do this to go forward. 

    And so there’s an element of distrust. Well, if you’ve got a rep and warranty policy, all of a sudden an insurance policy takes the place of the seller’s indemnity obligation. Seller gets a clean exit. If the buyer suffers a loss, buyer’s made whole. And so it’s just been a real revolutionary product that’s accelerated deals getting closed successfully. It’s lower the temperature, it’s done a lot of wonderful things. But you know, don’t take my word for it. You know, Michael, good, bad or indifferent, what experience have you had with rep and warranty insurance?

    Michael: I mean, it’s the greatest thing since sliced bread, right? I mean, we we we just exited one of our portfolio companies. So reps and warranties, warranties policy there. You know, of course, reduce the escrow, maximize proceeds to the seller. It made negotiation of of the purchase agreement considerably easier. And you know, we’re excited being in the lower middle market that that’s now available. It obviously started in the middle market. And is is, you know, a tool that is available to us in the lower middle market. And I just, we use it everywhere we can.

    Patrick: But I’m very pleased because you know, especially for the lower middle market, there’s been a little bit of a threshold. Because while rep and warranty does come down to smaller deals, there’s there’s a point at which the cost for due diligence to be eligible becomes a barrier to entry. And this is largely on deals where the transaction value starts falling below 20 million. A lot of buyers do not want to incur the expense to do all the diligence to get there. And at this time in 2021, the insurance industry is so full with the larger deals, there’s absolutely no bandwidth to even entertain small deals. 

    What I’m very excited about is that there is a new facility out there. Provides a sell side policy. But it’s one where it’s designed exclusively for micro market deals where the transaction value goes from under a million to 10 million. Where the policy we can ensure that deal all the way up to full transaction value up to 10 million. There is no underwriting fee, there is no diligence process required. It’s just an application. And it’s designed to address that area. And you know, we’re using this as a platform to get the word out because even though a lot of lower middle market deals are involving companies larger than 10 million, you always have add ons. 

    And it’s really nice if you can backstop you know, a sub $10 million add on where the seller has a policy at the seller’s expense so the buyer has some protection. And so it’s called TLPE. So I want to make sure that we just make a mention of that. Because for NCK Capital forward as they go on, this could be a fit on some areas where the traditional rep a warranty policy just just doesn’t work.

    Michael: Sounds like a fantastic tool to have in the toolbox, especially for add ons. So that can make, make that, make those a lot easier.

    Patrick: Thanks a lot. Thanks a lot for your comments on this. I’m glad that you know you got you got that one deal done. It’s interesting. We’re we’re kind of curious with private equity, the view of private equity is they are very reluctant to incur insurance premium expenses. If they can transfer risk, however, they can limit their expenditures, they won’t hesitate. Rep and warranty is the one exception where they they gladly go. And I’m very proud, because it’s been the good performance by the insurance companies. 

    They’ve kept their word. They’ve delivered on claims. And so we’re very, very happy. But as we get back into, you know, NCK Capital, Michael, where I mean, I blanked, and we’re already planning for 2022. You know, could you tell share with us, what trends do you see as we go end of 2021 into 2022? Either macro or NCK Capital in particular? 

    Michael: You know, sentiment is mixed. Some people think that, you know, there’s going to be reduced deal volume in 2022. And everything and some of the proposed tax changes were driving the, or anticipated tax changes, were driving 2021. Deal volumes, obviously 2021 was incredibly busy for everyone. You know, I’m a little more optimistic. I think there’s I think there’s a lot of businesses that are waited to come to market due to you know, they wanted to get some, some some time away from the pandemic. 

    And I think there’s going to be an enormous number of great businesses in the marketplace. One of the things that I think that we’ve, we’ve seen just from a deal structure standpoint is it’s been more structure in deals this year, then then, I mean, earnouts were dead pre pandemic. I mean, they’re just, they just weren’t, weren’t very commonly used. And you’re starting to see those more and more. And I think that’s really interesting. So I think that’s going to be I think that trend may continue on into 2022 as well.

