• Dena Jalbert | Focusing On the Strategy of the Transaction
    POSTED 4.6.21 M&A Masters Podcast

    Our special guest on this week’s episode of M&A Masters is Dena Jalbert. Dena is the Founder and CEO of Align Business Advisory Services, a team of former business owners, operators, and executives in offices throughout the US who bring Wall Street resources to the lower middle market. She was also recently named on Mergers and Acquisitions Magazine’s list of the Top 25 Most Influential Women in Mid Market M&A.

    Dena says, “When we sit down with clients, we start creating the investment thesis, helping them make that decision. We help them really analyze all their options and what they all mean, then we have it reflect their personal needs, because 99.9% of our clients are owner-operated businesses. Quality of life and success all have to be considered in addition to what opportunities the market can avail. We align those two dynamics, and then the clients will get excited about it.”

    We discuss the ability for companies to grow organically, as well as:

    • What happens when business owners reach their inflection point
    • Helping sellers understand the science of the deal
    • Cultivating relationships with investors to better serve as an intermediary
    • The greatest resource for both buyers and sellers
    • Women in the M&A workforce and the opportunity to offer value and see more diversity 
    • And more

    Listen Now…



    Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&a Insurance. 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 Dena Jalbert, Founder and CEO of Align Business Advisory Services. Align Business Advisory Services, or Align, is comprised of a team of former business owners, operators and executives in offices throughout the US that bring Wall Street resources to the lower middle market. In addition to wrapping up a very robust M&A season, despite the pandemic, Dena was just named to Mergers and Acquisitions Magazine’s list of the Top 25 women in middle market M&A. So Dena it’s a real pleasure to have you here. Thanks for joining us.

    Dena Jalbert: Hey, it’s my pleasure. Thank you for having me. I appreciate it. Very much.

    Patrick: So Dena, before we get into Align, let’s set the table for our audience. Tell us about yourself. How did you get to this point in your career?

    Dena: Oh gosh. well, you know, I started my career years and years and years ago, with Arthur Andersen. So if that dates me at all, but you know, started in big four public accounting, I’m actually a CPA by trade. You know, I took to heart when Warren Buffett said accounting is the language of business. You know, I thought to myself, okay, if I can speak the language, then then I’ll understand it. So it was just kind of the path I, I followed, but I was fortunate enough to never go the the kind of traditional CPA route, you know, I started my career with big four in internal audit, and then went into transaction advisory. 

    So I’ve been doing m&a for since the beginning. And then over the years, I transitioned to the other side of the desk, where I got to work for corporations who were buyers. So I worked for Tribune Media, who owned a publication in in South Florida. And I worked with the publisher there to help do acquisitions of smaller publications and evaluate those, and that was kind of my first foray into being a private buyer. So buying, you know, small businesses, and then that same experience followed me over the years. So subsequently went to work for some technology companies, e commerce, financial technology, and professional services, and did the same thing would work to do acquisitions. and integrate those businesses, scale it and then exit it. 

    And so then over the years, they all just kind of piled up. And so, as a buyer, throughout those processes, I just saw how these smaller businesses were just really underserved. You know, we’re sitting there with our investment banking team, but they’re sitting there on their own, you know, for the most part, right, and, or they would have some support, but just not the right level of support. And one that just didn’t fit, you know, their exact needs. And so I saw an opportunity in the market to be underserved and, and that’s really where Align came, came to be. And so I leveraged all those years of experience, into how we do things here it Align and so far is borne lots of fruit for us, which has been great.

    Patrick: So let’s talk about Align now. And why don’t we start by sharing with us how you came up with the name, because unlike a lot of law firms and insurance practices out there that have no creativity at all, they just named their companies after the founder’s last name. Tell us about the name, how you came up with it. And let’s then turn the attention to your commitment to the lower middle market.

    Dena: So it was a word that we used all the time, I would find myself in conversations as we were working with businesses, that word came up a lot. And and as I think about what we’re trying to do for clients, you know, we’re trying to align buyers and sellers in transactions, we’re trying to align, you know, internal operations or financials or preparation for sale, you know, everything was about, you know, creating alignment and synergy and so on. So that’s really where it where it came from. And and it’s, it’s, it’s ironic, because it really is the core theme to what it is we do and I’ll find myself in conversations with clients and investors and acquirers and they’ll use the word and chuckle and I’m like, no, no, it’s okay, pun is very much intended.

    Patrick: One of the things to really point out about Align is your commitment to the lower middle market, which I think is excellent because not only is the lower middle market, just a vast marketplace that’s sizable, it’s seriously underserved. And while you and I are involved in an m&a transactions, day in and day out, these owners and founders aren’t. And when they come new to me, they don’t know what to expect, they don’t know where to turn. And what’s unfortunate for them is because they don’t know any better, they’re going to default to either an institution, or they’re going to default to a strategic because they don’t know any better. 

    And if they go to the institution route, unfortunately, they’re going to get overlooked, they’re not going to get their needs met. But they’ll get overcharged. If they go to a strategic without guidance on how to navigate that process, they may end up with a less favorable deal than they thought. And so let’s talk about that, and how you’re helping them. Because the great reason why we want to highlight Align is that companies like yours need to be known by the lower middle market, because of all the great things you do and how you commit to them and bring resources at a fraction of the cost that the bigger shops are offering.

    Dena: That we are no and we stay focus here. For a number of reasons. One, as you mentioned, you know, it’s it’s it’s a huge market. And it’s comprised of industries that are extremely fragmented, you know, and so, which breeds opportunity. So I, as a buyer, knew and understood that there was value to extract there. But you know, when you think about how quickly you want something to grow, it’s the age old, you’ve got the aircraft, carrier boat, or the speedboat, the lower middle market is the speed, but they can go faster, they can be more flexible and nimble, and there’s more ocean for them to cover at a much faster clip, it’s harder to turn, you know, the larger boat. 

    And so when from an investment perspective, when you’re thinking about how much can I grow something and in receive a return on that investment, you know, larger deals, their organic growth potential is much smaller. And there’s not as much that hockey stick that everybody loves to model, you can actually achieve it in the lower middle market. So I knew that there was value there. And it’s just a matter of making sure that those who are in the market understand that those opportunities exist for them. And because it’s underserved, you know, you have some investment banks who work in the space, and they’re great, there just aren’t enough. You know, there are some that that, you know, try to but maybe don’t quite give it their focus or 100% effort. 

    And then there’s a lot of very well intended business brokers who traditionally are more Mainstreet focused, and that’s their expertise, you know, they’re the best resource for there. And there’s, you know, the age old business of they’re too, too big to be small and too small to be enterprise. And it’s really that niche, but they have so much potential. And there’s, and because they’re in fragmented industries, you can grow both organically and in organically. And that’s just such a recipe, you know, for an investment thesis all around. So I looked at that and said, you know, these companies just need to, they need the help, and they need someone to pinpoint the opportunities that are available to them. And that’s what we hear from clients every day is that, gosh, I didn’t even know that an opportunity like this could exist for a company like mine. 

    And I, that’s what we strive to do. And you know, and then on the flip side, you know, our the investors we work with new cars we work with, are so thankful that we’re there to help bring them highly qualified and good opportunities. And so it’s, you know, it’s a win all around, we’re just there to make it, you know, more efficient, I think sometimes we as intermediary, sometimes get a look as to, you know, are you here to hinder or to help and, and I think our brand is now been proven and is known for definitely being helped and generating quality deal flow.

    Patrick: I like your observation of companies that are too big to be small and too small to the enterprise. And essentially, where they are, they’re at an inflection point where they’ve got to make some kind of move, whether it’s getting more capital, looking for an exit, looking for an acquisition, something like that. And that’s where you guys come on in. And you’re on both sides of the table, actually, because you’re not only bringing resources to sellers, you’re attracting buyers, which is very helpful, because there are a lot of buyers out there that don’t know probably all the places to look, they don’t know where all the opportunities are. So why don’t we talk about just how you’re bringing services, we’ll start from the sell side of the table, and then bring it over to the buy side on how you’re bringing those together.

    Dena: Perfect yeah. So I’m using your example there’s a business owner that’s reached an inflection point. And they need to to make a decision. And sometimes it’s not even so much that they’ve reached an inflection point. It’s just that there are an abundance of opportunities at their feet. In either way, there’s a decision point to be made for a business owner. And first off, they they just need to understand what it all is. Because there’s really you know, complex turn leveraged buyouts and you know, indemnification and all sorts of things that, you know, make the heads swirl, you know, for a business owner if they’ve never gone through the process before. And so we we bring our expertise, and our technical knowledge, I call that the science, right? It’s the science of the deal. 

    You know, there’s the art component, which is the sales, we’ll get to that other side of it, as you mentioned, but then there’s the science of the deal. So, you know, we are team members, who focus on that are CPAs, MBAs, JDs, CFAss, right, you know. We technically adept people that traditionally that level of skill is out of the reach of the smaller businesses. The smaller businesses unfortunately, are, because they sit in that niche of being too big to be small and too small to be big, that they, they get shoved into the Small Business Resource bucket. So that means small business coaches, and it’s not and again, all well intended, you know, people, but it’s, it’s not that level of strategic experience and the science there that, that someone like ourselves is able to bring them. 

    And just because they don’t have access to it doesn’t mean they don’t want it, right. And so what we see when we sit down with clients, and we start creating the investment thesis, or your idea here and helping them make that decision, as they come to that decision point, we help them really analyze here, all the options, here’s what they all mean. And then we have it reflect their personal needs as well, because 99.9% of our clients are owner operated businesses. And so there’s a personal need from, you know, economics, of course, but quality of life, and it’s a succession all sorts of things that have to be considered, in addition to what opportunities the market can avail. And so again, we align those two, those two dynamics, and then then the clients will get excited about it. They’re like, yes, you know, this is great. A lot of the time our clients think m&a only means I sell to a competitor. 

    And it’s like, oh, gosh, you know, m&a is. It’s like Baskin Robbins, there’s 31 flavors, right? There’s so many different ways that you can do these things. And so our Wall Street resources, if you will, that science, you know, we bring the technical knowledge and expertise around capital markets and deal execution to one help them decide what they need and to get it done and not feel overwhelmed by the process.

    Patrick: Yeah, so standing there, you’re providing options to the sellers, where, as you said, they may think of a transaction, they only think of it one way, and there are multiple ways to pathways to get to the ultimate goal where they want to be. So that’s great that you’re able to handle that. And I apologize for being overly simplistic. But I think the other thing that you’re providing is very similar to what professional stagers do in real estate for homes, where they bring in folks that are going to stage up the house make it look ideal and optimal.

    And in a lot of cases, the owners look at the the staged house and kind of wish they were living there now because it looks better, and but you’re setting it in a way and you’re positioning a company to put his best life out there. And it’s amazing how whatever money is spent to do that staging, that process of improving a company and getting its looks right. The return on that investment alone is seven or 8x. And was amazing to me is how many business owners don’t even realize this kind of service exists.

    Dena: Oh, fundamentally, and those that are aware of it, you know, think of it as purely a you’re just going to introduce, introduce us to buyer, right, they only see the relationship piece of it. That’s something that, you know, we’re very proud of us, you know, our scope is very broad. So using your house analogy, it’s a great one, in that, you know, we help them evaluate the house and say, well, listen, you know, do you want to fix up the kitchen, before you go to market, you know, or not? So, as an example, we could be working with a client and their financials might not be as strong or as or as cleaning, or where they’ve got maybe a couple of management issues or some some things internally. 

    And so we all talk about, you know, is it something you want to address before we got to market? Or is it something that we’ll just be transparent about and know that the outcome of a process will actually naturally solve for those things? You know, so it’s so much more than, than just, you know, an introduction to someone who might read a check. And then it’s also, you know, helping them through all the nuances of a deal. A lot of again, small business owners who do have some basic knowledge of it, think of it as so much, I’m just going take the biggest offer. 

    But then when you break down as you know, and what you do, there’s a way more to it and so we help them understand all of that as well. And that’s, that’s a big lightbulb moment. So it’s all of those components that there They’re important and we help package all that up to answer your question. And we do package all that up and, you know, help them get the most value at the right terms. And that’s what we call the right deal. It’s not just getting a deal, it’s getting the right one.

    Patrick: So that’s a real thorough explanation of the sell side of the table where you’re bringing all that valuing coaching them through that. Let’s turn it around. Now let’s go on the buyer side, because for every seller, you’ve got to find a willing and able buyer and make that fit. So tell us about that. Because you don’t just have knowledge of buyers that are out there, you know, what they’re looking for. And so that’s ideal, because you can save them time bringing ideal clients or ideal targets that they’re looking for. Why don’t you talk about the buy side?

    Dena: Absolutely. So that’s the product called the art of the deal. So and we’re structured that way, we actually have, you know, team members who are focused on on the the art side of the house, or the sales side of the house, both with clients and with with investors. And we then we have those who are dedicated to the science. But so now on that side, you’re exactly right. So I spent a tremendous amount of my time and so does our team, constantly interfacing with investment groups, those that we’ve met and known over the years, just through doing deals, that’s the best way, right. But then, you know, through that, there’s just more and more that are added every year, every minute of every day, and all different types, right family offices. 

    In independent sponsors, you know, corporate debt groups, you know, you name it, there’s so many different types of folks on the other side, and it’s our job to know them, and we try to the best of our physical ability to, to have those conversations and create relationships, one of the things that we like to do is, rather than just taking kind of a basic shopping list, if you will, like it has to be this amount of EBITDA, it has to be in this vertical geography, we don’t care, it’s, you know, I know better, they do very much care, and they very much have far more specific needs. And so we try to take the time to sit with acquires and investors, and really dig into that, understand their strategy, and be a part of that. 

    One of the things that, and by doing that, one of the things that we’ve been successful at doing is when we sometimes will place a client with an investor, and it will be a new platform for them, and we know them so well now that they’ll then in turn, use us to help them find add on acquisitions, because we just, you know, know, the client innately Well, we know the space, because we’ve been in it, and so, and then we create sector focus in that, in that way. And so, you know, and I spend my time during that, you know, I cultivate relationships with various investment groups and touch base with them to understand and then we track that, you know, when we start to see pockets of demand bubble up in certain sectors, that’s an indicator to us that, you know, there’s there’s money being put to work there by several folks. 

    And that means we should focus our efforts there to be able to help support them in their deal flow. And so it helps us It helps us kind of laser in on on where, where demand lies. But then it’s, it’s, it’s fun, because then we get to help put those puzzle pieces together. Yeah. Well, you just did an acquisition in, you know, in Georgia now, are you looking at Alabama? Are you thinking about the Carolinas, or the Northeast? You know, we are, you know, you just bought this new service line? Well, you know, what have you thought about XYZ, and so we get to really become a part of their strategic plan, and just help them execute it. 

    And that’s a lot of fun for us. So you can do it on on, on both sides. And because we’re constantly talking to businesses, you know, sometimes we’ll be able to bring those proprietary opportunities, folks that might not want to go out in a full in a full process, but it still winds up being the right deal, because we know what the buyers needs and intentions are going to be and we know the fits going to be so yeah, so we worked very hard on both sides.

    Patrick: Well, I think for buyers out there, particularly those that are looking for add ons, this is ideal for them, that’s a great value add that you’re bringing, because if you already know what they’re looking for, you’ve helped them on one deal. And now you’re aware of their appetite. So you’re saving them from one of the dirty little jobs out there. Private equity is doing biz dev, where they are looking for companies in literally cold calling perspective target companies, which nobody wants to do, but it’s out there. And what you’re coming along with is your another set of eyeballs that are out there. And one of the things you mentioned I caught was that you can bring them deals that are not necessarily looking for an entire process. So all of a sudden this becomes part of their proprietary deal flow. And you can’t put a price on that.

    Dena: Yeah, yeah. And, you know, I’m also a big believer in time is a resource that none of us can recreate. It’s the one thing that you know, it puts pressure on all of us. And so my goal is to never waste anyone’s time you know as a seller or a buyer. You know, we don’t like to present opportunities that are a stretch, it’s just a waste of time. Now granted, I know a lot of these groups have great processes to be able to review things quickly. You know, but again, that’s, that’s just a, it’s a, it’s a waste of effort, it’s a square peg, round hole. And, and people pay for things they want, you know, any of us in our day to day lives, you know, pay for things that are of value to us, it’s no different in the investment community. 

    So if it’s not as directly hit by why waste time, and the only way you’re going to know that is to truly get to know your clientele. And so we really, and, and also, we genuinely care where our clients go, which I think, frankly, is a bit of an anomaly. And in our industry, I genuinely want to see our clients succeed, again, back to it’s the right deal, not just a deal. And so that’s where, you know, truly understanding buyer strategy, and, and who they who the people are inherently that are a part of the team, you know, we want to put our clients in the hands of good people who share the same values, who, you know, they all are excited and aligned, see how that works out in the same mission and are excited about this particular opportunity, what they can do together, you know, that’s where you see great things happen. 

    You know, as an example, we had a client, that we that we helped exit them their new platform investment. And it was extremely competitive process, there were a number of folks at the table, they went with the best partner wasn’t necessarily the highest offer. But it was the best terms, it was the best opportunity overall, and just the best rapport and relationship and this company went on to grow, they grew 20%, the first quarter after close, they’re going to double in size, within less than a year, it’s only been 10 months ish. And those are the types of stories that I get really excited about, because that means we, you know, we, the puzzle pieces align came together really well there. And that’s where growth and success happened. So, you know, we pride ourselves on on doing that, and not forcing things for the sake of forcing things.

    Patrick: What’s your ideal client profile for Align? Both on the sell side and on the buy side?

    Dena: Yeah, so for Align, it’s, it is that, you know, growth stage business that has had, you know, strong, a good strong year three to five years of growth, that it’s like well, huh. Okay, where do we go next? Because, you know, those even who aren’t in a pressure situation where you’ve got to worry about like retirement or succession or some trigger. It’s really any business who’s who’s been doing really well. And most entrepreneurs that we meet, are always saying, What’s next? Because in order to grow, you’re always challenging yourself, and you’re always doing new things, right. 

    So, you know, the the ideal client for line is, yeah, you know, that that client that’s got 10 to 15 million in revenue, and we do your transactions bigger and smaller than that. But those kind of second stage growth stage companies who are at as you put it earlier, that inflection point of, man, we could really grow this thing and blow it out. Or maybe, you know, maybe I’ve been doing this for 15 years, and I want to go pursue my love of, you know, competitive barbecue, or something. I mean, we’ve seen so many different types of stories, but, you know, maybe there’s a new passion and so whatever that is, but you know, and I would say we as a firm tend to focus in service based businesses or in or manufacturing. 

    A lot of our team has come from various industries of services, everything from healthcare to industrials to business. But I would say we tend to focus there and you know, someone who’s saying, What’s the next opportunity, and, you know, those are the companies we like to work with.

    Patrick: So now as we’re talking about prepping and transitioning, you know, between buyers and sellers. Now, one of the things that we have to keep in mind on this is these deals have quite a bit of risk attached to them. And you’ve got a human element that we have to not overlook were, particularly with original owners and founders who aren’t dealing with m&a day in and day out. They’re not accustomed to the fact that they become aware of as you go through the negotiations where you get to the talk, the subject of indemnification, where the seller is held personally liable to the buyer financially. 