    Patrick: Right. I agree. I see no end in sight with M&A. I think that we’re just going to get a lot more creative as we go forward. And I think that tax issues, taxes are gonna go where taxes are going to go, that should never be your primary motivator for doing things. I also agree there have been a lot of sellers that have been on the sidelines because they’re kind of refilling their balance sheets, and just upping their value as they go along. Well, Michael Kornman with NCK Capital, how can our audience members find you?

    Michael: Yeah, I thank you for asking. Our website is NCKcapital.com You can find both Grant and I there. And, you know, really a pleasure to chat with you today, Patrick. It’s a great podcast. I listened to it regularly and I I was honored that you invited me on so. So thank you very much.

    Patrick: Thank you so much. And I will just as a shameless plug for NCK Capital, I would say too and we’ve got quite a few audience members out there that are family owned businesses that are owners and founders out there. Give NCK Capital a quick look, especially because I think they’ve got a soft spot for you. And that always works to everybody’s benefit. So Michael, thank you again.

    Michael: Thank you so much.

  • Gina Cocking | Reps And Warranties Insurance: Why It’s Essential In Today’s Climate
    POSTED 10.19.21 M&A Masters Podcast

    Our guest for this week’s episode of M&A Masters is Gina Cocking, CEO and Managing Director of Colonnade Advisors LLC.

    Colonnade Advisors is a boutique investment banking firm that specializes in merger and acquisition advisory services, providing financial advice to business owners interested in selling their companies, buying competitors, and raising capital. Gina was employee number one at Colonnade, then left to pursue other interests. She returned to Colonnade Advisors as a Managing Director in 2014.

    Despite overlap between our practices, there are a lot of parallels going forward and I think you will greatly benefit from this episode.

    Listen as we talk about:

    • The critical element to managing expectations
    • The truth behind valuation and how to get the best price for your company
    • Gina’s take on the new reps and warranties offerings and what’s coming for 2022 in the industry
    • And much more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on executive and transactional liability, and president of Rubicon M&A Insurance Services. Now a proud member of Liberty Company Group of Insurance Brokers. 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 Gina Cocking CEO and managing director of Colonnade Advisors, LLC. 

    Based in Chicago, Colonnade is a boutique investment banking firm that specializes in merger and acquisition advisory services with exceptional strength in serving the clients in the financial services sector. Now while there’s been little overlap between our respective practices up up to date, there are a lot of parallels with what we’re seeing going forward and Gina and I’m very excited because my audience is really going to benefit from your perspective today. So thank you very much for joining.

    Gina Cocking: Oh, thank you for having me. I’m excited to be on.

    Patrick: Now before we get into Colonnade in the financial services sector and all that great stuff. Let’s kind of ease into this. Why don’t we start with you. What brought you to this point in your career?

    Gina: This is my favorite topic. You know, I love being an investment banker. I really, really do. You I get to learn about businesses from best in class entrepreneurs. We at Colonnade, don’t do restructurings, we only work with successful companies. I get to spend my days hanging out with entrepreneurs and leaders of companies that have built organizations that have grown and are now selling for large prices. Like a masterclass every week on how to run a business. So I have loved to be in investment banking. When I started my career out in investment banking and left it for a little while. Hated those years when I was gone and had a chance to come back. 

    I started, I went to University of Chicago undergrad and I joined a firm that is no longer around called Kidder Peabody. It was a bulge bracket investment bank in the 90s that was owned by GE of all places. But at Kidder Peabody, I did mergers and acquisitions, a lot in insurance and, and general industrial companies. I spent a year with Madison Dearborn Partners, a large private equity firm. When I was in business school at the University of Chicago, I spent a summer with JPMorgan in equity capital markets, and then had the chance to come back to JPMorgan after graduation, where I did a lot of mergers and acquisitions out of the Chicago office. 

    I’d left JPMorgan after a few years to join the person who was then the head of the Technology Group at JPMorgan when he founded Colonnade Advisors. So I was employee number one at Colonnade. We initially focused on technology companies and business services companies. I was with colonnade for five, four or five years and had a challenge balancing having a young child at home having a husband who was a partner in his law firm, and just generally handling all the travel that’s in investment banking. So I left investment banking, and I became the CFO of a number of companies. I was the CFO of an equipment finance company, a company that did about we had a portfolio about $35 million. 

    I was the CFO of a private equity backed manufacturing company, and I was the divisional CFO at Discover Financial Services. So Discover the credit card company also had a $29 billion direct to consumer bank that I oversaw finance for. A $5 billion personal loan portfolio at that time. And then also all of non card operations. I oversaw the finance teams for that. And then in 2014, I had the chance to come back to Colonnade which was a thrill of a lifetime. Investment bankers don’t often have the chance to leave the industry and then come back.

    Patrick: Yeah, you can get very stale very quickly.

    Gina: Exactly. Exactly my partners took a risk and brought me back and it was perfect timing because my career and what Collonade had been doing dovetailed together. They had been focusing on financial services and business services during the intervening years and so I brought back my operation experience and financial services and we’ve been growing ever since.

    Patrick: Then at the core of that is the expertise where your role as a CFO, so you can’t bypass that discipline and have that expert not have that expertise. And so you definitely were staying, you know, in the game as somebody. Now with Colonnade now that you transition from technology over into financial services. That is a market that is not for the beginners, okay. You’re going in, particularly in the area that you are because you’re in the ideal spot I mean, everybody would love to be selling, you know, in real estate that prime real estate and the mansions and all that which is where you are. 

    You’re definitely not in the startup phase or the turnaround phase. So you don’t have the right degree journey once you now have all these really ideal targets, okay? And so that’s not with a lack of competition. So talk about Colonnade and how you cut your own niche within financial services, and talk about the type of competition because I mean, I can imagine you’ve got the big gorillas like Goldman, you know, come coming into that area too.

    Gina: Sometimes, sometimes, yes. So we have found at Colonnade, that focus has been the key to our success, and the success that our clients have. We have dialed into a few niches that have really helped us understand the buyers of those companies, and understand the accounting issues that come up in those companies and the operational issues that come up. And I think that really gives us an edge over other investment banks that companies may consider hiring, they just don’t have the same type of experience. So for example, one of the areas that we have done a lot of work in is insurance premium finance. We have done like 27, 28 transactions in insurance premium finance that we’ve actually printed. 

    There are a couple of buy sides ones that didn’t actually end up, our clients didn’t win. But we’re involved in pretty much every insurance premium finance transaction that happens in the industry. So I guess you could say that we’re the national leaders in that practice. We are quite active in the automotive finance and insurance space. So that is a $81 billion dollar at retail industry. So that includes vehicle service contracts, car warranties, tire wheel contracts, all those types of products that consumers can buy at an auto dealership. There’s been a lot of M&A activity in that space. And we’re very active. We do a lot of work with equipment, finance companies. 

    And so small and large equipment finance companies, we work with both balance sheet intensive businesses on the financial services side, and businesses that are asset light. For example, just last week, we sold Open Road Lending to Clarion Capital Partners. Open Road Lending is a direct to consumer auto refinance company. So they placed the paper then on their lending partners books. They do high transaction volume, billions of dollars worth of loans over time, but they aren’t putting those loans on their balance sheet. So those are the types of companies that we’re working with. And what we have found is because we as I said, I’m dialed into these types of companies. 

    We have pattern recognition. So we know what to watch for with these deals. We know to watch for with these companies. And then sometimes complex accounting issues that come up. We see this a lot in the auto F&I space. Rather than just using gap accounting or even cash accounting. There’s actually another methodology called modified cash accounting. Modified cash is what those types of the auto F&I companies actually trade on. So we are pretty well versed in how to handle modified cash accounting. And so that’s what we bring to our customers or our clients is by focusing on several within financial services, even in several niches. It really lends to our expertise, and we bring a lot to our clients. 

    We also do a lot of work in business services. In business services, often it’s business services that overlap with financial services. So it might be businesses services related to auto dealerships, or business services companies that are in auto dealerships. Or Insurance Services companies, or financial services companies that really aren’t doing anything with consumers, but actually, technology or products into financial services companies. And so we keep our universe kind of corralled into what we look. That means sometimes we turn down deals, but the general industrial deal will frequently turn it down, which can hurt. But it keeps us focused and helps us give a better product to our clients.