    In the event the buyer suffers a loss post closing that the seller didn’t warn the buyer about and sellers get very scared and surprised because they don’t realize it is their personal assets that are risk, they can’t hide behind a corporate veil, they are personally liable to the buyer for something that may be completely out of their control. Buyers are accustomed to this as part of the deal for them. And so over a very short period, there’s quite a bit of tension and stress that is created because of of this dynamic because buyer doesn’t want to be left holding the bag if something blows up, and the seller doesn’t want to be on the hook for this. 

    Fortunately, the insurance industry came out with a product. It’s called reps and warranties insurance. And what it does is it transfers the indemnity obligation away from the seller to the insurance company. buyers are protected because they have a guarantee of recovery. In the event they suffer financial loss seller gets a clean exit. In many cases, the rep warranty policy replaces 90% of any escrow that’s out there. So the buyer gets to exit with more cash at closing. And they have a peace of mind knowing they get to keep all of that cash and not worry about a clawback sellers like this because it reduces the tension. 

    It eases negotiations, because if there are particular terms out there that the two sides are are discussing and negotiating. If an insurance company is going to cover that rep or warranty, guess what no need to go on anymore. And so we’ve found this to be a real elegant solution that was reserved years ago just for deals in the 100 million dollar plus transaction value level. Because of competition, because of the great outcomes that the insurance industry has been receiving, there aren’t as many claims getting paid on this, the costs have come down, the underwriting criteria have been simplified. 

    So now more deals and more lower middle market companies, owners and founders can benefit from this. And it’s purpose of why we want to share this news because this is the only way we can get it out that what years ago was ineligible, you could have a deal as down around 12 or $13 million transaction value can now be an eligible risk. And so Dena, with your experience at Align, why don’t you share with us good, bad or indifferent? How have your clients fared with rep and warranty insurance?

    Dena: I love rep and warranty insurance and not just saying that because we’re having a conversation. But genuinely, because of the type of client we work with. They are the ones that no matter how much you explain it to him, it’s it’s inherently difficult to wrap your head around that liability. And we’ve worked with exceptional attorneys. I mean, don’t get me wrong, they’ve got great legal advice, but even still, it’s just it’s a complex thing to talk about. And then it’s what you know, how long does it How long do I have these sleepless nights. 

    And, you know, and because a lot of our clients don’t have the most sophisticated infrastructure, I love the point you made about you know, I’m betting millions that you remember everything. And it literally is that it’s that have they remembered everything, because there’s not as much infrastructure, you know, institutionalized process and administrative things there to, to give them comfort that it has, in fact, been done. And so and, you know, from a deal perspective, it makes the deal frequently move faster. And it also gives buyers and sellers, you know, we’re so focused on the success post close as well, that when you put insurance in place, the deal really is in the rearview mirror, it removes that measurement point and the the the need for attorneys to come in, in the future and kind of argue around measurement and potential claims or whether it is whether it isn’t what the basket was, etc, etc, you know. 

    It’s a it’s a challenge, and it just strips all that away, I’ve seen a number of deals where it should have been used and wasn’t and so, you know, big escrows that they’re asking to be held in, you know, in off to the side and you know, even 10% you know, to investors, that’s not that big of a deal. And it’s not much but to a selling person, what do you mean, you want to keep 10% of my money and why? And it’s hard for them. I mean, they get it conceptually that they they don’t like it and you know, there’s no there’s no more positive moment than the moment the wire hits the bank account for any seller. And to know that any of that might get clawed back and or it’s not as much as it should be because you’ve got all these different, you know, things sitting around, you know it and what I’ve seen is the cost I when I first started, you know, years ago, no money the cost was prohibitive. 

    It’s so much less expensive now that it’s, it’s less than it’s, you know, it’s significantly less than what you’d have to post up in escrow. So it really gives folks a tremendous peace of mind allows the deal to be far more focused on the strategy of how we’re going to make this thing work and win, then it is about making sure you told me about every single contract and every relationship you’ve ever had since the inception of time. So our experience has been really positive with it. And we’re seeing more and more of it to be used. And I hope that trend continues.

    Patrick: Definitely don’t want to overlook the fact that I’m speaking with somebody who was named to Mergers and Acquisition magazine’s list of the Top 25 women in m&a. And as a father of two young teenage daughters, I am more aware now that I have in the past about the importance of diversity out in the workplace and opportunities for women, particularly, you know, selfishly for my daughters. And I’m just curious, from your perspective, I have seen women underrepresented in the world of finance in general, and m&a in particular, and it’s beginning to change. But I’d really like your perspective, why don’t you share your thoughts on on women and m&a? And and that whole subject?

    Dena: Yeah, absolutely. So, you know, I spent a number of years as being the only woman in a room and still are a lot of the time. And for me, it was one of the catalysts for me and founding aligned was, you know, there is room for more women and in broad diversity to you know, I’m not just gender, but ethnicity and professional personal background, I actually pride myself on the fact that our team members, you know, those on the front end of what we do client facing, and they’re not all informer, investment makers, you know, we’re up business operators. And so your diversity can bring a number of different connotations to it. But particularly women are definitely underserved. Finance has been an industry where hasn’t been super welcoming to, to that. 

    And I actually gave a speech at University of Central Florida here in Orlando, where we’re headquartered to the MBA students, and there’s many statistics around women who graduate with finance degrees or graduate with MBAs who don’t stay in finance long term for their careers, for a myriad of reasons, you know, the fact that they, you know, aren’t welcomed, given as many opportunities, it’s starting to change, I definitely see more and more women, you know, the fact that a list like this exists is great. You know, and I’m certainly honored to be named as one this year. 

    It’s, it’s humbling when you see the other women on the list, but I think we’re all there in, in pursuit, and in proof that there is a place for it, and many of us went and carved it for ourselves, I think it will become more and more, you know, institutionalized, you know, with time, and less the exception, then, perhaps it may have been or even slightly, still is, and so, but I think, you know, what women bring to m&a is a level of empathy, that doesn’t exist, or not as much with others, you know, and that’s, it’s not a bad thing. It’s just, I think, something that is a bit gender specific. It’s that I guess, maternal, if you will, quality that people often refer to women about but we have an ability to listen, and we have an ability to empathize. 

    And so everything that we do, is based around, you know, aligning people in something, and so you have to listen, and you have to understand, do you have to agree sometimes, well, no, you know, naturally, but and that helps, you know, in negotiations with prospective acquirers, you know, I can understand them. And I can understand our clients. And that’s where we talk about how we translate that language, the speak on either side of the table, I think we as women have a unique ability to truly empathize and, and apply that practice, which has led to a lot of value creation, and a lot of success. And so I think it’s peaking, you know, peaking the ears of groups who maybe have been a bit more homogeneous until now to say, well, gosh, there are approaches creating value and bringing return on investment. We need more of that. And I hope that to continue.

    Patrick: And just to double back on something that we discussed earlier on about, you’re not able to remove the human element from m&a. And what better way to capitalize on that factor, then bring in these alternative perspectives where you’ve got empathy. You’ve got These other skill sets, other viewpoints out there. And what’s beginning to be seen is, I think traditional firms out there that may have been resistant to some form of diversity, whatever it is, they’re figuring out that by having these other perspectives in this diverse team work, that framework is a competitive advantage. 

    And once that becomes translated to them as a competitive advantage, I think we’re gonna have a lot more buy in, we’re already seeing that happening. The other issue is that bringing in other perspectives doesn’t limit opportunities, it actually expands opportunities, expands avenues for growth, and ways to get, you know, a deal completed. And so I think that’s a great value add right there just in and of itself.

    Dena: Correct. And it’s also about reflecting the the clients that we serve to, you know, I mentioned before, how unique our team is, is, you were comprised of so many different types of people, all ages, and backgrounds. Because it’s really important to me that we were, that we look like and represent the clients that we are working with, you know, and that’s where, again, the empathy and understanding comes from too, because, you know, you can really, when it when a client’s telling you about their personal needs and wants, it resonates so much more, because you truly innately understand it. And because you’ve got connectivity there. So, you know, being able to reflect who our clients are, is equally important to us, where sometimes that turns around is a challenge is maybe a bit on our acquiring side and the investor side. But from their perspective, it’s all about value creation. 

    So if you’re bringing them something of value, you know, it’s it’s so in those moments, I actually had this a couple weeks ago, I brought together two groups of people who’ve been voraciously, hungry to meet with one another. But, you know, I was the one that was able to bring them them together to consider a really, really important potential merger between these two organizations. And, you know, I was the only woman in the room and at one point, there was someone in the space was like, Well, how did this happen? And who, and I can raise my hand at the end at the table. And it was, you know, just really interesting to see the expressions, but again, they’re just like, oh, that’s awesome. 

    Because you’re creating value. And, you know, and so there’s far more when you’ve got that, those success stories to point to those in something good for those guys to look at. It. They’re far more accepting of that, I think then when it years ago, and what it used to be. So there, there’s definitely some shifts happening. And and I am I hope firms like ours. There’s, there’s more stories like that to be told. And that’s where change happens.

    Patrick: Now, Dena has a great perspective. Now, as we look back on 2020, I guess you couldn’t be blamed to be sad that 2020 ended because you had all the success with deals and then making that top 25 list. But as we go forward, now, we’re looking into 2021. Tell us what you see out there. What trends either with Align specifically or m&a in general?

    Dena: Yeah. So 2020 was an exceptional year. And I remember though, in March thinking, oh, my gosh, are we going to do any deals, the rest of this year is like, just the world’s gonna stop. You know, I mean, it was just, there’s so much uncertainty, nobody knew. But like any of us in any moment have, of course, challenge. Yeah, they, you pick yourself up, and you figure it out. And so it just became different. And then, you know, once that initial shock, because it was it was a bit of a light switch moment, it was just like, you know, you can pinpoint the day, almost, you know, in each local place where, where that’ll happen. And that’s so unique. And so once once, what’s that shock? Or often it was, okay, well, how do we make this work? 

    Because clearly, it’s not going away anytime soon. And then, you know, so we saw March in April get pretty quiet, but then come May, 2nd half of the year was just gangbusters. And, you know, at the root of it, I think there’s still a ton of cash out there. And so 2020 was strong. 2021 is going to continue to be I think even more so, because there’s still bottled up demand and there’s still a lot of cash coupled with consumer. You know, you mentioned the beginning of the end of the pandemic, and we’ve been caged animals for over a year. Everybody wants out you know, once the gates are open, as I call it and make that I guess joke, but everybody’s gonna be running every which way. 

    You know, I’ve, I’ve never I just had lunch this morning or this afternoon with someone and said, I can’t wait to travel for business again, meaningfully. You know, I’ve done a couple things here and there, but you know, I’m usually on the road regularly and so, those norms will come back and with that will come the volume of life and of work in various industries. You know, I, we at Align of always focused on need to have industries and need to have businesses, you know, we are not the firm for your venture tech, high tech, you know, organization, you know, we are, as I mentioned, we work in healthcare, you know, industrials, and, and manufacturing, and business services. And so those are all things there need to have. And so I think that’s, yeah, there’s no perfect word. Exactly right. And, and so by virtue of that 2020 continued to be strong, because all those businesses, you know, still carried on because you needed them. 

    And for us, 2021 will continue to be the case, because that’s where people are putting their money in and seeing this infrastructure is needed. These are businesses that are recession resistant, nothing’s ever fully recession proof. But they were recession resistant. So money’s pouring in there, we can’t keep up with the demand, we’ve actually had more requests for buyside help in that regard than we’ve had, historically. And so I see that trend continuing. But then I also see money flowing back into the hardest industries, you know, fitness, hospitality, you know, restaurants, leisure, all of that, because again, once the gates open, people are going to go take those vacations are going to have the weddings, they’re going to go out to eat, they’re going to, you know, do all the things that they haven’t been able to do. 

    And so we’re seeing good consolidation happening, maybe some weaker players merging with some stronger ones, and so they’re going to be primed and ready to go for that rebound. So I think we’re gonna see a lot of growth. And the administration is one who is known for being more of a spending infrastructure, per se. And you know, that’s going to benefit infrastructure, and it’s going to benefit again, some of the sectors that we do a lot of work in. So we are bullish, we’re hiring or growing, hoping to double in size again this year, so exciting 21 ahead.

    Patrick: Dena, how can our audience members find you?

    Dena: Well, you know, you can come to our website, you can find us at You can look me up, I’m on social media, LinkedIn, Instagram, we’re in all those social channels. And or just drop, you know, drop me an email. Our company email is just and ironically, those still find their way to me directly. So if anyone wants to reach out, reach out that way, our website also has our company phone number on it. So just you know, give us a call, shoot us a note. Send us a message to social whatever is your preferred channel. We love just to meet folks and have to just have a good conversation and, and help them be able to get more information and learn more about this crazy word world of m&a, whether it’s something they want to do now or 15 years from now.

    Patrick: Dena Jalbert of Align Business Advisory services. This has just been an outstanding conversation. Just a real pleasure meeting you and speaking with you. Thanks so much for joining us today.

    Dena: Thank you.

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

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

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

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

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

    Listen Now…



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Listen Now…



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Emily: Thanks so much, Patrick.

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

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

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

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

    Listen Now…



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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: Up and to the right, yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: Hobbyists.

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

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

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

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

    John: Thanks, Patrick.

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

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

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

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

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

    Listen Now…


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Dan: That’s right. 

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

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

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

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

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

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

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

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

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

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

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

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

    Listen now…



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Ed: Thanks, Patrick. I really appreciate it.

  • Brett Hickey | The Surprising Result of COVID: Increased Productivity
    POSTED 2.23.21 M&A Masters Podcast

    Our special guest on this week’s episode of M&A Masters is Brett Hickey, the Founder & CEO of Star Mountain Capital, LLC, a specialized U.S. lower middle-market investment firm. Star Mountain employs a data-driven approach to provide value-added debt and equity capital to established small and medium-sized private companies, leveraging its scale-driven resources and longstanding relationships.

    Brett graduated from McGill University with a finance and accounting degree and has over 20 years of investment and advisor experience, with over 15 years specifically focused on the U.S. private small and medium-sized business marketplace. He chairs Star Mountain’s Charitable Foundation which supports the career development of women, veterans, and athletes, as well as health & wellness initiatives, including cancer research. 

    We chat with Brett about the surprises that have come out of the pandemic, as well as:

    • The influence of growing up in a small town on his company today
    • Learning from those who are already immersed in the financial culture
    • The Utility Curve of Money
    • The North Star of the company and their guiding values
    • Impact Investing
    • And more

    Listen now…

    Mentioned in this episode:


    Note from Star Mountain Capital: Past performance is no guarantee of future results. All investments involve risk including the loss of principal. This interview does not constitute an offer to sell or a solicitation of an offer to purchase interests in any fund, note, separately managed account or other product managed.

    The investments discussed do not represent all investments made by Star Mountain Capital. It should not be assumed that any of the investments discussed were or will be profitable, or that the recommendations or decisions made in the future will be profitable or will equal the performance of the investments discussed herein.

    Certain information contained in this interview constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements.

    Crain’s two-part survey process consisted of evaluating each nominated company’s workplace policies, practices, philosophy, systems and demographics. The second part involved an employee survey to measure the employee experience. The combined scores determined the top companies and the final ranking. Star Mountain must pay a fee to Crain’s only for survey collection purposes. Detailed eligibility criteria can be found here:

    P&I partners with a company called Best Companies Group on the survey that is behind the Best Places to Work program. P&I works with them to develop the parts of the questionnaires that are specific to money management. Beyond those questions, P&I’s survey partner develops and scores the surveys. P&I only sees anonymous responses to questions, identified only by the company name. If Best Companies determines that a firm scores above the threshold cutoff that they have set for a firm to be considered a Best Place to Work then P&I names them on their list. P&I uses the same cutoff for all firms but rank the firms against their peers by number of employees. P&I only ranks the top 5 firms per size category and then list the rest in alphabetical order. Detailed eligibility criteria can be found here:


    Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Brett Hickey, Founder and CEO of Star Mountain Capital. Star Mountain is a specialized asset management firm focused exclusively on the US lower middle market. They do this by investing debt and equity directly into established operating companies, making strategic investments into fund managers and purchasing secondary fund positions. Star Mountain Capital was once again recognized by Crain’s and Pensions & Investments as a best place to work for the second consecutive year. And my guest Brett was named one of Axial’s Top 20 thought leaders for the lower middle market for 2020. Brett it’s great to have you here. Thanks for joining me.

    Brett Hickey: Thanks, Patrick. My pleasure.

    Patrick: Now, I guess people couldn’t blame you. But I’m just wondering if the track record you had? Were you a little sad to see 2020 end?

    Brett: Good question. No, I think 2020 brought a lot of interesting learnings. And as with everything in life, it shows us the importance of agility, strategy, organization and culture, as well as insurance related matters where your expertise comes in. And thankfully, being ready for challenges and ready for opportunities. We did as a business thrive last year, and we’re excited about 2021. But of course, a lot of challenges for a lot of people which were very heartfelt around. And we did a lot of support relating to with our Charitable Foundation.

    Patrick: Brett, I don’t mean to put pressure on you. But before we get into Star Mountain Capital, you have a fantastic story. And it is reflective on not only yourself, but on the caliber of Star Mountain Capital. So again, I apologize, no pressure. But before we get into your firm, let’s talk about you. How did you get to this point in your career?

    Brett: Not not as a crow flies, that’s for sure. I often sit back and reflect. And I recently as we were talking about moved into a new house and, you know, made me reflect upon where my life is now and where we’re going and how I got here. And it’s it’s been a real evolution and is pretty interesting. And one of the reasons that I like to sit on different boards like Harvard’s alumni entrepreneurs, and try to be helped with our charitable foundation to inspire people that you don’t need to have grown up in the community you want to land in, you don’t need to have gone to all the best private schools and universities and so forth to get the best jobs. There are a lot of paths forward that largely relate to being strategic, having grit and tenacity, and effort really working hard. And if you do that, I’m biased to think that a lot of people can achieve a lot of things. 

    So with that as a little bit of preamble, very quickly, I grew up in a small town in northwestern Canada of approximately 10,000 people. A bit of middle of nowhere, sort of halfway between Vancouver and the US border. And I unfortunately lost my mother to cancer at a young age, which was pretty formative to me on a number of fronts and how I think about life. I was fortunate to have a father who was very involved in my life he was a principal of the middle school at the time and quit that and became a teacher at the high school to be more involved in my life. So as an only child, having lost my mother to cancer when I was six and she had diagnosed and fought it for two years when I was four. You’re really is made me think about community, culture health, I’m very fortunate that a lot of people again, thankful to my father’s engagement in the community, they really engaged with me a lot of my extended family helped in the life I had, I did want to ultimately get out of that life if you will and move to live somewhere A warmer as a very simple threshold test and B where there would be other careers outside of lumber and you know, forestry mining, oil and gas is is pretty, pretty prevalent for what’s there. And you see the cycles of those industries which led me to where I don’t invest in those industries today. I’ve lived and watched how cycles can be difficult and and it’s hard to time that we don’t do it. 