    Patrick: Well, I can imagine the more you look at an industry, you focus and drill down, you’re going to find these niches and this entire universe of different classes of businesses within there. Yeah, I think what happens oftentimes where, you know, my experience is, you know, people are, are looking to have the problem solved. And if you could understand the unique problems that are particular to that particular business, okay, right. And you can solve their problem and they trust you to solve their problem, you’re going to be a lot more successful and a lot more effective. 

    And you just cut out the waiting time and the delays. With all the noise with everybody else. You don’t venture in there. I would say to anybody, if you’re in these particular silos, okay, this is where you have to find a specialist like Gina in Colonnade and say, look, we have, we have the types of problems that we know they can solve, they don’t have a learning curve to undergo at our expense. And we’re gonna maximize that. So I think that’s outstanding. One of the dynamics that I want to check with, with you on with investment bankers is that a lot of what we do is in the lower middle market. Sub 100 million dollar transaction value in many cases sub 10 million. 

    In those areas, you know, engaging an investment banker is looked upon as almost a luxury or, you know, it’s optional. Sometimes at the event it you know, at the advice of an aggressive strategic buyer, saying you don’t need, you don’t need that. But it’s optional. When we get to where you are, if you can share with us, you know, your, your, your deal size, your target range, but at at this level, with this sophistication, I mean, you’re mandatory, right. Tell us what the difference is.

    Gina: Sure, you know, our typical deal size, is say, 75 to 125 million, we do larger transactions, we’ve had quite a few that are larger, we do smaller transactions. A threshold, though, is really about 4 million in EBITDA. And the reason for that is is the buyer universe we work with a lot, the PE firms we know well, are generally of that size. So when we’re working with smaller companies, we don’t have the same types of relationships to identify those buyers. So we tend to work with companies of that size. Now, generally, what we find is, you know, in working with a lower middle market versus a larger company. The larger companies usually have leadership teams that have more experience in M&A. They either have gone through it themselves, they’ve gone through a capital raise, or they maybe have bought companies already, they’ve done inorganic activities to get them to where they are. 

    And so we work with them, they’re more prepared for us to walk in. Their books are in better order, their story is tighter. It’s prepared, they have contracts in place where they need to, it’s not as much on the back of the envelope. With earlier stage companies, oftentimes, what we find is, you know, there’s a little more softness into what they do. So they might not have contracts with some of their key partners. They might not have employment agreements in place with their employees, or non disclosure agreements, or non compete agreements with employees. They might do sometimes what we call an electronic shoe box for their financials. You know, they don’t have audited financials, because the CEO says, it’s a waste of money to have audited financials.

    Patrick: We’ve had QuickBooks for 10 years, we’re fine.

    Gina: Exactly. exactly. It is never a waste of money to get an audit. It’s like not going to the dentist. Do you not go to the dentist and let your teeth fall out? Do you run your company without an audit? You don’t know what’s happening. Like, well, I don’t worry about it Gina because I don’t have, I’m not worried about fraud my company. That’s not why you do an audit, you might not have your financials in accordance with gap. If they’re not in accordance with gap, you may not be making as much money as you think. Or you may be making less than you think. And that can impact your value. 

    So what we find in working with some of the smaller companies, is we need to roll up our sleeves a little bit more, and help get them market ready. And that is helping them build a detailed financial model. Helping them go through a sell side quality of earnings, helping them prepare schedules that they will need for the process. Helping review some of their contracts and talking about what they need to have in place. In addition to the coaching of how to go through a process. But really the rolling up our sleeves and getting involved with the companies is where some of our biggest value add is for companies that have never gone through a process like this before. And we kind of bake that into even from our first conversations when we’re reviewing their financials, and helping them think through things and we always talk about when we go in. 

    Whatever is on your income statement. We’re going to talk through with you every item. We’re going to help you figure out what kind of adjustments and add backs you have. You may have personal expenses running through your income statement and that’s okay. You won’t under a new buyer. So let’s adjust the financial statements for those personal, the income statement items. If you’re doing it because for tax reasons, whatever that’s between you and your tax accountant in the IRS. Let’s add it back though for understanding what your true company profitability is. And we’re really good at doing that.

    Patrick: Overall the whole process I mean,  the huge thing is you got to manage expectations and guide them through the process. And kind of be the sounding board. So you play all that bedside manner, in addition for the inexperienced as well as the experienced.

    Gina: That’s right. You know, we just recently lost out we lost out on a deal. A firm didn’t want to hire us because they said our valuation wasn’t high enough. They said you guys are undervalued. Colonnade, you’re undervaluing us. So they went a different route. And they thought they were going to get a lot more for their company. And they went through a process and there was a higher, there was a higher sticker price on the company originally, and then the deal closed, right where we told them it would. And so we do work to manage expectations. We don’t over promise and under deliver. I can’t sleep at night doing that. So we we go out with a valuation, we are pretty honest about what we think the company is worth, because we know we can deliver.

    Patrick: And I think I think the other value add that you bring in this is that you’re helping sellers and you know, owners and founders with this, you got a nice network of reliable buyers where you may know what they’re looking for, you have the relationship, and they trust you and you trust them. Because if they’re just kicking the tires for an exercise, and they’re not going to be there, they’re not on your list. Talk about that real quick on the relationships on that side, because I think that’s something you don’t need tons of buyers, you just need one really good one. It could be two, but you just need one.

    Gina: We are, well I went to the University of Chicago. So I believe in free markets and, and the free market will determine what the price of something is. We can we can do lots of valuation work. And I am I actually won a contest when I was in business school on valuation. But that was like a national competition that U of C participated in. So I’m really good at valuation. But I will tell you, it doesn’t matter. What matters is what somebody is willing to buy your company for. And the best way to determine what the price of your company is, is through a broad market process. 

    And that’s going to multiple buyers in finding out who is going to bid for the company and what price. When you talk to just one potential buyer. And it’s like, you know, I know this company, and they’re going to buy me and I’m going to get a great price. Of course, the buyer’s going to say, I’m going to pay you a great price. And we get a great price, you don’t know what the rest of the markets willing to pay. They might be willing to pay you 10 times, the next company might be willing to pay 14 times. 

    So it’s best to do a broad process and talk to as many buyers at the same time, and get everybody to put their best foot forward on what the price of the company is. And that will kind of keep the process moving quickly. Because everybody’s worried about losing out on the deal. And it will uncover what the market really believes the value of your company is. And that’s what investment bankers do. We help uncover the highest value through usually through running a process.

    Patrick: And it also is just aligning interests, is making sure you get from point A to close and you get through that. Now in addition, all these wonderful things that you do in this is a parallel between Colonnade and Rubicon is you’ve been very active with sharing information, sharing content, sharing, you know, educating the community and and just sharing your knowledge base and what you’re seeing out there. And you’re doing it through some excellent white papers. 

    You have just launched and if you could talk about this, in that you’ve just launched what you call a an index on SPACs, called the SPAC Attack Index with your partner, Jeff Guylay. And then in addition, and then finally, it’s a crime if I don’t mention that you’re the host of Middle Market Mergers and Acquisitions podcast, you have a podcast as well. So give me your philosophy with what you’re sharing and the various things you’re out there. We will in the show notes direct every our audience, they will all go and swarm your site. Why don’t you talk about that.

    Gina: Well, first of all, these activities we do are a little bit self serving, because they’re good intellectual exercises. When we write a white paper, it’s hard. It’s painful. It takes a lot of work. But it causes us to come up with a point of view and really think about industries and think about what are the drivers of valuations? What are the drivers of market activity? Who are the buyers, why are companies doing what they’re doing. They are a great exercise for us and our clients benefit from it. And you know, it’s all about having discipline. I could sit there and write a nice, we could all sit there and write a paper for ourselves, but not quite as motivated. 