    But fast forwarding a little bit. I spent one year on the oil drilling rigs in northern Canada, which is how I ended up paying for college. I initially I was going to college in Calgary, Alberta. I was speed skating on the national speed skating training team with aspirations of going to the Olympics. I’ve been fortunate to be a Canadian record holder and a gold medalist in speed skating when I was younger in Canada, I thought it’d be a lot of fun to go to the Olympics. I feel fortunate that unlike other sports, speedskating, you know, right up front, there’s no money in it. So plan B, I didn’t know exactly what it would be, but I knew I needed a plan B. And I figured that school would really be the door that plan B, I unfortunately flipped my bicycle training on the velodrome in the summer, and got injured and decided not to continue to pursue the Olympics from that capacity. And then really switched the energy into business. And I as I learned more about business and was in a bigger city in Calgary and environment, I got very excited and very passionate about that. 

    And this is now in the late 90s. And so I learned to code and built a little internet company and stuff like that, which was a lot of fun. Nothing overly financially successful, just interesting, and the innovation and passion of building that was really my first taste of and I love that I also really got inspired by finance and what you can build in your career and how much impact you can have and how interesting and dynamic it seemed. And I wanted to go to either New York or London to work in investment banking, I was fortunate to get into McGill University in Canada, which is one of the best launching pads out of Canada, because it’s a reasonably well known International University and one of the top universities internationally, and particularly in Canada. And I was lucky enough to get recruited from McGill to work for a bulge bracket investment bank, at the time was the largest investment bank or largest financial institution, I should say, pardon me, and the investment banking division within it at Citigroup Salomn Barney, and thought that covering asset managers would be really interesting buying and selling asset managers looking at different strategies, evaluating strategies, and really having a future strategic thought within the investment space that way. 

    And so I moved to the US about 20 years ago to do that. And then I left that to try to tie together the investment banking and the finance, which I really learned to love. And I did my undergraduate degree in both finance and accounting as well. So I love math, I was one of those guys that in school, I found somebody telling me whether my story was or wasn’t good to be very subjective. And I wasn’t as much of a fan of that subjectivity. Whereas I loved math. So I loved calculus. And I like to go in and take an extra calculus classes within the engineering faculty and whatnot, because I liked the fact that you were either right or wrong. And somebody couldn’t subjectively tell you that. And maybe that’s one of the reasons I like investing were one of the ways that we get judged is our returns and our performance, and it’s black and white. And that’s, I guess, something I’ve learned to like in my life. 

    So getting to where we’re at today, Patrick, I left investment banking to focus specifically on than just principle, investing in the lower middle market in 2004. So at this juncture, we’re about 17 years into my career investing us lower middle market, I’ve made over 100 private equity and private credit investments, as well as over 20 secondary and fund purchases all within the US lower middle market. And the trends in the US, US lower middle market are both interesting. And I feel it’s a place that we can have an impact. From a culture community, you mentioned the awards that we’ve been fortunate to one. And, of course, thankful for my team in helping us do that. But we also do invest very aggressively in culture in team in talent, in how we build our training programs, how we invest in ongoing training, we have a Star Mountain University. And we we really put a lot of effort into that. And I’m thankful for my team for putting that effort in. 

    We also align interests with our entire team, where all of them own carried interest and share in the profits of our investments. We have about 75 people in total now, including our operating partners in 20 cities across the US that are focused on nothing but finding high quality private businesses, figuring out how we can add value to them. And one of the other things that I wanted to build within star mountain was a flexible capital solution approach where we could sit down with business owners, get to know them, understand their personal desires, their businesses, challenges and opportunities, and really come up with a game plan and the right type of capital for that, whether that’s debt, whether that’s equity, whether it’s a combination, whether it’s some hybrid security in between. 

    There are different types of capital and different needs for different businesses. And we really want it to be a Blackstone or a KKR type of a player. But within the lower middle market, where we have a full range of services and capabilities for business owners and for our investors within a marketplace where we target generating alpha from an investment perspective. And then for business owners, it feels good to be able to add value and really understand them and get to know them and that’s where it takes I guess my background is that entrepreneurial ism, the small town community where you work as a community, you trust each other, you work together. And you really have that sense of community, bringing that into the financial creativity, and being able to really drive impact. And what we do is something that I’m extremely excited about. 

    And sitting here today as a 42 year old, I’m extremely excited for the future, because I think we’ve really just scratched the surface and how we can add value to different businesses across the country and for our investors. And that’s, that’s really exciting for us, Patrick.

    Patrick: Well, and you’ve segwayed right into, you know, my thoughts about, you know, either the commitment to a lower middle market is that, you know, I think that, as with everything, as you start doing investing, there are a number of investors quite a few that the deals just keep getting bigger, just from inertia, and then they just trend up that way. And there are organizations and their executives like you that are committed to stay. No, we like this segment of the market. I mean, I would just think, just logistically, there are a lot more of those companies out there they’re created every day, you have a bigger impact. With returns bigger opportunity you want on the smaller stuff than on the larger stuff. 

    But I think the other thing is important, I think you get this too is that this sector of the market, the lower middle market is underserved. There are so many of these organizations that are not as sophisticated. And a lot of times they are not accustomed to mergers and acquisitions or making that transition or taking that next step to get to the next level. And unfortunately, there are a lot of choices out there. But they’re not aware of them. And they can’t distinguish one option from another. So they default and go to an institution. And they’ll unfortunately, when they go to the institution, they don’t know any better, but the institutions don’t have the bandwidth to meet their needs, take hold their hand, get them over. And so unfortunately, the institutions are not going to treat them, you know very well, they’re going to overcharge them, and they’re not going to deliver on execution and so forth, the way that the lower middle market really needs and is essential that there are organizations like Star mountain capital and you that have the passion, the commitment, and and you want to be there to serve that. 

    And I like that, because what you’re doing is you’re not just trying to, you know, objectively get a return. You want and correct me if I’m wrong, but you want to come in and impact the culture. And you want to do that not just for the culture of that organization, but the culture around the community, because you grew up in that kind of community. I mean, yeah, pretty consistent?

    Brett: Yeah, it is. And you you touched on a number of things, I think, are really important. And one is that things I’ve learned, I’ve been lucky enough Patrick to be invested in and have different partners and people in my life that are incredibly dynamic, experienced and successful. And that’s really allowed me to have a rich learning environment. And I couldn’t have been right enough, when I grew up in a small town to say the smartest thing I can do, knowing nothing about the finance or investment banking industries, get into that culture, get into that. And living in New York City for nearly 20 years, I’ve lived walking to my office the entire time. And the amount of effort I was able to put into that the amount of learning from people, it’s just been incredible. And some of the things that I’ve observed, and we all see this, or we all have access to this data, including the utility curve of money. We all know that once you surpass your basic needs, the incremental utility or happiness you get from money is very low. 

    And there’s a lot of great professors from ours at Harvard. And other than that have written about this and and lots of good people, right, that have written about that. And you see a lot of people that are very wealthy and not happy, and so on and so forth. And so I really took a step back having lost my mother at a young age and said, Who am I? What matters to me? What do I stand for? What do I want to be a guiding light for my children around? What’s the North Star? Star Mountain Capital is a name that I came up with. There is no star mountain, the star in the mountain is our North Star. What are our guiding lights? What do we stand for our ethics, our integrity, our humanity, and really staying focused on that at all times, with the strength and stability of the mountain is really the idea behind building that. And I think that the impact when you lose somebody the young age, it really makes you reflect on life and its fragility and how I built star mountain where I have a very large executive team of extremely capable people. This is not a business built centric. around me, this is a business. That’s a platform. 

    It’s not, you know, Brett Hickey Incorporated, this is Star Mountain capital, 100% of my employees share in the carried interest and profits of our business. We are a 100% employee owned business, despite managing approximately $1.5 billion today. And I’m extremely proud of that. And I’ll even say, you know, sharing, just personally for you, Patrick, and your audience at my wedding, to my partners at Star Mountain, were two of the four best men in my wedding. You know, we have real relationships where I said, I want to wake up every day and have fun, stand for something, trust, who I work with, enjoy who I work with make an impact for lives of businesses and people that were really impacting their lives, not just for, obviously, our investors, but for the businesses that we’re backing and we’re supporting, that’s their careers, you know, their livelihoods. And we take that very seriously. And it’s fun, it really sense of purpose in life becomes critical. 

    And so I’ve tried to have my North Stars and guiding lights very clear. And you know, a couple other things that you mentioned, I think are important. Also, Patrick one is being committed to something in our case, we’re committed to being the best investor in the US lower middle market, which includes Canada as well, that we can be right we’re here to wake up every day and say, How can we do a better job every day? The mantra of the young presidents organization is lifelong learning. That’s similar to star mountain, we’re focused on creating value, driving value, constant improvement as a firm and constant self improvement. I’m sure as my wife can tell you, I have lots of room for improvement. And with all seriousness, I do and we all do. And so we trademarked investing in the growth engine America, we’ve trademarked collaborative ecosystem, because we believe in that community or think of it as a small town community feeling where we all serve a purpose. 

    We’re all here to add value to each other, treat and respect each other the right way. And when you mentioned the M&A capabilities, one of the other things that we viewed as a clear need in the market and a clear opportunity in some of the problems that Star Mountain is solving is how do you bring that large market expertise to small businesses, right, your Goldman Sachs’s of the world aren’t working with small businesses. If somebody is working with them, you’re generally getting a very junior type of person. So at Star Mountain, my partner, Brian, who’s the chairman of our firm, was the Global Head of M&A at Credit Suisse. He was also the president of the firm running an 18,000 person business. And he also ran their $100 billion global asset management business. 

    And other partners of mine were divisional heads and partners running five 600 person teams at Goldman Sachs, UBS to name to few institutions, running the leveraged loan business as the heads of it at Merrill Lynch, Bank of America, Merrill Lynch. So we really have come together as a team and said, we’re all here to make money. But we care more, we care about more than just money. We care about investing our own capital, protecting our capital, we care about who we’re working with making a real impact. And so what we set out to do is to bring those large market expertise to these smaller businesses. 

    And again, with the right culture, the right alignment and the right partnership, and the right long term investment, I had to invest a very substantial amount of money in building technology, opening up offshore data centers in India and places like that, that we opened over a decade ago, so that we could really bring those large market resources, skills, capabilities and knowledge into these businesses, which there’s always more to do, but it really, you know, really is exciting, and I couldn’t agree more with everything you just said, Patrick. 

    Patrick: Okay, well, let’s put something into perspective for our audience because this is now 2021. But Star Mountain Capital, I apologize. Opened in 2009? 2008? 

    Brett: 2009. I guess we officially formed we sort of say 2010 is when we launched so 11 years ago.

    Patrick: Okay. So 11 years ago. ESG environmental, social, government, the that culture, attention and commitment so forth. Companies Weren’t you weren’t paying lip service to it back then. Because it wasn’t on anybody’s radar. I mean, actually, from California’s perspective, it was still within California and the tech community. It was nice and it but it was still kind of remnants of a hippie type of perspective. Okay. Now we come into there and everybody’s talking ESG. And there’s this whole commitment. You were formed with this. So I mean, this is in your DNA now. And I think that’s that long view that you have I think is something that anybody in the lower middle market should really pay attention to. I also like to thank because I was going to ask, you know, what’s special about what you’re doing, as opposed to a lot of other companies. 

    But the other observation I have is that, and I think this is essential is that you’re having institutional grade talent that is available in a boutique delivery system. So you were, you know, a boutique. But now with the limitations of a boutique, you you have all in it comes from the talent of the your team members, but you got, you know, a less talent that’s available there at not the lowest prices. So I think that that’s striking. What other things is Star Mountain bringing to the table for the lower middle market?

    Brett: Yeah, it’s a good question. It’s one or the other thing is, that’s interesting, Patrick, just to try to make this a bit more, a bit more intimate, you know, for your audience in your group. And I think the more that we’re all open and honest and authentic with each other, I think that’s a good thing. And that’s just always been who I am. If you ask any of my friends, the people that know me, well, I don’t certainly think I’m perfect by any means. But I really do care. And I really do work hard and try hard. And I’m sure if you ask my colleagues, what’s one of the things you’d say is his effort. And I guess whether it’s working on the oil rigs, or speedskating, right effort has been something that I’ve I’ve always had as part of my core DNA. And it’s important in the lower middle market, I tell people when they come work for us, it’s exciting, it’s fun. 

    But you’ve got to be willing to put in the effort, these businesses need help analyze them the right way to find them the right way, the information doesn’t come packaged up in a boat, you’ve got to be willing to put in the elbow grease, put in the effort and work with these companies actively to help be a strategic capital partner to them. It’s fun, it’s exciting, it’s financially rewarding. But you have to put in the effort into it back to your point around the environmental, social and governance within ESG, which people often also call impact and impact investing. I think part of it is when you have a parents, my mother used to work for IBM. And it was really tough for her with a family. Because back in those days, it was really challenging for women to have strong careers and be a mother. And so that matters a lot to me. And so I think the COVID is going to have people allow for better work life balances that I actually believe will increase productivity. I know it started out and I believe it has it’s it’s you know, there are certain things that are less efficient. But I think on balance, our productivity has increased. 

    We’ve invested aggressively in our team, building home offices, building the right support the right technology, the right equipment for them to have full throttle environments. And it surprises me when I talk to some people that are like no, why would I that’s people’s homes, why would I invest in and I’m like, well, you invest in an office space for them. Why Why wouldn’t you invest in your human talent, if that’s your biggest asset, which certainly for our business it is. But I think the IBM dynamic, and this is nothing negative about IBM is just all large corporations back 30 years ago. But being able to support something and help impact what I know impacted my mother is something that makes me feel good in a way that I’m trying to give back. And I think it’s something also from having a father, as a school teacher, you’re focused on educating and giving back to the community being very involved in the community, which which my dad still is to this day. 

    And that’s always been something I’m very proud of, I’ve really tried hard to keep that with me as part of our life and to build a different type of finance firm that is really engaged on these matters. And I try to be very forthright about it. Because it’s not for everybody, right? If you don’t care about these things, and you just say, my simple goal is to try to make the most money I possibly can with my career, then you shouldn’t come here because we want people to care about our investors, care about the companies, they invest in care about our team, and are willing to not always put themselves first, but put as our fiduciary obligation, our investors, our team, our portfolio companies to think about them. Now, now as it turns out, I think actually, this approach on ESG and culture team, I actually do believe it also will actually provide the highest likelihood of the type of financial outcome that people want. 

    And there’s starting to be more and more data behind that but investing in culture, investing in community invest in your team. I think, for example, the fact that I’ve chosen to give up equity will make my equity worth more and will help me therefore be worth more in the whole by giving something away and aligning interest with my team that way. So I think that’s something I know different universities study a lot around that. And there’s more and more data. But I think doing the right thing pays off long term. When you probability weighted, what we’re really focused on is a high probability of your desired outcome. And I think that if you take that approach in life, and when I think about our children, I’m trying to raise them, I don’t care what their end up being worth, but I do care that they’re good people that live a good life, that mitigate risks in life that are happy, positive, good friendships, a good career, I care way more about that. So I want to give my children and our business the highest probability of the desired outcome possible.

    Patrick: There are, as we mentioned before, lots of options out there lots of firms, and there are lots of target companies, and you set the table really well on the subjective criteria that you’re looking for the subjective items that you you plan to deploy, and so forth. Let’s get a little bit objective for for our clients and our prospective audience members out there. And, you know, what is a profile criteria for an ideal target company for you? Okay, we’re, what is Star Mountain Capital looking for?

    Brett: Great, great question. Thank you for asking Patrick. The, we’re looking for business owners that want to do something else with their business, whether they want to sell their business, whether they want to make an acquisition, whether they want just strategic capital, to help grow a partner to say, hey, how do I frame out the world? What do I take my business to, and then we have different types of capital available, different types of debt, different types of equity, to help grow with them. So we look for businesses that generally have at least 15 million of annual revenue. We’re not experts at startups, so we don’t invest in them. We’re not experts in real estate, we don’t invest in it. We’re not experts in oil and gas, we don’t invest in it. 

    And I remember that’s one thing, I think that’s key that one of my professors have told me is that if you want to be great at something, you have to know what you’re not great at, because you can’t be great at everything. So there’s certain sectors and certain types of companies that we’re not the best solution for. So carving those out. The other thing I would say is that generally, if you’re over 30 million of annual EBITDA, there are probably businesses that are better positioned to focus on you, and where you’re going at your next phase. So what we’re really experts at is taking a business from 20 million of revenue to 200 million of revenue, or from 5 million of EBITDA up to 20 million of EBITDA, things of that nature, finding strategic acquisitions, analyzing them, negotiating, structuring the investment structure with them to earn outs and all that integrating tech talent systems, financing and providing the capital, and then helping those businesses really thinking about the future strategically and how they’re structured, as well as add on acquisitions. 

    So for example, in a downturn, we were ready, we were geared up, we viewed a downturn was coming. And I actually think there’s a reasonable likelihood another one is coming, because a lot of things that we worried about pre pandemic, like valuation bubbles, they’re higher than they were pre pandemic. So I would caution people to think that, oh, phew, we just got out of 08, now it’s gonna be another 10 year bull market. A lot of the Black Swans that were flying around, have perhaps been better fed recently. And maybe that means they can fall harder and from further to use the Black Swan analogy, but I think that being ready to find acquisitions, so for example, we helped one of our portfolio companies acquire a business out of bankruptcy that will hopefully be extremely valuable for it, we helped another business spin off a subsidiary as a wholly owned subsidiary, because that subsidiary, really, trades is a revenue multiple versus an EBITDA multiple and perhaps it’s a telehealth business that could really be worth a tremendous amount and how to how to take that business to the next level. 

    Similar to if you’re a big company that can afford to hire the best talent at Goldman Sachs and a Bain or McKinsey consultant. That type of strategic advice is really what we’re bringing to the companies and you know, we’re we’re looking for high quality people that are looking for, you know, good capital partners and people to work with. And you look, we’re, we’re open for business, we invested in about 27 companies last year, this year with continue to grow, open new offices. We have six offices in 20 different places, we have at least one person in across the country. So we’re we’re delighted to talk to people that generally speaking have between 15 million of revenue and 30 million of EBITDA and our North American based businesses is kind of our market segments in the world that were built optimize value with.

    Patrick: Yeah, well, one of the things they just came through on that in terms of the size and the other things you talked about it underlines and supports a philosophy I have about mergers and acquisitions. And it’s for the outsiders, people hear the news about an M&A transaction. And it’s usually the very large ones that are in in Wall Street Journal that it’s Company A buying Company B. And mergers and acquisitions for us is not that it is a group of people choosing to partner with another group of people. So it is a you can’t get the human element removed from that you have to have that. 

    And in an ideal situation is one plus one equals six. And it’s it’s that bridge that is key out there. And it comes really hard and fast, particularly with lower middle market where you’ve got owner founders that are selling their baby and looking for the next step. And you’ve got a willing partner there, where their attitude is, you know, with Star Mountain, we want to help we want to, you know, we’re is in our interest that your interests are also met. And it goes forward, I think that that works out really well. 

    Brett: And one of the other things I would just add on to that Patrick, one of the things I didn’t like doing early on in my career is having a much more limited type of capital, where I really had to sell my relationships on hey, here’s the right type of capital for you, whether that’s a senior loan or or private equity buyout. So one of the things that we built at Star Mountain is this, we have different funds in different pockets of capital with different mandates associated, which allows us to interface with businesses, with private equity fund managers, with independent sponsors with intermediaries, as really an open architecture platform to say, What are you looking for? What do you need, let’s talk about it. And let’s come up with the right customized solution together for you. 

    And now, I love that because I do business with so many different friends of mine, and I’m not selling them on anything, I’m not trying to stuff their desires into something else, because that’s what I have happened to have available. And so whether they’re smaller private equity funds, we also have our secondary fund capital. So we can get strategic with them, where we can buy an LP interest providing early liquidity to add value to their investors so that their investors can say, Oh, that’s great, I can be more liquid when I invest in XYZ’s fund, give them new capital for their next fund, give them new capital to help fund other deals. 

    Same with independent sponsors, and people launching other funds, we’re often really strategic with them. Because we understand the lower middle market, we understand the challenges we understand the needs. And so we’ve built a platform to really provide a lot of flexibility in trying to add value to as many people as possible.

    Patrick: Well, one other element that comes in this is what I’m very excited about now for the lower middle market is that I mean, these deals aren’t done in a vacuum. Okay, there is there is all this wonderful stuff, we are going to come together, we’re going to combine our efforts and move forward to a brighter future. However, you can’t ignore there is risk. And what sellers come to realize as they go through the whole process is that post closing, that individual seller or group of sellers, personally, is personally liable to their buyer partners. If post closing there, the buyer suffers a financial loss due to a breach of the seller reps. 

    And it isn’t until they start negotiating the purchase and sale agreement, you get to the indemnification discussions, and then all of a sudden, wait a minute, I might have to pay you back for something that I don’t know about. And now you’ve got the fear of the unknown out there. And initially, they start talking about I even been in a number of these situations where we have nothing to fear, we know of nothing out there. But then they don’t have a corporate veil to fall behind. They don’t have a company fall behind. Because post closing there is no company. And so all of a sudden, you know, risk becomes very real when it’s your dollars or your house at risk. And that creates tension, particularly for people that are new to M&A. And that’s everybody in the lower middle market. 

    Most likely, this is their first and only sale in a lot of cases. So there’s a lot of fear there. I’m very proud of the fact that the insurance industry has come in with a product called Rep and Warranty insurance that originally was reserved for the 100 million dollar plus transaction level deals where they take that indemnity obligation away from the seller, and they move it over to an insurance carrier so that if the buyer suffers a financial loss, instead of pursuing the salad, they go right to the insurance company. The insurance company pays the loss and I mean is an elegant, elegant way. It removes a lot of tension because risk is transferred. It really helps that owner and founder of those entrepreneur exit cleanly without the worry that some, you know call in the middle of the night is going to come in and something that they never thought about came in the development the last two years it was interrupted, just because a COVID is that the insurance industry has become mature. 

    And now with competition, there are more insurance companies coming and they are now targeting lower middle market deals with transaction values, under $20 million. Those those types of deals are not eligible for insurance in the past they weren’t. And so it’s great now that if you’re there to serve that lower middle market, here’s one more tool that removes the biggest, toughest part of that transition. And that’s getting that risk taken away from from the deal parties, because that’s the one that comes to attention and so forth. So we enjoy how this has gone. We’ve seen the credibility of it over the time. But you know, you can’t listen to me talking about it, it’s more, you know, I’m interested really, in your opinion, which, you know, good, bad or indifferent. Share with me any experience, you guys have had at Star Mountain Capital with rep and warranty insurance.

    Brett: Yeah, it’s great. You mentioned something that I think a lot of people under appreciate the importance of Patrick, which is the friction and making things easier, and how to do business so rarely in life is something a one and done and the relationship never matters again. So whenever you can do things to reduce risk and reduce friction, depending on the cost of it, of course, some capacity, but I generally think is well worth it. So for different types of insurance, I think it’s very valuable to help get deals done a where you can transfer that risk, because you say to an insurance company, it takes worries off the table for both sides. It allows for a better relationship between those two parties, because the more time you spend negotiating tough things, the more you’re hurting a relationship. So if you’re buying a business from somebody, and you want them to be speaking well of you afterwards to clients, community employees, whether they do or don’t have an economic interest remaining, you want them to say you know what, these are good people, I liked doing business with them, that’s always going to be in your best interest in life. 

    So if you can reduce the amount of friction, you create, and getting the deal done a, b, if you can increase therefore, the probability of getting a deal done, I think that’s great. And then the sleeping well at night, from either party’s perspective, knowing that you have that taken care of with a good insurance company and having, you know, the right type of person really understands the detailed minutiae of these insurance policies is crucial, because they’re complex, and you need the right people that really get it like yourself that specialize in it, just like we specialize in what we do you specializing in what you do. I couldn’t speak highly enough for how important it is. We sometimes have people that hire their real estate lawyers to represent them and stuff on complex matters. And it’s just, it’s just so penny wise pound foolish as the Brits would say. 

    And you know, the right people doing the right thing is important and insurance. From my perspective, I mean, I’m a big user of insurance on a lot of fronts, whether it’s D and O policies, E and O, policies, different life insurance related things, I think there’s transactions, it’s, it’s very important. And I think, as you pointed out, the evolution of it, Patrick is ongoing, and there’s things that I still want to continue to learn more about, we’ll look forward to speaking with you and your team further about, but I think that it helps you get deals done, it helps you have better relationships, it helps you sleep better at night. And all of those things, I think, are worth something. And what I generally observed is that the cost of insurance relative to the tail risk they can solve for is often really valuable. And you have some people in life that are really skeptical that say, well, you have an insurance company, they’re making money, they’re really smart. 

    Yes, but they’re doing a probability weighted analysis over an insurance company, they can take a dispersion of risk and say, on average, what’s the probability this is going to happen? Whereas for you as an individual, if that tail risk is only a maybe a two and a half percent likelihood, or 5%, whatever it might be, maybe that’s reasonably small. But what if it does happen? Do you want to take that risk in life? Is that something worth you living with and taking and so I personally think that removing big impact tail risks just to live a better life as a seller is extremely valuable. And as a buyer of businesses, I think mitigating those tail risks as well. So that, as I said earlier, having the highest probability possible of your desired outcome. And maybe that means because of the cost of the insurance, you get a little bit less potential upside, but you get a higher probability of a desired outcome. 

    And for me in life, that creates a lot of peacefulness, a lot of happiness I think our investors appreciate I think our portfolio companies appreciate it. I just think it’s a better way to live life philosophically, personally and professionally as a business. So highly encourage people to learn more about it. understand where it’s at the evolutions as you’ve mentioned, with it Patrick, hopefully, that’s helpful.

    Patrick: Brett as we’re talking today, we were just in the new year, got a new administration. COVID is, I don’t know if we are at the end of the beginning of COVID, or the beginning of the end of COVID. Time, but time will tell but, you know, as we sit here today, looking forward and you’re an Axial thought leader, you know, what trends do you see going forward? Be they macro with M&A, or just with Star Mountain Capital or lower middle market? What do you see out there?

    Brett: Good question. Here are a few trends. Some of them, I will try to polish my crystal ball for and have some guesstimate into the future. I love forcing people and some people don’t like as well, what’s the what’s the probability you think of that? Or where do you graded from a one to 10? And like, well, I don’t know, you know, they give these sort of qualitative responses. And as I mentioned earlier with how I loved calculus, and less liked English literature, just due to my own, probably lack of competency in English literature relative to mathematics. I like certainty, but I like to force people to quantify their views on things. So I’ll give a little bit of views of some of my thoughts of the future. And then certain things that are also much more definitive and are going to happen. 

    So let’s start with the definitive trends. There have been so many things going on between COVID politics, I think people have forgotten about some major massive, definitive trends. One is the aging demographic, our population is aging, that creates a tremendous amount of both challenges and opportunities that people really think about how does that impact the future of industries of businesses, because the impacts are large, and they are systematic. So where that benefits Star Mountain is that you have more privately owned businesses and business owners that are saying, I want to transact The second thing that we know definitively is the amount of debt in the economy at a generally speaking at a sort, certainly governmental level is big, and it’s growing. Right. 

    So I think people need to be just mindful of understanding that I know in California, you have people that are concerned and moving to Texas is that I think the biggest probably outflow, but people are thinking about taxes. And they’re thinking about, what’s the economy going to look like? Does there come breaking points where the economy can’t invest more into x, because it has to make difficult trade off decisions. Those are questions that are important now today, with rates really low, they can finance high levels of debt. But if rates do increase, it could get very difficult. And I think that is a trend. It’s more difficult to forecast how that can impact things. But it is a definitive trend that I think people should be thinking about. I know we are thinking about it, and how that can again, impact the economy, industries, taxes, things that are systematic. 

    There’s a new, obviously a new party in charge, how does Biden think about things? What is he likely or less likely to do? Some of that is more difficult, so I won’t try to predict that. But it is something that is worth thinking about and how that, again, may have positives or negatives and industries and sectors and so forth. But the one thing that we always know about the government is, there’s a unknown, there’s a volatility aspect related to it, that you just can’t control what they’re going to do. And sometimes it’s hard to anticipate what they’re going to do and be able to do, right. So there’s what they may try to do and what’s the what can they actually get past and how does that impact things. But I think that’s worth really thinking about how much is government involved in an industry or business that you own and run, or that you’re looking to invest in and in whatever capacity that might be, I think is really important to think through those things. Because it’s everyone’s a little bit different and the probability weighting of it. 

    And we’re big fans at Star Mountain of probability weighting future outcomes, you’re never going to be exactly right. But you you do a probability weighted analysis and say, If this happens, then what and you kind of forecast a few moves out and play chess, if you will, to think about how to deal with things. As we think about some of the other things that are definitely there. But really hard to understand the impacts of valuations, public market, valuations are extremely high relative to historical measures, and people believe they’re fair or not fair, I won’t comment on but they’re high, the amount of liquidity in the market right now is very high, the additional government stimulus money that’s coming in, is really high, which is correlated to the dead, but does of course, help the economy from just more liquidity more spend.

    Other things that are happening that people may less know about is that costs of goods, where manufacturing can be challenged right now, in some places a demand for certain things, high costs of certain goods are increasing. How is that going to impact the future? How does that impact potential inflation risks? People need to think about that one of the other challenges that we see out there is, from a business perspective, how do they think about their future planning? knowing some of these things? How do you think about talent replacement? One of the things that businesses I think, under evaluate is the org chart. And yes, I know that we have a president currently and a former president that are in their mid 70s. 

    But the probability of health issues occurring as you age increases, right? It’s just factual. And this isn’t a comment on any political person, it’s going to happen to you and I as well, it’s just a fact when you look at businesses understand the org chart, you may have like, how important is this person? And do they have succession planning really well set up or not? Because the aging demographic that we have, is more than it has ever been? So the other last thing I’ll say, Patrick, is that the pace of evolution, the pace of change, continues to increase. And I think COVID has exponentially increased that. So one of the other things that I was going to mention is that the weighting of the large tech companies and just big companies period, irrespective of the type in indexes, so a lot of people used to think of, well, the S&P 500 is a really balanced, diversified index, not so much anymore. Now, the weighting to these trillion dollar companies, which we’ve never had before in history, is huge. 

    So how do you think about how diversified you really are or aren’t in something that you use to be very diversified? Now, you’re very heavily concentrated in a few companies with their idiosyncratic risks that any company has, as well as sectors and so forth. And hopefully, some of that provokes some thought. I know, it doesn’t give any definitive answers. But that’s the reality of life, no definitive answers, but there are things to be focused on. And I think this is a good market to look for both challenges and opportunities, because it’s, I think the market is is riddled with them right now, maybe more than ever.

    Patrick: I think you’ve outlined a whole variety of things, both challenges and opportunities. And I think that’s the successful leaders out there do that is they look for both. And, you know, they, they make decisions, straightforward. With all the information, I can’t tell you how much we appreciate having just all this, you know, perspective that you provided in what you’re doing with the lower middle market, and so forth. And I think it’s just like I said, you’ve got a compelling story. And I’m sure everybody that’s listening is probably going to want to get a little bit more. How can our audience members find you, Brett?

    Brett: Yeah, thanks, Patrick. The best way from an email address perspective is That’ll come in and then we can route you to the right people, including myself if that’s what’s needed. Second is we have our YouTube channel forward slash c forward slash starmount capital that has a lot of good content, our LinkedIn profile, we keep a lot of good information on update in a world when physical events which I can’t wait for them to come back, do come back again, we host a lot of events, historically, close to 100 a year all across the country, try to make them fun and interesting and stuff like that, and giving people the opportunity to get together and collaborate and that builds relationships for us. And it’s part of us kind of giving back and being engaged in the community just like you do, Patrick, with this right you’re not charging people for this. It’s it’s the more we all collaborate, share information, share resources, we all benefit.

    Patrick: I’m going to just buttress that with recommending people visit You’ve got a news tab there, you probably have one of the most, one of the more active, updated news of you’ve got a lot of great content. You’ve got a lot of great information out there. So I think that’s, that’s something that you were focused on with communications and I think that’s essential. So, Brett Hickey of Star Mountain Capital. Thank you very much for joining us today and just hope your 2021 eclipses a real productive 2020.

    Brett: Here here. Thanks, Patrick. Be well everybody.

  • Peter Lehrman | M&A Matchmaking in the Lower-Middle Market
    POSTED 2.16.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Peter Lehrman. Peter serves lower middle market owners, acquirers, and advisors as CEO of Axial, the largest trusted online platform used for safely buying, selling, and financing private companies. Over the last 10 years, Axial has established a single well-known platform that business owners and deal professionals alike trust to discover and connect with new transaction partners.

    Peter says, “The whole idea behind Axial was to develop a trusted platform on the internet where buyers and sellers of lower middle market businesses can find, connect with, and be found by one another at the right points in time, and on the right opportunities.”

    We chat about the origins and philosophy of Axial as well as:

    • The big differences between the lower middle market and the venture capital community
    • The common practices of evolving out of the lower middle market
    • 10,000+ PE-backed portfolio companies looking for an add-on target
    • Navigating the overabundance of choices in the LMM
    • Trends to watch in 2021— retail 2.0 and the rise of independent sponsors and individual buyers
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today, I’m joined by Peter Lehrman, Founder of Axial. Axial is the largest platform on the internet for buying, selling, and financing private companies. Over the last 10 years, Axial has established a single well known platform that business owners and deal professionals alike trust to discover and connect with new transaction partners. Peter it’s a pleasure to have you. Thanks for joining me today.

    Peter Lehrman: Thank you, Patrick. It’s great to be here.

    Patrick: Now, Peter, before we get into Axial, let’s set the table for our audience and give a little context. Tell them tell us what brought you to this point in your career?

    Peter: Sure, so you can, I’ll do the sort of medium version of the answer there in terms of length, so I, I graduated from college in 2001. And I went straight back to New York, where I was born and raised and went to go and work with my brother, who had co founded a information business focused on serving investors and public companies, not private companies, I spent the first six years of my career helping to develop that business, both in America and the business was quite successful abroad as well. Over those six years, all almost all of my time was spent developing information based services and products for investors in public companies. 

    And then I went off to business school. And I was lucky enough to get a sort of year round and summer internship working for a private equity firm, investing in lower middle market businesses. And after spending the first six years of my career, focused on building information products and information tools to help investors in public companies make better decisions. I, I was just amazed by how little information there was on privately held companies. And you had all the same sort of cast of characters, highly sophisticated investors, and investment bankers and all these, you know, people, you know, investing in public companies, you had the same kinds of people largely investing in private companies, but just a radically different sort of information, infrastructure available for those transactions to be facilitated. And that did really strike me. 

    And so when I, when I graduated from, from Stanford, for grad school, I, to make a somewhat long story short, I basically jumped into the deep end, and began to build what is now Axial. So, you know, six years in the public markets, appreciating how investors use information there. And then a few months in private equity, when I was back in school, made it really clear that there was an opportunity to build a much better information infrastructure for investors and private companies. And I think at the end of the day, that’s really what Axial is all about is improving the quality of the information flow between buyers and sellers.

    Patrick: Yeah, I think one of the elements of the technology, evolution throughout throughout America and the world is not data storage, data collection, it’s what to do with all that data, and how to segregate is slice it up and get it out there. And so that that’s fantastic. And I think that the more data there is, the more ways it can be utilized and leveraged and so forth. So let’s get into Axial. And I always like to ask my guests this because unlike insurance firms, or law firms that name their companies after the founders’ last names and so forth. Yeah, usually a story kind of sheds a light on, on on the person at personality of that company. So why Axial? Where’d you come up with that name?

    Peter: So I labored pretty hard over this name, there were a few things that I was trying to accomplish. And there’s a lot there’s a funny story that I can tell as part of this, too. So there were a couple things that I wanted to accomplish. The first was, I wanted to spend very little money on a domain name. And it’s hard to do that actually, like a lot of good domains are like already taken, and they’re really expensive, or you can’t get them. So that was one thing that I wanted to do. I wanted to not, you know, start the company and spend 10s or hundreds of 1000s of dollars just buying our domain name. So I was hunting around on GoDaddy and looking to buy a domain name for you know, 19 bucks a year that was you know, that was sort of goal number one. 

    Patrick: And maybe that was common, by the way. Sorry. 

    Peter: Yeah. But you know, I, you know, there’s a lot of value in a good domain name, but I just couldn’t get comfortable spending a lot of money on it. So that was one thing, the second thing that I had thought about, and then I guess I had read about, you know, in some startup article or something from grad school was, you know, sometimes these were the, you know, the name of a company can just be sort of unfairly advantage just because it comes really early in the alphabet, right. So, as I was coming up with my list of names for, you know, for the business, I did have a little bit of a predisposition to try and find something that I thought would start with an A or a B, or something like that. And it really does turn out if you look at like, you know, the way that an index or a category or a list of sponsors at ACG conference, or something like that, very often, it kind of is like alphabetized, right. 

    And so if you have a, if you have a, an A or a B, or something early in the alphabet, you kind of get a little bit of unfair visibility. So that was rattling around in my head, as I was thinking about it. Obviously, the specifics of Axial ultimately really resonated with me. So the word Axial has a couple of different meanings. There’s a medical meaning for Axial, but the one that was actually much more interesting to me, and the one that like, kind of persuaded me to try and pursue a domain name, and a company built around it is there was a, there was a philosophical and religious age called the Axial age. And that age refers to the period in, in the history of the world when some of the most profound and some of the most significant religions began to sort of take hold. 

    So Confucianism, Christianity, lots of different religions, became developed during this period called the Axial age. And so the Axial age is often sort of thought about as this period when, you know, men and women and civilization began to sort of learn about right and wrong, and reason and virtue and and, you know, good and bad. And it was like this period where men sort of like, you know, came out of the caves and became, you know, sort of more enlightened right and, and filled with more information and more knowledge. And I have to say, having spent, you know, that, that summer, in that year in private equity in 2007, and 2008, I really did kind of feel like the way private equity and deals were getting done. Really, it did feel in many ways, like the Stone Age, there was no use of technology, there was really, really limited use of the internet as a means of Information Discovery, building relationships, it just sort of felt like, you know, private equity for all of its sophistication was just completely behind in terms of embracing technology, information, and, you know, just the dawn of the internet as a way to transform their work.

    So it all kind of, you know, came together in my mind that, you know, there was an Axial age for private equity and for business owners, and that axial age for business owners and private equity would be an age that was based upon, you know, free or very, very affordable access to information and we could be one of the driving forces in that, you know, in that opportunity set. So I landed on it, unfortunately, was not available. So I bought for $19.99 on And, and, alluded the company until actually just last year, we finally locked up the domain after a multi year negotiation. And there’s a funny story behind that, too, so.