    But when we do it, we’re publishing it, you know we have more motivation to do that. And so we find that number one, that’s a great side benefit of these papers. Number two, these pieces are really out there to help educate potential buyers. So private equity firms and strategic companies that are maybe thinking about the F&I industry, or they’re really trying to understand what’s happening in the SPAC market. By doing these, we are raising awareness and educating those parties. Like we’ll do white papers on the automotive F&I industry and private equity firms. 

    When thinking about the space, they will Google, they’ll Google auto F&I M&A, and one of our white papers will come up and they’ll find some insights. And then like, wait, now I’m smarter. Now I can go bid on a company that Colonnade or someone else is selling and I have a clue as to what I’m doing. And we use it to educate the buyer universe. So we have better buyers. And to then the buyer universe is usually reaching out to us and saying, you guys obviously know this space, well, we want to see your next deal. And that’s why Colonnade is so good for our clients, because we know who the buyers are, because they’re coming to us.

    Patrick: I think that what we do is the more we educate the community out there, it will to our benefit eventually. If you do it solely as as a you know, as a scheme to drive up clicks or whatever, I think is going to backfire. If you have purity of intent because with your your MBA, or your business school stuff in Chicago, so your ideal capitalist, I am an ideal abundance guy. And I keep thinking, the more we put out there, the more the higher quality is going to be available. And it’s also we start by giving. If we give you something and get this out there, you know, people are going to benefit and it does come around.

    Gina: Now, I would say also, on our podcast, one of the reasons why we do our podcast, it’s a little bit different target market. It’s not the private equity community, because our podcast is on middle market mergers and acquisitions. They know how to do that. It’s really to help companies out there, owners of companies that are thinking about going through a process and how they can think how they prepare. I mean, it’s it’s intimidating. 

    When you sell a company, if you’re an entrepreneur and you’re selling your company, it is one of the biggest decisions you are going to make in your professional career, maybe one of the bigger ones in your life. It’s kind of like going into buy a car. It’s your first time car buyer. It’s a little intimidating. So like, I don’t know anything about cars, and they’re all talking about all the stuff I don’t understand. Same thing in M&A. And so what we hope is that our podcast by going through and deep diving into the tactics, and the techniques and the processes that are used in M&A.

    Patrick: Each step of the way. You’re addressing each step of the process. Yes.

    Gina: Exactly. So then you’re not, you know, when a company is ready to talk to an investment banker or talk to a buyer, they kind of know what’s coming. They’re not thrown for a loop. For example, when somebody says, well, you know, we need to do an escrow they’re gonna be like, wait a minute, wait a minute, I remember from the podcast that reps and warranty insurance is the way to go. I don’t need to tie up my capital and my money for two to three years when escrow works out. We can solve this through reps and warranty insurance and by the way Mr. Buyer you should pay for it. 

    Patrick: You’re walking right right into you know, our area of expertise. You actually have a fantastic episode on reps and warranties that I highly recommend. One of the things you mention about in the mindset there for owners and founders, especially the ones that haven’t experienced you know, an acquisition before. It’s not only just going into buy a car for the first time. It’s buying a car when you’re only 15 and a half. So really don’t know what you don’t know. You have this kind of you know, this is a you know, I consider this not just a life changing, but a potentially generational change opportunity for families. 

    And going in there I mean, you have that whole issue of fear. And you know, the fear of the unknown what’s going on and it’s not your fault is just you know, you don’t know. And and the buyers unfortunately are not going to you know, make you feel any better when they’re talking about indemnification and well we’ve got these it’s just usual standard of business we have, you know, your reps and we need to be able to have a money back guarantee. And you know, that brings in tension which can be you know, released with reps and warranties which essentially takes the indemnity obligation away from the seller goes to an insurance company. 

    Gina: That’s right. 

    Patrick: Buyer suffers a loss. Buyer doesn’t go after the seller, buyer goes right to an insurance company and I’m just good, bad or indifferent. Your mission is almost a standard so I get the impression you trust but you know, don’t take my word for it, folks. You know, Gina, what’s your impression with reps and warranties?