    Patrick: Well, and, you’re tackling an area when you talk about, you know, private equity, particularly in the lower middle market. When it comes to information five, six years ago, yeah, they were in the Stone Age, because it was almost as if they were an exclusive club. And if you ever wanted to identify a private equity firm, let alone team members on the on the firm or contact details, they kept that so restricted. It was as if, hey, you can’t reach us unless we know who you are, which becomes a challenge if you’re out there in the marketplace. I mean, you don’t want to be the best kept secret in the market if you want to if you want to grow. So I mean, that was pretty daunting. When you started doing that back then it would have been easier to go and look at the higher flying publicly traded or the larger area. Why? Because you have a focus with the lower middle market, both in terms of companies that are target companies looking for a buyer, as well as private equity, or financers in the lower middle market. Why that focus?

    Peter: So I think that the reason that we chose the lower middle market was not in any way, accidental, I think the lower middle market has a level of dynamism to it, that makes it a market where solving the information problems that plague buyers, and sellers make it harder for buyers and sellers to find one another, to be found by one another, to assess one another as counterparties and partners, there’s a lot of problems and challenges that are, I think, much more unique to the lower middle market than to really any other sort of, you know, quote unquote, category of, of private capital markets. So, by contrast, the venture capital community still remains highly concentrated in Silicon Valley, New York, Boston, and now increasingly, you know, Austin, Texas, and maybe one or two other areas. 

    You can get your hands around a great amount of that community quite quickly, it’s geographically concentrated. The super large cap private equity community, right, it’s, you know, they all have headquarters between 40th and 60th Street in Manhattan, right, and they have offices around the world. But, you know, there’s not that many multibillion dollar private equity firms out there, when you go into the lower middle market, everything changes, there are literally 10s of 1000s of, of active buyers, between the private equity community, the portfolio companies that are owned by the lower middle market, private equity community, I think, I think that there’s about 10,000 private equity backed portfolio companies in the lower middle market now. So in addition to all of the funds, then there’s then there’s a whole whole nother just huge range of acquisitive, privately held companies that are owned by those funds. And then you have, you know, folks like J2 you know, or you interviewed the folks from J2 the other week, you know, and they’re, you know, a Fortune 500, and a strategic buyer, all of that sort of fragmentation, all of the dynamism of people entering and exiting the market. That’s what makes it very, very hard, I think, for buyers to find sellers at the right points in time on the right side, on the right opportunities. 

    And for sellers to find buyers, the right points in time on the right opportunities. In addition, people tend to age out or succeed out of the lower middle market. So you know, as you get bigger and bigger as a corporate buyer, or as a private equity buyer, you kind of have to put more and more money to work. And the easiest way to do that is to do bigger deals. So even like, you know, most most operators in the private equity market in the lower middle market, if they’re really successful, they actually almost like grow out of it. And so as a result, you don’t have a lot of people who sort of stay in the lower middle market forever, there’s a natural exit and attrition out of the market. Because success means bigger font sizes, bigger font sizes mean bigger check sizes, and then all of a sudden they’ve left and they’ve gone up market, and then a new crop of people come back in right so so all of that sort of dynamism and all of that movement creates a really important information challenge for the market. 

    And, and, you know, we try to solve that through the axial platform. There are other companies like pitchbook, that have built great products to try and solve, you know, aspects of those problems as well. But you just don’t have those problems if you’re a multibillion dollar firm like Goldman Sachs, Blackstone, you know, there’s just not that many buyers and not that many sellers at that part of the market. And it’s just a, it’s a different ballgame than the lower middle market entirely.

    Patrick: There’s an interesting dynamic you reminded me of is as we’re doing research, and so forth, and again, five, six years ago, there are literally 1000s more private equity firms now than there were not too long ago. And a lot of them were outcrops where you had investors who really enjoyed being in that lower middle market space. And by you know, the very nature they just grew bigger and bigger and the deals got bigger and bigger and they lost touch it was almost like my daughter’s where they would start crying when they as they started growing. They outgrew their favorite shoes, and they still try to cram their feet in and they just couldn’t and you know, it’s just a natural law of evolution for them. 

    There are others though with with private equity. You love that small lower middle market. You just build that portfolio. You, sell it to there. There’s always a bigger buyer out there and they’re actually more bigger buyers out there now than before. But you know, as I see it not only in the private equity side, but just for owner, owner and founder businesses out there that a lot of them are aging out, or they’re finding some way to take that next step, if there’s not enough resources out there information wise for those owner founder individuals out there, they’re gonna default to large institutions, because they just they’re familiar with the name, they’re not familiar with being out there, who are these other buyers and sellers, they don’t even know about family offices, this is another class of buyer out there. And so if they default to brand names or institutions, they run the risk of trying to transition their business with an organization that for no fault of their own, you know, these institutions overlook them, they’re not as responsive, they won’t value them as much. 

    But they will overcharge that. And, you know, there are resources that can be brought to bear that are, you know, fit to that lower middle market. And it’s a vast, vast market. That’s one thing that’s very nice for, you know, supply siders like me, I want to be in markets that are growing, not markets that are very limited, they may grow a bit. But you know, there are a lot of these out there that all need help. And so the more that we can bring information to bear on that, on that group, that is a part. That’s why I have a passion for the lower middle market. 

    Peter: Yeah, I mean, you know, I hear all the time and about, you know, all the lower middle market, you know, it’s so underserved. And, you know, and that’s like, you know, to me, that’s kind of old news, and sort of a cliched theme, there are a lot of outstanding investment professionals, investment bankers, lawyers, CPAs, providers of financial products, insurance products, like what Rubicon is doing in the lower middle market, I don’t actually think that the lower middle market is underserved. In the way that I hear people always talking about well, you know, buying businesses in the lower middle market, because it’s really underserved. I think the real issue in the lower middle market, at least now, is not that it’s underserved. It’s that there’s a huge, you know, diversity and array of different providers and partners that you can, you know, theoretically choose from, right, you can sell your business to a private equity firm, you can sell it to a permanent capital organization like J2, you can sell it to a strategic buyer. 

    There are family offices in the market, there are lots of different intermediaries. Some of them are two, three person, four person organizations that do high quality work, others that do low quality work. Others that are 100 person organizations. Yeah, so I think I don’t think it’s underserved. I think it’s, I think it’s well served, I just think it’s very, very hard to, as a business owner, to know, to know, all of these people to know how to sort of assess all of these potential partners to work with. And so I think that’s actually the bigger challenge, right? It’s not whether it’s not that there’s not enough people serving the lower middle market, it’s helping the owners and entrepreneurs navigate those, that huge list of choices, right, there’s 100, private equity firms, I mean, what am I going to do, like, you know, go to every single one of their websites, they all sound the same and say the same thing, right? So how am I really going to figure this out? 

    So that’s what I think is actually the bigger challenge. It’s not that they’re underserved. It’s that it’s that there’s too much choice, and, and they need help slicing through those choices by getting their hands on, you know, good information, and, and good resources. So that’s a little bit of my sort of, like devil’s advocate argument to what you know, is sort of the cliched chatter on how the lower middle market is underserved. I think it’s really well served. I just think it’s a lot a lot of different operators down here. I mean, one of the things I was going to say just prior to your prior question. In the lower middle market, it’s the only part of the sort of private equity sort of quote unquote market where you truly have these, like individual business buyers who are buying, owning and operating businesses for their own account. We on the Axial platform serve a set of clients who are buying businesses, they’re not raising outside capital. They are not a family office, they are a person, they are an entrepreneur. And they own and operate a small portfolio of SMBs small and medium sized businesses, they buy their own capital they buy it with a combination of bank financing and their own capital. No such creature exists up market right yeah, there’s no there’s nobody who’s you know, buying businesses for their own account in the multi 100 million dollar category except t for Jeff Bezos, right, you know, who’s behind the Washington Post or whatever. But there is none of that. 

    And so I think that’s one of the really interesting things in the lower middle market is you can, you don’t have to sell your business to a private equity firm, you don’t have to sell it to a strategic buyer. There are actual entrepreneurs in the lower middle market who have made a career buying businesses for their own account. They’re not a fund, they’re not anything, they’re there, they’re a person just like you are. And that kind of buyer just doesn’t exist in any other sort of part of the the private market. So lower middle market is just so unique, because it’s just got all of this sort of dynamism and diversity and different ways to skin the cat.

    Patrick: Well I didn’t, I didn’t realize because I’ve been chanting that same thing underserved market and so forth. I think it’s almost like they’re getting an overabundance of choice. And, and they’re, they’re almost just blip stuck, and with with too many choices, and it can feed into, okay, well, where do we go, you know, information overload and choice overload, and so forth. But yeah, you’ve got a, you’ve got an Axial brings a solution to that. So let’s talk about this a great segue into because Axial isn’t just Axial, there’s the Axial, that’s the online platform, but then you’ve also got the Axial network. 

    Peter: Sure. Yeah. So I mean, you know, the whole idea behind Axial was, can you develop a trusted platform on the internet, where buyers and sellers of lower middle market businesses can find and connect and be found by one another, at the right points in time and on the right opportunities. And that’s a straightforward concept, right? It’s like, you know, we’ve been written up in various publications, as you know, the for m&a or the, you know, the Tinder for m&a is the way Bloomberg wrote the story on us. So it’s just it’s a straightforward concept. It’s obviously a hard problem to actually solve perfectly. 

    And we definitely have a long long road to go that we’re excited to go down to make it better and better. But the core functionality of the Axial platform allows for a owner of a business who’s looking to raise capital or sell to either on his or her own behalf, or through a trusted intermediary, who they have hired on their behalf to go on to the Axial platform to confidentially upload a bunch of information on the business and the transaction that they’re looking to execute. And to do that, in total secrecy, as if you’re sort of like you have like a one way mirror on the market of buyers, as you upload the data onto the platform, Axial returns back to you a set of recommended potential buyers or lenders based upon the data that you’ve uploaded. 

    So if you’re looking to raise $30 million of debt, we’re not going to recommend growth, equity investors, if you’re looking to sell your business, and you operate a manufacturing company, we’re not going to be recommending buyers of software businesses. So the more data you add into the sort of fields that we’ve built, the richer a set of recommended buyers we can provide to you, or lenders or equity investors in the business. And it’s at that point that the business owner who is deciding, okay, who do I want to engage as part of this process gets to sort of have that one way mirror, it’s kind of like, you know, the, you know, the, the lineups when you’re in prison where like the person goes and looks and you know, sort of points, you know, but you don’t get to see who they are, they’re behind a one way mirror, that’s basically, that’s basically the tool set that we give to, to the investment banker and to his or her client. 

    So they get to confidentially upload the data on the business and the deal they’re looking to execute, they get to see all the potential buyers on the axial platform that might be a fit. And those buyers have all essentially articulated their investment criteria, their transaction histories, the reasons for their interest in particular types of businesses. And then the seller gets to decide who they want to invite into a private dialogue to begin discussing the transaction. So that’s basically what you know what the business. That’s what the business does, again, and again, and again and again, for different sellers and for different buyers is enable those kinds of introductions and those kinds of customized conversations to happen at a scale that we think didn’t happen and couldn’t happen before. 

    Something like Axial. We automate in addition to that, we automate you know, the execution of NDA s and the distribution of CIMs the confidential information memorandum. So we we’ve used software to automate I think a lot of the more busy drudgery oriented admin work of an analyst or associate investment banker, and let the the bankers and the deal team sort of focus on more valuable sort of more value added interactions and and more interesting work. From the buyers perspective, that obviously, you know, creates a a, I mean, ideally, we’re augmenting your your pre existing deal flow, right. So you know, every buyer buying businesses have some of their own deal flow, it’s a function of their first party sourcing networks and their personal networks, we don’t aim to replace that, we just aim to augment that and sit on top of that, and grow the reach and distribution that you have on the buy side. 

    So that’s the, you know, that’s the core nuts and bolts of Axial without creating too much of an advertisement for it. I mean, well, but we just, you know, found is that, you know, as a result of building this network of buyers and sellers on the platform, there was an opportunity for us to build real community around that and not just have it be this sort of cold machine like software organization. And so we began to hold events for our members that use our software platform. And for the last six or seven years, those events have all been in person, we started holding digital events in March of 2020. Coincidental with the arrival of COVID. 

    But what we’ve really found is that by creating an environment where both digital and in person events can happen among and between our members, it’s just kind of like the Yin and Yang, for the business, the software platform enables a lot of scale, a lot of productivity, a lot of automation solves a lot of problems for you know, for the members on the buy side and the sell side. But the events, enrich the network, enrich the platform, create the opportunity for more meaningful relationships to be formed. And while that’s not important at the beginning of a deal that is critical at the end of the deal, so you just can’t very few deals get done. And go all the way, you know, go the whole distance, when there isn’t a pretty strong sense of trust and chemistry between the buyer and the seller. 

    And so anything that we can be doing to improve the quality of the relationships and strengthen the trust within the community of members that use Axial, that’s good for us, because it makes it easier for them to find and be comfortable doing deals with one another. So that’s kind of how we thought about the network that sits on top of Axial as opposed to just sort of raw lines of code that you know, that power of the application itself.

    Patrick: Now well, I think that you know, my belief about M&A is this is a people business, this is not a Company A buying Company B, it is a group of people choosing to partner with another group of people. So ideally, one plus one equals six and and that’s the objective get out there. And you cannot get the human element out as much as there’s a lot more efficiencies with technology and the gathering of information, that you’re still the person to person network, it is essential, I think that you’ve honed down the membership, because it is the lower middle market area. And these are the deal players that are there. 

    And these are long term players, they’ve been around for a while, and you’ve built up the network over 10 years. So this is a fairly well established credible venable group group of participants in there that, you know, they don’t do it once I mean that, particularly the buyers, they they, you know, we’ll be doing this again and again, and some some sellers may want to go out and adventure down down the road as well. That’s the big element out there that you just referenced was, you know, with business development, in M&A, a lot of it because it was all in person was fragmented. And then when you could collect people together would be at an ACG conference and other industry conference. 

    And that’s where, you know, for me, it was a real challenge, just trying to track down private equity, managing directors that are either at conferences or at shows or out on the road, and so forth. COVID comes in, boom, all that stops. And, you know, the whole traditional model for business development now has changed. Actually one of the members put out a real thought provoking article, I interviewed him not too long ago, Mark Gartner, where he talked, business development has changed forever. And there are organizations like yours that at least, you know, you may not close something from beginning to end virtually. But you’re getting, you know, around second base by using the Axial network that does that. Why don’t we talk about you know, how COVID has changed Axial and M&A in your realm?

    Peter: Yeah, for sure. I mean, I think, you know, I do think that COVID has definitely had a permanent and material impact on on on, on financial transactions deal making in private markets. I mean, the public markets were already so automated, you know, the exchanges and trading and all of that. So I think they were really far less impacted by COVID than the private markets. And, and so, here, I guess a couple of thoughts that I have with respect to to COVID, and business development, and just generally private markets, I think the first thing is now that everybody can meet face to face, without meeting face to face. 

    That is going to redefine the, the value of the need for and the appropriateness for an actual physical in person meeting, right. So, fast forward two years, vaccinations are done, you know, COVID is effectively gone. Everybody can now meet with one another very cost effectively without leaving, you know, their their basement. Right. So what does that mean, for the in person meeting, I think the in person meeting is not going away, I think in a world where everybody can easily meet on zoom, and there’s essentially no marginal cost to meet, you know, over zoom. The people who make the effort to continue to meet with people in person to continue to have that be part of their business development mix, whether it’s in private equity, or whether it’s in any other sort of high touch, you know, sort of big stakes transactional category are going to, I think they’re gonna have like an advantage if they use those types of meetings, right? It’s like, if you think about what happened to the written letter, once email arrived, yeah, right. 

    So, you know, if someone sends me a bottle of champagne at Christmas, or whatever, and I send them an email, like, Hey, thank you so much for the champagne. You know, from their perspective, that’s nice that I sent, you know, sent them a thank you note, right. But there’s something totally different when I take out a fountain pen and a nice piece of stationery, and I write them a note and put it in the mail and put a stamp on it and go out of my way to do those things. And, you know, and and they get a nice piece of, of, you know, handwritten mail in, in the mailbox a couple days later, I think there’s the same, I think the same kind of shift can can can now translate to this kind of Zoom in person meeting, it’s going to be a way more efficient space because of Zoom and the speed with which you can meet in person, you know, or not in person, but you know, meet face to face over the internet. 

    But there’s going to be something very significant about the person who makes the effort and the investment, to get on an airplane to get in their car to get in a train, and come in and see a business owner face to face. Right. And so I don’t think that that advantage is going to go away. One of the things that I think so that that’s one big change, I think another really interesting changes. You as a buyer of businesses, or as an investment banker, courting business owners to to earn their business and be their advisor of choice, if you have been developing the relationships in advance of any transaction, and part of the development of that relationship has been in person and part of it has been over Zoom. I think that subsequent transaction can occur extremely quickly now, right? 

    So if you if I’m buying businesses, and I’ve already met an entrepreneur, and I’ve been following his business for two or three years, and he picks up the phone, and he calls me, and we have a Zoom call, and he says, Hey, I’m ready to go, Well, I’ve already met him in person, I know who he is, I’ve been following his business, I can basically do the rest of that deal over Zoom. Right. So I think that like the back half of a lot of transactions can happen way more quickly, in a post COVID world, provided that the relationships between the buyer and the seller have already been sort of created, you know, up the funnel. So I think that’s, you know, that’s really interesting. I also would say that private equity is probably a few years away from actually moving to a fully virtual diligence process, the venture capital community has already gotten there. And they tend to move more quickly for a number of good reasons than private equity, largely because they’re not really ever doing controlled transactions.

    But it is totally common now in the venture capital world, to meet an entrepreneur over Zoom, and, you know, right them a $10 million Series A or Series B check, you know, six weeks later or two, three months later, without having ever met them in person that’s happening all the time now, in the venture capital category. I know that private equity still feels like they more or less can’t quite fully do all of the m&a due diligence that they need to that way. But again, I would take the devil’s advocate point of view here and say, the efficiency of of being able to do things like this, the quality of bandwidth, the quality of the technology, all this stuff. Just think that within five years people are going to be capable of and comfortable doing full control buyouts with very, very limited in person contact. I just, you know, you heard it here first. 

    Patrick: And you’re gonna just see competitive pressures forced that, where

    Peter: I think that’s right. You know, as soon as one private equity firm says, hey, we’re willing to do it all virtual? Well, I mean, you know, it’s just a prisoner’s dilemma at that point, right, then everybody else has to sort of try and figure out how to do it too, right. So it only takes a few brave souls in private equity to say, hey, let’s try and figure out how to really do basically all of this virtually. And in the course of figuring out how to do that, they have created a really interesting competitive advantage that allows them to move faster and close deals with shorter closing windows. And that’s really compelling to bankers and to, you know, to business owners, and then the whole rest of the market has to follow suit. So I really do think it will happen, I don’t think it’ll happen in 2021. But I do think it will happen before 2025, for sure.

    Patrick: Well, there’s a perfect segue when you talk about diligence, and you know, dealing with risk, and so forth, I mean, you have to get over the first hurdle of just making sure that you know, by yourself that there’s a fit there, and then and then you move forward, then you go through the whole diligence process. And, you know, there’s risk with a lot of stuff. And you know, both parties want to go ahead, and if they can’t, if they can’t mitigate or limit the risk they want to transfer now. And so that brings me right over to probably one of the other big developments in M&A. 

    And that’s insuring deals through a product called rep and warranty insurance where the seller reps, rather than being the personal liability of the sellers, to the buyers financially for any breach of the seller reps. Well, now we can just transfer that risk over to a third party insurance company with deeper pockets in both parties in most cases, and all of a sudden, seller gets clean exit, they don’t have to worry buyer if something does blow up, their their risk is hedged. And it is something that’s beneficial. They’ve gotten cheaper, because the claims they’re there, but they’re not huge monster monster claims that are driving up rates as in other things. 

    And so it’s become just a real, efficient, elegant tool. I’m curious, because this product wasn’t really available for the lower middle market until about 18-24 months ago, it was reserved for the 100 million dollar plus deals. Right? Tell me with, you know, whether ever experience that you’ve seen, and you’ve drawn from your members, what have you heard about rep and warranty?

    Peter: Well, so, you know, I have never been an M&A buyer of businesses in the lower middle market in the way that our clients are, but I have raised outside capital for Axial. And, you know, I remember very well, the, you know, the, the endless back and forth over reps and warranties, as part of, you know, raising rounds of financing for Axial. So it’s a huge deal. There’s lots of deal breaking moments that can emerge in the reps and warranties part of the negotiation. And yeah, from, from my perspective, for that piece of risk in a transaction, to become the focus of professional underwriters with very, very deep pockets, to transfer that risk away from the seller, that I mean, you know, I’m sure the buyer still have to get comfortable with just the inherent risks of buying the business. 

    But I, that is an incredibly good development, in my opinion for the lower middle market and for capital markets for private companies. Because it is, it’s hard to believe that that doesn’t increase the velocity with which capital can form around small and medium sized businesses, if you can take a piece of risk. And, you know, and transfer it both away from the seller, and also have the buyer have peace of mind, you’ve just taken a huge a huge aspect of deal making that makes the deal longer, makes it slower increases breakage risk, and you’ve taken all of that and you know, you haven’t, like farmed it out in some careless way. 

    But you now just have a place where you can you know, where you can lay off that risk, and that allows the deals to proceed probably more quickly. I don’t know how the insurance underwriters of reps and warranties go about their work. Are they doing that work fairly expeditiously? Like how fast can they diligence, the reps and warranties that they’re preparing to underwrite?

    Patrick: Yeah, the misconception out there is that underwriters will perform a whole set of their own diligence when they’re looking at a transaction. In reality, what they do is they’re relying exclusively almost exclusively on the buyers diligence. They Want to see what the buyer looked at? They look at the reps than they just are going to be pulling the buyer and say, show us your legal report, show us your HR report, show us financial reports. And if they’re not audited now they flex they’re flexible will show us a quality of earnings report, show us that you went check the boxes as much as possible. And if we felt that you you’ve done a thorough enough job, then we’re gonna we’ll backstop you. It’s completed in a matter of days. So the only thing that’s been constraining on the insurance industry is more deals are getting quoted. And so more diligence reports have to be analyzed. And, you know, five years ago, there were only three rep and warranty insurance companies. Now there’s over twenty.

    Peter: I mean, I think that’s an incredible development for the lower middle market, I think for for underwriting to happen in a handful of days in, you know, in many cases, that takes the reps and warranties risk takes the tension that that creates between the seller and the buyer and creates a third party, I think, the way we tend to look at the you know, for us at Axial, we’re always trying to sort of figure out where’s the friction in deal making in the lower middle market, right, what is the source of friction, because, you know, that’s what’s slowing down the pace and the velocity of transaction execution, that’s what increases the likelihood of deals falling apart. 

    So whenever an innovation arrives in the lower middle market, that’s decreasing the speed with you know, improving the speed with which deals can get done, figuring out ways to take risk, and move it off the table or distribute it more efficiently. Those from our perspective, usually, those are almost always very good things for the lower middle market, they’re good for entrepreneurs, they’re good for business owners, they’re good for the economy. So it’s great to hear that the reps and warranties market is growing in the lower middle market and not just, you know, sort of for the big dogs north of $100 million. I mean, that’s, that’s really exciting.

    Patrick: Well why don’t we because everybody’s all had their appetites whetted for Axial. Give us the profile of an Axial member.

    Peter: So, you know, I guess, it’s been so great to just serve the diversity of member types that we’ve served, you know, you know, the, you know, sort of at the top of the food chain, so to speak, I mean, they’re, you know, the portfolio companies at a place like, you know, KKR that are looking to acquire small, lower middle market businesses, those are customers of Axial, right, we have a, you know, corporate corporation that’s buying home health businesses and behavioral health businesses, it’s owned by KKR. And, you know, their clients of Axial and they’re out looking to buy small, you know, just small, you know, single location, retail, behavioral health clinics, and they use Axial as a channel to source deals for that, right. 

    So that’s like some, you know, big name and KKR. And then, you know, just, you know, just a month and a half ago, a ex investment banker, professionally trained, I think at B of A for many years spent, you know, did his tour of duty in New York City, he went back to move back down south, and he’s, he’s one of these guys who buys and owns businesses for his own account. He doesn’t have outside capital. And he bought a wholesale distributor of dairy products and dairy supplies business, and he bought the business, he sourced it through axial, bought the business for about 5 million bucks. And, you know, so what we’re really trying to do on Axial is not create a platform where only the really well heeled and really well capitalized sort of institutional and corporate buyers can, can succeed, we’re trying to create a platform and a business model and an offering where all different kinds of buyers from all different sort of walks of life, can pursue acquisition opportunities through, you know, through the platform. 

    So that’s a little bit about like, sort of, you know, the spectrum of buyers on Axial, I mean, you know, the, the, you know, the bullseye target, are, you know, lower middle market, buyers of businesses focused on companies that have typically somewhere between a half a million and 10 million of EBITDA. So that’s really like, that’s the sort of core sweet spot for Axial is sort of half a million, maybe 1 million of EBITDA up to about 10 million. There’s transaction activity that occurs above that range. But the overwhelming sweet spot is sort of within those two goalposts on the sell side. Again, you know, some of the more well known names on the sell side in the investment banking world using Axial, there’s firms like Stephens, which is a pretty well known investment bank based out of Little Rock, Arkansas. 

    They do really big deals, they’ve got a really respected presence, you know, up here in New York City. But, you know, we were working with, you know, Business Brokers that operate a single shingle, you know, and, you know, they have their own LLC, they sell one or two businesses a year. That’s how they pay for, you know, their mortgage, and put their kids through college. And they’re able to use Axial, the same as, you know, a fancy investment bank, with a lot of, you know, a lot of pedigree. So we really are trying to basically, what we care about is whether or not you are a good faith, high quality participant in the lower middle market, right. And we don’t care. 

    You know, if you’re at a fancy brand name, whether you’re at a big organization or a small organization, what we care about is whether or not you’re genuinely focused on doing high quality deal making, and transacting in lower middle market businesses, as an owner and operator, an advisor or a capital partner. And if you can clear that criteria, then we really feel like we have built something that could be you know, could be helpful for you. So that’s the spectrum of profiles. There’s very little business owner activity on Axial directly. So most of the business owners hire an intermediary and the intermediary is using axial on their behalf. I’d say 15% of all activity on Axial is from a business owner directly. And the remaining 85% is intermediaries who use Axial’s tools on behalf of their their sell side clients.

    Patrick: What trends do you see this coming year 2021 for either Axial in particular or M&A in general?

    Peter: Well, I think what’s going to be really interesting is to is to watch how dealmaking occurs in the world, in and around sort of retail 2.0, right. So, you know, when COVID hit, like, retail 1.0 just got destroyed, right? I mean, unless you were a grocery store, or you had the scale of Walmart or Target. You know, I mean, it just was it’s very, very brutal out there. But I think now, there’s been almost a year of time. And so I think, retail businesses of all different kinds are have have had eight or nine months to try and survive, and to try and sort of reinvent their business models, right. And so I think there’s going to be some really interesting, innovative models that take advantage of local retail distribution and storefront capabilities. 

    And I think while the big mega wave trend is obviously ecommerce, and that’s only accelerated because of COVID, I think there’s going to be this sort of resurgence of a new model and a new form of retail. And I think there’s going to be some really interesting growth capital and maybe interesting m&a transactions that sort of occur on the, you know, on the upswing of retail, which right now is so massively distressed. So I think that’s like an interesting area to watch for some interesting green shoots, as new business models get get created there. I think on axial in particular. Look, I think, you know, one of the interesting trends, and it’s not a new trend, but I just think that there’s more and more. There’s more and more entrepreneurship through acquisition happening in, in the lower middle market. So there’s a lot of people who are leaving Apollo or leaving KKR, and saying, you know, what, I’m just, I know how to do deals. 

    Now, I’ve been really well trained, I’m a professional principal investor, I can go out and using a platform like axial or even not using a platform like this using my own relationships, I can go out and find deals, you know, for my own account, I really think that that form of entrepreneurship, where people can go and buy small and mid sized businesses either for their own account, or the little bit of backing from family offices, not just the independent private equity sponsor model, I think there could be like a really huge wave of growth in that category. In 2021, and and beyond. 

    And I think that that that’s another interesting, interesting one to watch where, you know, people say, I’m not going to make the climb to managing director over the next 10 years, I’ve decided, I’m just going to go out on my own, I’m going to set up my own little principal investing vehicle, and I’m going to go buy five to $10 million businesses. And so I think that that’s going to change the face of private equity in the lower middle market pretty significantly. I think the trends already underway, but I think if you like by 2025, I think it’s going to have like, been quite transformational to the complexion and the demographic realities of lower middle market buyers.

    Patrick: Peter Lehrman, thank you so much. This has just been very entertaining. Very informative.

    Peter: Well good. It’s been great to be on the show. Thank you very much.

    Patrick: This is great. How can our audience members find you?

    Peter: Well, I’m available to anybody anytime via my email address, The website is and it’s also now which is great. So either one of those will take you to our website. And it’s free to get started on Axial. So we have subscription based offerings, but we also have offerings that are free to get started. So anybody can get underway for free on Axial on the buy side or the sell side. And there’s lots of resources there as well to just sort of learn about what we do and how we’ve been helping people. So feel free to reach out to me or feel free to head to the website.

    Patrick: I agree. I will say that I have stolen from you and Axial content wise, just ideas because you guys have some great content out there. Great cutting edge trend things and because you’re in, of and for the lower middle market, who better is a resource to rely on for cutting edge insights.

    Peter: Appreciate the thumbs up there.

    Patrick: Very good. Thank you.

    Peter: All right, Patrick. Thank you.

  • Codie Sanchez | The 9 Steps to Buying a Business
    POSTED 2.9.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we’re joined by return guest, Codie Sanchez. Codie is the Managing Director of Entourage Effect Capital Partners and one of the most sought out speakers in the cannabis business. She also co-leads Unconventional Acquisitions, an educational resource making the buying of businesses accessible to anyone willing to put in the work.

    Codie says, “If you have the mindset to be an entrepreneur and to get to go and grind and build your own thing, you have the ability to be a deal maker, and to buy businesses, period.”

    We chat with Codie about the abundance of opportunities to buy small businesses right now, as well as…

    • The commoditization of buying businesses
    • The timeline of businesses on the market
    • The Laundromat Model
    • The 9 steps to buying a business, including the mindset required to close the deal
    • The magic of “deal-maker glasses” and seeing opportunities everywhere
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m rejoined by Codie Sanchez, Managing Director of Entourage Effect Capital Partners, the first private equity firm to focus their investments exclusively in the cannabis industry. Long before legalization had taken hold they were there. You can find our original interview on Apple iTunes, or in the link to our show notes. 

    I’ve asked Codie back to share with us her newest adventure, Unconventional Acquisitions. Unconventional Acquisitions is an online platform that teaches individuals how to acquire a business in a simple nine-step process. Here’s a question for those out there who either are or know an aspiring entrepreneur, why build a business from scratch, when there are literally millions of small, profitable underlying network profitable businesses out there just waiting to be acquired? This conversation is especially timely because even in the throes of a pandemic, there’s never been a better time to be in the acquisition game. Codie, great to have you back. Welcome to the show. Thanks for joining me today.

    Codie Sanchez: Thank you for having me. Thrilled to be here.

    Patrick: Codie, before we get before we get into talking about mergers and acquisitions, and acquiring companies, because that’s something that you’re going to be leading the way in on the micro and lower middle market space where there’s a ton of opportunity. Tell us what got you to this point in your career following the great success you’ve been already having in the private private equity space?

    Codie: Oh, thanks. Well, um, you know, I think we have a little bit similar stories. And that, you know, from my background, I did very traditional Wall Street everything from asset management to alternatives and PE and hedge funds to investment banking, to product distribution. And, and what’s interesting is, you know, I started out as a journalist before any of that, and we did talk about this a little bit on the last one. 

    And the interesting trait that a journalist has is we just asked a ton of questions, and we never associate asking questions with being unknowledgeable, or having an ego around not knowing something. And what I found in finance is in finance, people do you know, we like to pretend like we know everything all the time in finance. Oh, yeah, I already knew that. Like, this is, you know, I got this, I don’t need to ask you these questions. And yet the smartest dealmakers I’ve ever found are the ones that asked really smart questions. And so I was kind of amazed how much journalism played right into dealmaking investment banking, PNP. 

    And, and venture capital, it’s really just can you ask a lot of really dumb, low level questions and get somebody to explain it to you at a very foundational level. And so I used that to get into finance climbed through a bunch of finance companies like Goldman and Vanguard and State Street and built up a pretty big asset management business in Latin America, and then sold out of it. And right about the time, I guess, about two years before I sold out of that business, I started realizing that, you know, may be similar to you, Patrick, like, why am I making all of this money for companies in my LPs, or investors? And why am I not taking this same idea and applying it to my own portfolio, I’m highly overweight, public stock markets in which I don’t have an unfair advantage. And I don’t have the ability to create some sort of arbitrage. And I’m underweight hugely on private sector. And the only private sector exposure I have is through private equity funds that you know, I have part of the gpn. And so that sort of led me to start thinking, Wait, I need to start questioning these tools that I use for big buyouts. And instead, why wouldn’t I apply them to creating my own portfolio? And that’s when I started investing. 

    First, I did what most people do, which is angel investing super sexy, you know, you think you can go and get 100 x trade very binary, and then realize quickly that that’s a great way to lose a lot of money, and have fun and learn and support an ecosystem. And that’s fine. But that I didn’t like the, you know, you invest in 10 startups and eight fail or sort of flatline. And so I said, Why wouldn’t I instead do what we do in PE and buy small businesses? And so I started doing that and like, let’s call it 2000. And I guess it was it was like 2014 was the first year that I started buying these businesses myself, instead of doing mega deals for big Wall Street firms. And, and then I, you know, my strategy is very simple. It’s like buy hold forever. And so I invest in these companies that are very boring and continue to invest in them, put operators in them and run. And then that’s got us to where we are today, which is talking more about, you know, I’ve realized how simple this actually has to do with how pro programmatic it’s not easy. Like you have to do work. There’s no free lunch. But it is simple. There’s a process that goes to it.

    Patrick: Well, in from this experience that you had you developed a couple of channels here, you had one, which is called Contrarian Thinking that’s out there, that is a regular newsletter, where you’ve got all these, I guess, business hacks and other ways around where, you know, you’re not trying to find. I don’t want to say shortcuts or the easy way, but you’re finding clever ways where you buck the conventional wisdom. And you go ahead and do that. There’s another venture that you came came in develop with called Unconventional Acquisitions. 

    Now, when we hear your background and that you were Goldman, your State Street, and you had this great reputation, you train high end universities and so forth, that can be a little daunting for other people to say, Well, you know, of course, Codie, you can go buy a bunch of little businesses, and it sounds like they run themselves, you just plug and play. But I don’t have any experience. I don’t have the capital, I don’t have that. And so what do you say to those people about this? And how hard or easy is this to get started them walk into the process?

    Codie: Yeah, well, first of all, I mean, I think there’s this, you know, we in traditional private equity, and, you know, hedge funds or alternatives. We’re, we like to overcomplicate things and make them sound scary, because then we get our two and 20. Right, which is how we make money. Yeah, exactly. So the more complex we can, I mean, I have this one graph I like to show which shows, you know, a pricing arbitrage theory, and it’s the algorithm that you use in order to get to this theorem, and it’s very daunting to look at. And then I explained that the graphic what it actually looks at, which is like, buy low, sell high, sell, sell high, buy low, you know, and basically, that’s all the theory is, and we don’t have to overcomplicate it. So, for buying a small business, you know, the couple things that you have to think of is this, if you’re destitute today, and you have no money to your name, you probably shouldn’t go out and try to buy a small business with debt, because you’re going to have to have some sort of assets or personal guarantee. 

    But if you are a W-2 employee, you know, have some savings built up in some way, shape or form, it is exactly like buying a house or a car, except we get very comfortable buying a car or a house because it’s normalized in society. But if you think about it, the return that you get on buying an auto or a car is always it’s a depreciating asset by and large. And yet, you’re willing to take that kind of risk on that sort of investment, even though it’s a depreciating asset immediately. And the same thing with a mortgage, you go out and have a sum of money 15 to 20%, down, let’s say 10%, maybe in this environment, and you lever up to buy a house that you think you will not only get to live in and be able to afford, but potentially will have upside potential and sell. The problem is neither of those assets actually pay you. And so if you apply that same model of you can get a loan to buy a business, just like you can get a loan to buy a car or get a loan to buy a house, you can become sort of comfortable at a base level, it’s the same thing, then we have to get into operating the business that’s different. 

    And so we do talk about, you know what that might mean. And there are some businesses that are very passive, and there are some that are very active. And so this is why more people don’t do this, because real estate is like, you buy the business at a set price. And you flip it or you buy the business at a set price. And all you have to do is get a renter in and the process is so normalized, that there’s no, there’s no variance, there’s no change really in one multifamily unit to another multifamily, or one single family unit to another single family unit and business. There’s various things are different between a landscaping company and the HVAC company. But the crazy part is they’re not that different. 

    So my belief is, is that just like, today, we have sort of commoditized investing in real estate, we’ve commoditized investing in stocks, we’ve commoditized investing in funds and ETFs I think in the future, we will commoditize investing in small private businesses. And it’s the next evolution, it just hasn’t happened yet. Because the returns are double or triple what you get from investing in real estate with the amount of capital that you have to put down.

    Patrick: It’s interesting that you come up with this give us a little bit of an example when you’re talking about this where you can go ahead and buy a business and it pays you I mean yeah, I would just for somebody that says Oh, I see this corner bakery and they want to get out of business or the owner wants to take off. Do I have to become a baker? I mean, yeah. paint a picture for us on on just working something like that.