    Gina: You know, I think it’s essential in deals today. Number one, it takes away, as you mentioned, the tension or the potential for conflict. So here’s a scenario, entrepreneur builds a company, and sells the company to a private equity firm, or majority stake to the private equity firm. But that entrepreneur still has 30% equity rollover in the company. And an entrepreneur is continuing to run the business. One year down the road, something comes up, that is, could be an issue that would go against the reps, representations and warranties in the purchase agreement. Okay, that’s really stressful. 

    Now you have a situation where you have the private equity firm, the board and CEO of the company, are in conflict over something that CEO is like I didn’t even have anything to do with that issue. That was one of my employees two years ago. And they’re arguing about that. And how do you get past it? How do you run the business day to day, and still had a good healthy relationship? Reps and warranty insurance, separates that problem and reduces the tension that’s there.

    Patrick: Yeah, I think it’s very elegant. That happens to Silicon Valley quite a bit where you, I mean, the dilemma happens where you’ve got a good sized buyer, there’s a, you know, there’s an escrow, or a withhold of, let’s say, five, five to $10 million, and you’re bringing on this rockstar development team, and they’re looking for their money after 12 months. And then there’s a breach that happens, was out of everybody’s knowledge out of everybody’s control. And the dilemma for the buyer is this. Do we clawback this money that they’re waiting for? Okay, that they’re counting on? Or do we just eat the loss?What do we do? Right? Now there’s rep and warranty insurance in place, all of a sudden that that’s a non issue. 

    Hey, you’re putting the claim and it’s all taken care of. So we find that. I would say that the biggest development that’s happening in the reps and warranties market now as this has been a product with the province of deals with transaction values of a 15 million legitimate and up. You can go lower, but the diligence requirements are such that it’s usually more favorable at the $50 million threshold and up. However, there is a new program out there is a sell side policy, which will insure owners and founders of companies with enterprise values of 500,000 to 10 million. 

    And a policy will cover to the entire enterprise value. It is a newly launched program out there, we’re very excited about it. We think about it, while this is too small for a Colonnade type client it is not too small for add ons. And there are a lot of in particularly in technology here in Silicon Valley, there are a lot of seven $8 million add ons that are brought on every day that have they don’t have access to the benefits of reps and warranties. So we always want to highlight that.

    Gina: That’s a really good product. And we work a lot with companies that are doing add on acquisitions especially, we see this a lot in the automotive F&I space, where they’re buying agencies and those agencies are smaller transactions. And you don’t want to involve you know, they’re too small, historically, for reps and warranty insurance. But you don’t want to tell the guy I’m buying your agency for $8 million. And by the way, we’re going to put $2 million into escrow. I mean, that’s horrible. So you’re just kind of setting up a rough situation. So that policy solves a lot of problems.

    Patrick: Absolutely. So what’s what I’m very proud of with with a dynamic insurance market that we have is there are needs that are coming up and in the market is rising to meet those needs. So I’m excited to see how this goes forward. And and Gina as we’re looking forward, okay, we’re, you know, latter part of 2021. I blinked and this year just went through. You know, what do you see for, you know, forget 2021. What do you see for 2022? I mean, macro or just with Colonnade?

    Gina: Sure, well, let’s look at the the macro side, you know, we are in a low interest rate environment, we are in an inflationary environment. And we are in an environment that we have a very large private equity overhang through the pandemic, we even in May, June of last year, private equity firms were raising new funds. There’s a lot of assets allocated to the alternative asset class, the private equity asset class. And so there’s a lot of funds to be deployed. So there are buyers for companies. There are more buyers probably and there are good companies to bought. And that’s driving up valuations.

    Patrick: It’s a seller’s market. Yes.

    Gina: It’s a seller’s market. And I don’t think that is going to going to abate in in 2022, maybe even to 2023. I usually don’t look beyond 18 months, but I still think it’s going to continue to be a strong M&A market. And there are companies that have come through the pandemic now. We’ve been through the worst of the pandemic, and we’re seeing either they did well through the pandemic or their recovering coming through the pandemic. So 2022 is the year that they’re going to sell, we kind of will say, you know, let’s not, let’s not focus too much on what happened in 2020, or first part of 2021. But things are back to normal, they’re going to sell in 2022. 