    Codie: Yeah, so I like to use Oh, even pull up one of the models that we have here, I’m one of the deals we did. But like, I like to use really simplistic models to start. So one of the first businesses that I bought was a laundromat. And now I’m not saying that you should go out and buy a laundromat because a lot of people doing that it’s a little bit more commoditized over the business. But if I look up the model right here, about how we bought that first laundromat, essentially a laundromat very simplistic right, you have the storefront, you lease out the storefront, you have the cost of utilities, water and electricity are the two biggest costs in tandem with rent, you have, you know, some sort of automated sensor for the door to open and close, you have a security camera, you have the machines in the system, and then you have a cleaning person wanted once a day a couple times a week, whatever the case may be, that is literally the business. 

    And then you would be the one doing, you know, taking in the money theoretically on every other day basis a couple times a week basis. And you know, you need a bank account, and you would need to file your taxes each year. Let’s say this is a very simplistic business. And this business is one where you can be basically an owner investor in it, even if you don’t have an operator. So there’s two ways to buy business owner or investor meaning you own the business, you just invest in it, somebody else operates it, you have an operator, or you can be an owner operator, where you run the business and like you said, you buy the bakery, and you bake the cakes, right? 

    Most people when they’re doing deals like you and I have done them a million times, we don’t want to be the baker. You know, we want to invest in a business. And we want to at least rev out of the business, something that’s meaningful for us. For me, I don’t want to do a deal unless I make 100K a year in profit. Ideally, I like a little bit more than that, because I want to have like 250-300K in profits. So I can pay an operator 150K to run the business itself. I step out, I take the 100K additional profit as a cash distribution each year and the rest goes back into the business. But for a laundromat, like what’s fascinating is, here’s an example of how it works. So like, and we can link to this. I wrote up a piece on this one that was public because it’s a deal I did it was a few years ago. 

    There’s nothing proprietary about it anymore. But small businesses all trade at like two to three x their profits for the most part businesses below $5 million in revenue. These businesses by and large doesn’t matter the section two to three x profits. And you know, these businesses like a laundromat, the one that I was looking at was making like $67,000 in profit a year. Not a ton, right? But where are you going to get a real estate property today that pays you $67,000 a year profit? It’s going to be very hard to do. Right?

    Patrick: Plus the headache too.

    Codie: Yeah, well, and you’d have to put a lot of money down so you’d be putting you know your your cash on cash return or your ROI, your IRR would be really low. Because in order to get $67,000 in profit, you’d have to spend a lot now that so if this plate if this laundromats making 67K, that means it’s worth something like, you know, let’s call it 100. In this case, what it actually came out to was the valuation was $125,000 is what they valued the business at. So the purchase multiple amount of what something like 1.9 to two x something like that. And and the interesting part about this business is that, you know, like you mentioned, Pat, there’s 80 million Boomers retiring this year, or in the next couple of years. There’s 10,000 a day.

    Patrick: Yeah, over the next 10 years, we got about 80 million Baby Boomers retiring, a large chunk of that, I wouldn’t say majority, but a large chunk are business owners.

    Codie: Mm hmm.

    Patrick: And so yeah a possibility where are they they’re they are incentivized to exit. They may not be exit exiting big so they’re not looking for that and they have no other place, you know, to send the business because their their children, or current employees aren’t interested in taking over. Now what do you take the car, just park it on a on a corner, leave the keys in it?

    Codie: Yeah, well, or, I mean, it happened to my uncle and he had a business that was doing $5 million in revenue plumbing business. And it was doing about $1.72 million in profit. And he just wound down the business. It was old. You know, he was 67 years old. He had no idea he could sell it. He didn’t realize that was a thing. He didn’t go to college. He grew up a sharecropper. And so nobody told him so we wound down a business that would have netted him if it was 2 million bucks in revenue, let’s say could have been four to $6 million dollars, right? So anyway, but if you take the laundrymat, philosophy $67,000 in profits, let’s say it’s worth $125,000. 

    The beautiful thing is you can go and get an SBA loan from the government for that $125,000, usually they’ll cover about 90% of the price in tax returns that have been shown to be in the profits over the last three to five years. And you can acquire an asset for very little money down, you do have to put a personal guarantee on it. But for very little money down, you can acquire $67,000 in revenue. And the case of this one, which I bought, we got a loan for like, I think we were able to get a loan for 100K, from the SBA. And then we did a an equipment loan for the other 25K. So and then we got the seller to finance two thirds of the deal. So I had $125,000, in my hand.

    Patrick: And the seller was fronting the money for you, too.

    Codie: And the sellers fronting the money. Yeah. And so you know, the breakeven is immediate with with the debt, or the breakeven is essentially, you know, two years without it. And those trades happen all day long. Every day, we have, you know, we just had five students close their first deals inside of 60 days at Unconventional Acquisitions, because this stuff isn’t rocket science. It’s It’s simple, but it’s not easy.

    Patrick: Well we talked about this earlier reference with real estate, and I want to make sure that we are not falling into this trap, because it has the air of you can you can make profits with no money down and do the traditional house flip, just come to this hotel ballroom, give us give us 100 bucks, and we’re going to show you how to do it and everything. That’s not the case here. This is a real legit issue. That’s very dynamic. Okay. And I mean, if you can talk to that, how is different from that real estate flipping mentality first? And then secondly, you know, I just was thinking about why is this happening now, what’s different between pre 2014 other than maybe the, the financial collapse and recession in 2010. But what’s happening that’s making this easier?

    Codie: Well, a couple things one, the SBA do does have a new loan program, it’s continually continuously gotten easier. We just had a call with the guy who implemented the most recent version of how the SBA does loans. But the thing that I really think has changed as it’s just the internet, it’s that for the first time, I mean, you’ve already mentioned the Baby Boomer generation. So there is a massive supply and demand change over happening here, where, you know, in real estate, you have a massive amount of demand across the entire industry, there’s basically no market that’s not at all time highs for real estate right now, except New York and San Francisco, some of the urban city centers, but in and then, you know, supply limited houses in San Diego where I am right now, we’re going like this, we’re trying to buy a place in Wilmington, Delaware, like we can’t get to there to see them fast enough, happening all over the country. 

    But in small businesses, the average small business stays on on a listing for for more than a year, one in 11 businesses will not sell inside of one year. And so it’s because, you know, we weren’t taught this. I mean, I’ve been in PE for a decade plus, and I never thought to apply what we do at the mega scale to the micro. And I don’t know why. But now with the internet, with the baby boomer generation changing with interest rates at all time lows, with, you know, the ability for people to get debt from things like the SBA, and with more knowledge out there about the micro PE space. I think it’s starting to open up and change. So anytime there’s a supply and demand imbalance, I think the market wants to write itself. You know, and that’s, that’s what’s happening here. 

    There’s, I mean, we talk about cannabis a lot because I invest in a lot of cannabis deals, but cannabis is hugely devalued. The only other industry that is devalued as cannabis is energy, but they have some systemic issues. And then you put small businesses down there is businesses, I mean, we’ve bought businesses for one x multiples, or we bought businesses for a percentage of their revenue for us coming in and helping them grow the business and optimize it, and no money at all. So there’s lots of ways to do this. And if you don’t believe it, then go chat with an entrepreneur of a small business like an old you know, 65-75 year old entrepreneur, go talk to your dry cleaners or your laundromat or your landscaper and and see how they feel. And you’ll very quickly ascertain that most of them are ready to pass the reins, but to your point, they don’t know how to and that’s where these buyers come in.

    Patrick: I’d like to get into a little bit more information about the the Unconventional Acquisitions program that you have set up if you want to be an entrepreneur. or acquire businesses. There’s a particular mindset for that. And there are a lot of people that are probably withering away in jobs or in fear of insecurity where they are now. And they want to be free and go out and do this and going to be their own be their own boss, and so forth. But like you said, it’s easy, but it’s simple. It’s just not easy. What kind of mindset would you know, from your experiences is needed for this?

    Codie: Well, it’s such a good point, because I think most of the reason why people don’t get deals done is because they’re, they’re scared. Well, it’s really two reasons why one, most people don’t take the first step to the people who take the first step, give up halfway through three, the people who don’t give up halfway through, don’t continue on the path long enough. And then for the winners are just the people who are left. And so you know that the game is largely persistence. Because like I said, I mean, you know, none of these businesses are rocket science, we’re not, we’re not telling people how to go and cure cancer, or invest in biotech or do these really complicated things. 

    So I think you’re right, the mindset is basically, if you have the mindset to be an entrepreneur, and to get to go and grind and build your own thing, then you have the ability to be a deal maker, and to buy businesses, period. If you have the mindset to be an employee and execute on the things that you’re going to execute on and to be flexible. When things go sideways, you can be a dealmaker. And in fact, I think people are crazy these days, for, you know, continuing to work at jobs with one income stream only, I think it’s super dangerous. And I think you don’t have to leave your job to do all of this. But you should diversify your assets, you should have some real estate. 

    And I think you should own some businesses that cash flow as a distinct asset class, even if you don’t want to leave your W two and go run it. So those are the two types of people, we have people who want to leave their W-2 or they want to get paid more. They want to own their own business, and they want to go in and own or operate. Or people like me who are like I run a fund. I like what I do. But I want more asset classes, and I want more cash flowing income. And so I’m an owner investor, but you’re right mindsets, so critical.

    Patrick: And the way you have a setup, it’s, again, it’s not rocket science. And it’s just a matter of if you know what numbers to look at. You don’t get yourself in too big of a hole to go in, you can execute and again, you don’t have to be there on on the ground. And I can tell you just in the mergers and acquisition stage, some of these businesses that are being acquired are like you said, landscape it, where you just have somebody that bought one, you know, mow and blow outfit, and then just added another one added another one, add another one, you know, and again, this isn’t for everybody. But you know, within three, four years, that’s a $25 million venture that gets sold to a private equity firm and private equity firms you think are going after the next cutting edge fascinating, shiny new toy. There are a lot of lawns that need to get mowed.

    Codie: Yeah. You’re exactly right. I mean, we have one student who works with us. So it’s hard. It’s funny calling him a student because he, you know, we I’ve known him for a while. So we have talked deals before. And when he came into the course and started working on some of it, his name’s Robert, he built up a landscaping company, exactly like he talked about was commercial, not residential. And the landscaping company built it up to $20 million dollars in revenue. And then you know, sold it to a private equity fund for six x their EBITDA. So you know, essentially their profits. And, and that business, he he didn’t, he did it himself, he built up the whole business. And now he’s come back and he was on garden leave, he had to take a year off. And now he’s like, I don’t want to buy I don’t want to build a business. 

    Again, that was like brutal, excruciating work. Now what I want to do is I want to buy a couple landscaping businesses and roll them up and combine them. And I want to do it with a pest keeping business too. And I want to bundle this home services in my area. And so we’re working through that with him on how to do it. And he has like three LOIs out right now. The guy’s an incredible operator. He’s never done deals before. You know, he’s an immigrant from Ireland, he had no no financial background. And so that is I think, the differentiator if I could go back to my 15 year old Codie, and change my mindset of I’ve always built little businesses and then I’ve sold some and you know, whatever. 

    But I wish that I would have bought more. Because the income that you can get with the not assurance because you got to be careful of that but buying a business that’s already doing 100,000 a million dollars in profits, you have a lot more wiggle room to mess up. You know, when you’re doing a startup, you’re funding it yourself for maybe years. But with this, you can use the funds in the business to really grow. So, yeah, I think there’s like nine steps to do this. You figure out those nine steps and and I think anybody who has that persistent grit that you talked about, has the capability to get after buying a small business.

    Patrick: Well, let’s talk about those nine steps and Unconventional Acquisitions. This is a platform, we’ll we’ll link it to our show notes. But it is in your online guide, as a whole series of steps on how to do where you hold people’s hand all the way through. Let’s talk about that.

    Codie: Yeah, so the reason we created this is because not dissimilar to you, I’m sure you get asked all the time. You know, when you’re a provider in the PE and M&A space, you just get asked to look at deals constantly, and you have a lot of the same phone calls. And so anytime that happens to me in any segment of my business, I try to create some guide that people can use to answer those questions, but so that I can leverage my time, so I don’t have to be on the phone all the time. So we created this originally, just to scratch an itch of mine, which was love you humans don’t have time to be on a phone call explaining all these deals to you. Here’s a guide you can do it will give all the proceeds to charity. And and then what happened is that the the guy did 50K pre launch. 

    And so you know, there are a lot of people that wanted to learn this. And so then I was like, wow, there’s a business here. And maybe we can get this group of humans together. And then they can be a great deal flow source for me. So I can get more deals, they can get more deals, we can syndicate stuff together. But it’d be fun. You know, and I don’t like to sleep, apparently. But how the course works is the first is sort of the intro to the why that we’ve been talking about, you know, the opportunity in small businesses, what does it mean to be a small business that the size, scope sector? What’s a bad sector to be in? What’s a good one? What’s a bad business to buy? What’s a good one? So that’s sort of the intro, then it’s the what type of business and that means what type of business for you. So this is where you kind of gain some clarity around, you know, do you want to? Do you want to operate the business, you just want to invest in it? Do you want to make a million dollars a year? Or do you want to start out making 50? 

    What what are the goals for you, then we give sort of like some guidelines and templates on how to do that. And then it’s, it’s deal origination is what we call it, but that just means finding in the business. So you know, going out and figuring out, okay, I have my parameters, I want a business that does 100K, I want it located in San Diego, because that’s where I am, I want the business to be, you know, low capital expenditures, and I want to have to have a lot of, you know, inventory and machines and whatever, wanted to be a pretty streamlined business. So we kind of narrow that down, and then you go find them, there are a bunch of different ways to find these businesses. 

    The Internet helps a ton now, then it gets into how do you sell yourself to the owners? Because you know, if you’re like me, and they see me, I might look a little young and the 65 or 70 year olds are going to be like, what are you going to do my business? So it’s how do you sell yourself? Then you get into valuation? How do you value a business bunch of templates, you know, models that you can use that are very programmatic. Nothing like that creative that we have. This is pretty industry standard. If you’re in PE, and then you get to negotiating the deal. So how do you put together the term sheet? How do you talk to them about buying a business. And then finally, you get to find it. That’s the part that I always love, because you can get super creative. A loan from equipment. A loan from the SBA seller financing, you know, maybe you have an investor come in, there’s tons of ways to do it. And you can play it’s all a game in financing, and we tell you how to a bunch of different ways to do it. 

    And then you can choose, then the last one’s legal and contracts. This is where we talk broadly about what they are, we give you some examples, but you really got to go get one done by an attorney in your area and the business. And then lastly, it’s the first 90 days, so you’ve bought a business. Now what and really, those are the steps. And if you follow them, you know, we’ve had students close deals in 30, 60 and 90 days. But they’re driven you know, they don’t just like, you know, they got you got to do some work to make this happen, just like anything else. But the returns, in my opinion are amplified.

    Patrick: Well, there’s also the magic of you got to make sure that the target company that you want to work with or acquire, they got to be willing to play the game too. And you know, and there are a lot of cases I think if you’re well prepared, and you have a good game plan, you’re going to go a lot farther on the trust scale than somebody that just calls him out of the blue which private equity that happens all the time there haven’t been his death is a sexy way of saying you know, cold calling. But you’re right. The one thing I would ask about and this is just my insurance background kicking in your your unit on legal and contracts and so forth where you’re doing you are making a real recommendation, hey, find a good attorney. And, you know, here’s the game plan, but make sure they get to the point quickly.

    Codie: Oh, yeah, no, no, I mean, what we basically tell you there’s, there’s like kind of seven key documents you need. But those key documents gotta have drafted by somebody, you know. And so we kind of break down like, in there, you can basically see, there’s like, you know, you need your, you need a standard NDA that they, you know, to protect them, and you and you need an LOI, that’s non binding, and, you know, then you might need a term sheet. And then you might need some, you know, liability paperwork, and then you might, you know, so we kind of walk everybody through what those are. 

    And the goal is to say, these things, when I first started learning them in PE, they overwhelmed me, you know, it seemed like a lot, but then you realize, it’s just after you do a few deals, it’s all the same process. And as long as you have that good bend show of insurance, and accounting, and legal, then and your your banking institution, whoever your SBA loan originator is or equipment loan originator is, then then all these deals start looking very, very similar.

    Patrick: It’s, I think this is akin honestly, to cooking a huge meal, the first time you do it, it’s so difficult, because you got to chop this much, you got to do this and add these ingredients. And you don’t know exactly how long to heat something up and you know, saute things and add them when you add them. How much oh, I forgot my measuring spoon, how much spice do I put in, and all these things you worry about, because you don’t know how it’s gonna come out. You know, and it’s even more stressful when you try cooking for a big family that are for an event for the first time. But if you prepare a particular dish a couple times three, four times, you don’t even have to refer to the recipe. And you can make little changes because you can kind of know the tweaks and so forth. I think that’s what you do is you outline all that, and then you give them the basics. 

    And then if they want to leave something out, which I do with mushrooms and olives all the time, or put something extra in, you know, a little more spice. Those are things that you can do. And I think you lay that out really, really well. Codie, as we’re getting through this down, we’re on the on the backside. Hopefully we’re at the end of the beginning of the Covid 19 pandemic, as we’re speaking now we’re looking at 2021. What trends do you see, you know, in M&A in acquisitions of small businesses, just give us give us the Codie Sanchez contrarian view on what she sees out there for the world ahead

    Codie: Well, you know, the biggest thing that we’ve been sort of obsessing about lately is, you know, something like 67% of all businesses on Yelp, that closed temporarily have now closed permanently. So there has been a massive blow to small businesses in the US. And it’s a tragedy, it’s a real tragedy, and the economy is going to struggle to get back from that. But wherever there’s a tragedy, there’s an opportunity. And so the opportunity in that is that business owners are more incentivized now than ever to sell. Especially if you think about the demographic of who is who is most impacted by COVID-19. It’s later generations predominantly, who are the same people who run these in person, brick and mortar businesses. And so, you know, we are seeing valuations at the lowest levels I’ve ever seen. 

    And we’re seeing deals get done in ways that I haven’t seen in a long time to, namely, just because people are incentivized to move on. And anytime you have these sort of shocks to the economy, business owners get tired, they’re beat up, you know, they’ve been doing this game so long, even if it’s profitable, they just, it’s, you know, it’s been a 10, 15, 20, 25 year endeavor for them. And so there’s a real opportunity for new blood to come in and invigorate these businesses. And then the interesting part two, I think, is the closed businesses. We had one of the students in UA call me her name is Brittany, and she’s in our mastermind, and I love masterminds in general, because it’s just an excuse to only talk to people about the things that I’m interested in. 

    And nobody wants to small talk with me. And there’s, you know, nobody’s talking about the weather or the kids, which just get to talk deals and nerdy finance stuff. And so, you know, Brittany, one of our students, she owns a gym in Dallas, and she was talking about how sad it is that all of these other gyms in Dallas, she knows the owners of closed. I was like, Brittany, you need to buy them. What are you doing? She’s like, I’m like you just call them and you tell them that you’re sad and you feel bad for like, No, no, no. She’s like, well, I don’t have the money to buy them. And they’re like closed. There’s nothing to buy. I’m like, oh, timeout, and that’s when I realized that these. 