    So I think there’s M&A activity is still going to be high. There’s still going to be a lot of interest in it. I do think it’s a tough environment for businesses to operate. You know, wages are going up, and wages are going up because of inflation. And because people want more money for doing their jobs, and the I’ve never was not a big fan of higher minimum wages. I am a big fan of people getting paid more, because they demand it. If nobody’s going to work for $10 an hour, then you need to pay a lot more. And so that is impacting companies. 

    And so when wages go up, either margins shrink, or that gets passed on to the end customers. And so it gets passed on to the end customer, things are getting more expensive as a result. And there that might cause some dislocations in the economies and there and some industries will be hurt more than others. We see this and in travel and leisure and entertainment, and in retail restaurants. Other parts of the US economy are doing really well. People are figuring out ways, other ways to deploy their capital. I think financial services products is one of them.

    Patrick: I think that there’s just going to be new platforms for buying selling for financing things, just the way people pay for things is changing. And so we’re going to be a lot of force changes. There’s going to be I think, I’ll go out on a limb and say not only will things not slow down, I think if there is a slowdown, it’ll just be a slowing in the pace, but we will not see M&A fall off the cliff. There are many demographic issues, there are too many technology change issues that are going. There are all these forces that are coming out. I think the other thing that is a wonderful, wonderful outcome. And nobody thought about this is how many people stopped work the pandemic. 

    And when they’re returning to the workforce, they are not returning as employees, they’re looking to buy and start their own companies. And I mean, as basic as landscaping and car washes, could then go and then we got roll ups with that. And you know, and a lot of other things. So I think, you know, I would say the American spirit for innovation is not limited to Silicon Valley. It’s everywhere. And I think it’s gonna be a lot of fun and they’re great firms like yours out there with Colonnade that are holding the hand for those for those pros that you know they made it from, you know, A to AA, and you’re getting them to jump AAA into the majors. So I think it’s great, and I can’t thank you enough for this. Gina, how can our audience members find you?

    Gina: Sure. The easiest way is to go to our website for Colonnade Advisors, which is c o l a dv.com. I am on LinkedIn as is my partner Jeff Guylay. So Gina Gina Cocking on LinkedIn, Jeff Guylay, LinkedIn. Colonnade Advisors on LinkedIn. And that’s where you’ll see a lot of our content and so we we we post regularly and we post about things that we think matter to companies in the financial services industry, young companies and to buyers at companies and so we try to be pretty informative with what we put out there.

    Patrick: And I one plug for your podcast I will tell you this just fun little fact with podcasters okay. There are over 1 million podcast series on Apple iTunes, okay, and people think barrier to entry there are too many, okay. Your average podcast series doesn’t go past four episodes. You are well past that as you’re already on, on the upper half, upper half. So congratulations. Gina thank you again.

    Gina: Thank you, Patrick. It’s good to speak with you.

  • Ron Edmonds | What You Need To Know About Lawn And Landscape M&A
    POSTED 9.21.21 M&A Masters Podcast

    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:

    • How The Principium Group joins buyers and sellers to create a more positive experience for both sides
    • Where the biggest demand is in lawn and landscape M&A (and what is driving it)
    • How technology is changing the industry
    • What trends he sees coming for 2022 and beyond
    • And much more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    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? 

    Ron: Absolutely. 

    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?

    Ron: Back to words you can’t pronounce and can’t spell but our website is principiumgroup.com. That’s p r i n c i p i u m group.com. And my email address is Ron@principiumgroup.com.

    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.

  • Skip Maner | A Fresh Approach to Building Businesses in the Middle Market
    POSTED 9.14.21 M&A Masters Podcast

    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:

    • Capital solutions across five distinct strategies
    • NewSprings Holdings’ ideal targets
    • Upcoming trends for 2022 and beyond
    • And more

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    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. 

    Patrick: Yes.

    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?

    Skip: You, our website is newspringcapital.com. We are in Radnor, Pennsylvania, right right outside of Philadelphia. My email is smaner@newspringcapital.com and happy to talk anytime.

    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.