    Once you get the dealmaker glasses on you can’t take them off. It’s a beautiful thing. But you don’t realize that that happens. And then once you get the dealmaker latches on, you can’t walk into a place and not see an opportunity. It’s real weird. It’ll happen to you if you start learning this stuff. But with Brittany, I was like, Wait a second, I’m like, what you got to do is let’s call him immediately set up a phone call with some, like one of these people, I’ll just listen in, and I’ll sort of help steer you before the call. But you got to call them up and say, Hey, Sarah, I am so sad that your business closed, you know, it’s breaking my heart, I thought about you, because you know, your business is going under. And that means you won’t have an annuitized income stream. But but there’s value to your business, you have customers that were continuing to come in, you have instructors that have people that you know, love them and your gym to do personal training classes. So what we should do is, let’s do this, why don’t we annuitize over your customers and your instructors to my business, I’ll pay you a percentage of every customer that you bring over for a year. 

    So you will still get to make some income, even after you’ve had to shut your doors and your clients, they have a new home. And so you know, I’m going to do with this with a few other providers. But I thought of you first because you’re a friend of mine. And I wanted to talk to you about it. And what is she done, she’s brought in four new gym owners, to her business. And she’s essentially bought out their revenue stream with a rev share agreement without putting any money down. And so these creative deals I think, are fascinating for business owners. And if you aren’t looking at them right now, you should be.

    Patrick: Saying you provide that kind of platform, that forum with Unconventional Acquisitions, in addition to the modules for learning, you got that whole community you had, as people say, a tribe out there and it’s a deal tribe.

    Codie: Yeah, that’s exactly right. Yeah. So that’s just out here looking at spreadsheets, getting excited about deals. But yeah, that’s exactly right. And, you know, the goal is, I have a goal I want to make 100,000 business owners in the next 10 years is the goal with UA. And we want to try to employ through those 100,000 people, a million people in the US. And so, you know, it feels like at some point, as you’re building wealth and doing things in your businesses, you know, you have to have more for that that comes from it than money. And so that part’s really fun for us is thinking about how to get America back to work, and how to get small businesses back in the game.

    Patrick: I’ll tell you, one of the things that’s out there is there’s the concept of a finite game where you’re going out and businesses out there to win win win, and everybody’s a competitor. And then there’s the infinite game. It’s a book that I’ve recently read, where you’re not, there’s no edge, there’s just you know, we’re going to look for other opportunities here, look other objects, and you’re just opening up these new windows for a lot of people. And you can see there’s a natural multiplier effect. 

    And you and I talked about this with mergers and acquisitions. It’s not just one company buying another company. And so some one company disappears, you got one left. It’s a group of people choosing to work with another group of people, short and long term. And together one plus one equals six. And I think I mean, what a great platform and this is your real true gift on giving back. And Codie I can’t. I’d like to say I’m very, very proud of you. We’ve known each other for a while, but this is just great. This is just literally blossomed. And I’m very excited for people to learn more about this is the unconventional acquisitions. Codie, how can our listeners find UA and and reach out to you?

    Codie: Yeah, so you can go to or because apparently we love vowels, you can also go to, it doesn’t have so many vowels in it, either one of those and take you to the site, you can sign up for the newsletter there. I also talk about a lot of this on which is my newsletter, and then I’m just Codie Sanchez on all the social medias, and I’m pretty active on Twitter, Instagram and LinkedIn. So any of those spaces and pretty much all over there is like my email address. I respond to all the DMS. I don’t respond right away usually, but I definitely do respond. So any questions, let me know happy to show behind the scenes.

    Patrick: Codie, thank you very much. Great racing with you.

    Codie: Right back at you. Thank you for having me. This is fun.

  • Jessica Ginsberg | Building Trust in the Niche Manufacturing Market
    POSTED 1.26.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Jessica Ginsberg, Director of Business Development for LFM Capital. Leaders for Manufacturing Capital, or LFM, is a Nashville-based private equity firm founded by operators and engineers, investing in manufacturing companies in the US and Canada. Jessica manages business development and investment sourcing activities, and brings over 13 years of experience in the private equity, investment, and commercial banking sectors in a variety of roles in addition to earning a BS in Finance and Accounting from Georgetown University.

    “It’s a more complicated logistical process to get a deal done virtually, so I think you have to take a deep breath and just remember that there are a lot of parties involved that have different comfort levels. And, during these wild times, it might take another couple weeks to get a deal closed, but just remember what the finish line is and work hard to get there”, says Jessica.

    We chat about experiencing the manufacturing renaissance, as well as:

    • Offering creative solutions for small business owners
    • Honoring the expectations of manufacturing owners
    • Overcoming obstacles to building trust online
    • Virtual manufacturing meetings and remote decision making
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello, there I am Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. 

    Today, I’m joined by Jessica Ginsberg, Director of Business Development for LFM Capital. LFM Capital is a Nashville based private equity firm, founded by operators and engineers and they’re investing in manufacturing companies in the US and Canada. And I would say, from the perspective of somebody out of Silicon Valley, our attention is usually focused on the gig economy and service sectors and so forth. And after talking to Jessica, as we’re leading up to this, this conversation today, I wasn’t aware that we are undergoing a real renaissance in manufacturing in the US and so was very, very excited to have Jessica, who, whose firm looks at just that sector that is now on this upswing, even though we didn’t see it. So, Jessica, it’s great to have you. Thanks for joining me today.

    Jessica Ginsberg: Thanks so much for having me.

    Patrick: Now, before we get into manufacturing and LFM Capital, let’s set the table with our audience and, you know, give us a picture of you. What brought you to this part in your career?

    Jessica: Sure, sure. So I grew up in St. Louis, left St. Louis for college, went to Georgetown for undergrad where I was a finance and accounting double major, and then went into investment banking. So I spent a couple years doing leveraged finance at Bank of America, I spent a lot of time working on the debt side of private equity deals. So after after a few years of that, I jumped over to the private equity side, and, and spent some time you know, really deep in the weeds looking at deals and understanding what private equity investors look for in investments. 

    After doing that, for a couple years, I took a little bit of a turn and spent about five years in public markets, I worked for an investment management firm where I invested in small cap growth stocks, mostly in in technology. So so you know, probably some of your some of your neighbors out there in Silicon Valley, ended up moving to Nashville because of a job opportunity my husband had and was lucky enough to connect with the team at LFM. LFM had launched in late 2014. So they had been, you know, up and running for about nine months when I joined. 

    And they were really looking for someone who understood private equity, understood, you know, our investment philosophy, but could also really get out and network and build relationships, and really educate and inform the market about what we were looking for. So I head up business development, I make sure that our funnel is full and that our deal teams and operating professionals always have enough exciting and interesting deal opportunities to dig into.

    Patrick: Now with LFM Capital, I love asking about the story of private equity firms, because unlike boring organizations like law firms or insurance firms that named themselves after the founders, okay, we have LFM Capital. So, you know, start off by telling us how the founders come up with the name, does it mean anything. And then let’s talk about what what their focus is.

    Jessica: Sure. LFM actually stands for Leaders for Manufacturing, which is the former name of a grad school program at MIT in Boston, that three out of four of our partners and two of our founding partners attended. The program was attended by Steve, Dan and Chris on my team and it was founded in the 80s at a time when US manufacturing was under a lot of pressure from abroad. And major US manufacturing companies like Boeing, GM, and HP and others were looking for ways to attract top talent to the industry. So they partnered with MIT to create this LFM program. 

    It was a partnership between MIT’s engineering and business school and top us manufacturing companies. So you know, we identify really strongly with the the program’s mission. You know, manufacturing is a critical piece of the United States economic landscape. We believe the future of a successful manufacturing industry is really carried on the back of small companies that provide the foundation and infrastructure for our critical supply chains. So that program is now called MIT leaders for global operations, they have sort of broadened the scope. 

    It is intentionally very small, about 48 students graduate per year, very close knit and and, you know, highly influential alumni basis at companies, you know, like Amazon, you know, and Boeing and many others. So LFM, is now really proud to be one of only 25 industry partners to the program, which means that we have phenomenal access to talent and just, you know, the brightest minds in manufacturing and operations, both right when they come out of this program, and much further along in their careers.

    Patrick: And you’ve selected, they’ve selected because they know, manufacturing, so forth, but they’ve also made a conscious decision to focus their their practices, their efforts on the lower middle market. Tell me about that. And why they’re at that front, versus middle market, you know, how did that come about?

    Jessica: Sure. So, you know, we believe that, you know, LFM, as a firm can can add a lot of value based on the operating experience of our partners, where we’ve been, who we know what we know. And so by taking, you know, companies at the small end of the market that are, maybe they’re less sophisticated in systems, you know, these are areas that where we had a ton of practical experience, maybe it’s, you know, implementation of a new VRP system, or, you know, thinking about management teams, you know, there are a lot of small businesses in this country that don’t have succession plans in place, and you have, you know, founder owners with, you know, generations that, that have no interest in the business. 

    And so, you know, we’re able to attract really top talent to these, these businesses as a result of our networks from the MIT program, and otherwise, and so if we think gives us a real leg up and the type of value that that we can add. So, you know, we really like the idea of, you know, taking these small companies and really helping grow them to to the next level.

    Patrick: Well I believe, just as you that there’s just a vast number, a huge number of companies in this lower middle market space, that are really getting underserved. And it’s tough, because they don’t know where to go to move to the next level. And in some cases, they default to an institution or larger player out there, just because I mean, familiarity, and it is a challenge for them. 

    Because, you know, if they’re going to organizations that are larger, unfortunately, they’re going to get overlooked. They’re going to get underserved. And they’re going to get over overcharged. And so that’s when we really want to highlight organizations like LFM, that are committed to that space, because I think that you can bring to bear a lot of the the items that are missing, they can get them to that next step. 

    And, you know, one of the things that after speaking with you before when we met was you talked about that mindset that you have for manufacturing, because there are mindsets and capabilities and aptitudes for technology and for other disciplines out there. But manufacturing has really changed over the last 10 years where it was seeing outsourcing overseas. It’s now coming back. And you know, now that we’re having this, as you mentioned, the manufacturing renaissance, describe the manufacturing mindset out there and and how LFM is able to really connect with that mindset.

    Jessica: Sure. So I guess I would start with our founding partners and their operational backgrounds and really the culture that that sort of embodies. Steve Cook, who founded our firm, as I mentioned, went through that MIT program. And then after the program, he spent 10 years working for Dell. So he was head of supply chain, head of engineering, and then ran Dell’s, entire consumer business, both manufacturing and sales. One of our other partners, Dan Shockley spent years and years at Caterpillar, running various businesses and then ran the ditch which company big construction utility equipment company. And so in many ways, you know, as we go out and talk to business owners, we can tell a story of you know, we’ve been in your shoes, we understand the challenges that you’re facing, and, you know, we we can help, you know, we can really add value your based on our experience. 

    Also, you know, being, you know, having been operators, you know, we understand how important legacy is with within a company. And, you know, when an owner decides to sell a business that is often you know, his or her baby, just because they’re selling and maybe transitioning out of the business doesn’t mean that they care any less about the employees and the future of the business. And so, you know, because we look feel smell more like operators. 

    You know, that’s, that’s a story that I think resonates, you know, really well we’re gonna, we’re going to build on the legacy that the prior owner, you know, spent spent their life work building, and we’re really going to take care of these people develop these people elevate these people, as opposed to, you know, a strategic buyer that might come in and say, I’m buying the business and I’m closing the shop, you know, we would never do that. So. So that’s kind of the backdrop. 

    And then I think, you know, we we take, you know, philosophies like five s, sort set, shine, standardized sustain, you know, we look for Lean principles in our companies and, and work to work to improve those, but in a way, that is, you know, I would say, not a heavy handed micromanaging sort of a way. But, you know, when you think about Lean and implementing Lean, a big part of it is, is not coming in and pushing me in on a business, but really letting the business, you know, answer some of those questions and figure out the answers and then execute on those answers. 

    And so we subscribe to that. And even even as a firm here at LFM, you know, we do we have Lean exercises around our office, when we moved into new office space, we, we find that our space, and you know, we labeled our kitchen and did things that, you know, our, our portfolio companies do, do as well. So, definitely part of the mindset here.

    Patrick: You know, if a target company, ideal target company’s out there, is it really that simple, where you guys are showing up, and maybe they’ve been visiting with, you know, other other firms or financial buyers out there, and they’ve got the suit and tie. And you guys probably come in there with, you know, just your your shirt sleeves, and you start talking like operators. Is it that simple?

    Jessica: So, so it’s not that simple. But I do you think that that helps, I think our ability to bid to come into a business, whether it’s, you know, virtually over Zoom, like it has been over the last couple months, or, you know, to walk into a facility and be able to really talk shop and understand the process, understand the business know, where the products are going. You know, so many of the companies, we look at our manufacturers have kind of these b2b products, you know, a component that goes into a machine that’s used to make something else, and walking in the door and understanding immediately, you know, that one plus one equals two and how to connect those dots and one get where the end markets are, I think is really appreciated by by management teams. 

    So I think that, you know, the partners, our partners, certainly respect that expertise, and it does set us apart, you know, from from other buyers, we certainly have, you know, I would say a more down to earth approach, as you said, I mean, it’s, it’s jeans and pickup trucks, you know, around here, which I think is certainly different, you know, than our peers, but I think, you know, I think, you know, we we look for niches, product companies, highly engineered products, companies that have differentiated stories. And I think that, you know, sometimes when you find it, you find it, and you just, you just know, and there’s kind of that immediate chemistry, you know, between the people, you know, the sellers and and LFM and our partners and it works really well.

    Patrick: One of the examples where LFM actually came to our attention was your one of the organizations that was able to successfully navigate an M&A transaction through COVID. And so clearly, there was a connection, you were able to get there, get across the goal line on this with, you know, a lot less contact. 

    And I think it’s also as opposed to purchasing a financial company or a tech company or online company, with manufacturing, you have to walk the floor, you have to physically be there. You guys successfully bridge that which I think puts you in a great position. I mean, if you can do things successfully, in COVID and pandemic, imagine when everything’s lifted, I mean, you’re gonna really execute on a much higher level. Talk about the the recent deal you guys had and as a as a case study for LFM for other people out there.

    Jessica: Sure. So I think that so the deal you’re talking about is Diamabrush, which is a company we closed a little over a month ago, and Diamabrush manufacturers, diamond coated blades and abrasives that are used in concrete floor polishing, you know, concrete floor environments for both maintenance and polishing. So, really neat business, it sort of fits our mold. Exactly niche and markets, niche products, it’s highly differentiated and, and, you know, above all of that, there are multiple growth levers, I mean, there’s so many different ways to grow this business and take it to the next level. And that’s really exciting for us. 

    But you know, the the, if this was a process with an intermediary with a banker, launched a process in late February, it felt very normal. We submitted an initial period in early March, you know, the next step would have been to go go on a management meeting in mid to late March that was scheduled on the calendar, then COVID, hit the world closed. And, you know, we were told that we were going to do this virtual manager meeting over Zoom. And I think at first, you know, our team was was a little bit nervous, you know, how can you How can you be as effective? And how can you learn as How can you learn everything you need to learn if you’re, you know, sitting in front of your computer, but I think that, you know, we were able to be very flexible, we were able to pivot, and kind of, okay, wrap our heads around what this process is going to look like, and, and then I think we were really able to use our expertise to our to our benefit, you know, really understand the products, one of the partners on our team had actually used these products, or seen these products, kind of in the real world. And, and I think that helped a lot. 

    So, so we attended a virtual management meeting, got a really good feel for the business continued to do due diligence, sort of, you know, from our desks, and ultimately submitted an LOI without having ever been on site, which is something you know, we had never done never, you know, it had never crossed our minds that we would have to do that. We did commit to, to traveling in the first three weeks of diligence, which was, you know, kind of late May timeframe. 

    So it was, I would say, on the early side for when people were starting to travel again, but I think, again, it, it speaks to our flexibility, and our, you know, I guess our ability to, to do what it takes, you know, and, you know, kind of take take a very measured risk reward approach, and had learned enough about the company were excited enough about it, that it was well worth jumping on a plane, or in one case, driving a lot of hours over a over a very short time period, to to meet the team. 

    And then after that, I would just say it, you know, it takes patience, I mean, it, it’s a more complicated logistical process to get a deal done primarily, you know, virtually, and so I think you have to kind of take a deep breath, and just remember that there are a lot of parties involved that have different, you know, comfort levels. And during these, these wild times, it might take another couple weeks to get a deal closed. But if you just remember kind of what the what the finish line is, and work work hard to get there.

    Patrick: It’s just a real testament to the personality and the culture of LFM. Because you’re able to convey that commitment and convey that interest. Virtually, and manage to, you know, earn the trust of of your target. And, and even when you’ve got these obstacles in the way you guys found a way, and that’s real credible.

    Jessica: Yeah, well, and, you know, we actually felt like, Okay, if we can, if we can stand out on a computer screen, you know, then we can really stand out. And so we actually felt really good about kind of continuing to move forward in the process. You know, and again, maybe it’s, you know, you need, you need five, five groups in suits and ties, and then the sixth is, you know, feels a little bit a little bit more comfortable. And something about that just works.

    Patrick: So that’s a real key that I observed as not being an M&A firm. You know, as long as the one thing is, on the outside people think of mergers and acquisitions is Company A buys Company B. What it really in fact is, is a group of people, agrees and chooses to combine forces with another group of people. 

    And the outcome is one plus one equals six. That’s ideally what happens so you can’t get around the human element, even if you’re doing it virtually. Jessica, tell me what experience good, bad or indifferent you and LFM Capital have had with Reps and Warranties insurance because it’s a tool that was not very accessible for the lower middle market a couple years ago, and now is is being widely used? I’m just curious what your experience has been?

    Jessica: Sure. So I would say I’m not as close to the process. As I, as you know, some of our deal team members are, but I would just echo what what you said, which is the event A few years ago, it was very rare that we would we would even consider, you know, reps and warranty, but now it feels like just about every single deal. You know, we do use it. And, you know, while it does add, you know, another layer to diligence, I think, you know, in general, it’s never held up the close held up close or anything like that, it’s like, you know, my guess is that, you know, use continues to rise.

    Patrick: Yeah, I think that the price point of it even a year or two ago, the benefits outweigh the costs, even when the costs were well over $200,000. For now, though, in the lower middle market, you can get these policies for under $200K, in some cases, way under. And I think that, particularly if you’re a savvy buyer, you build the cost in with the seller, the seller will gladly pay for it. So it’s virtually a product that is free, literally for the policyholder, which we think is is really nice. Yeah. Now, as we record this, we’re just past presidential election, it could be a long time until it’s actually decided, but until then, you know, in the wake of your success with the deal put, you know, in the pandemic, you know, and from your perspective, as your focus on manufacturing, what trends do you see for M&A in 2021?

    Jessica: Sure, so I am, I’m very optimistic about 2021, I think a lot of deals were sort of paused, put on the back burner as the pandemic hit. And I think that, you know, a lot of those deals will come back, you know, at the end of the day, we do have, you know, an aging population of business owners and pandemic or not, you know, red or blue, you know, they are going to keep getting older, day by day, and these are problems that aren’t going to go away. 

    So I do think that there are situations like that, I also think that the pandemic has really, you know, emphasized just the, the very small amount of control any of us have, in so many ways. And so I think that, you know, there are business owners out there that are saying, you know, gosh, I thought that, you know, if I if I showed up to work, and I did everything the way that I was supposed to, and I grew my business that, you know, I can have, you know, the the exit of my dreams. 

    And while, you know, we hope that that is still the case, if something like you know, COVID-19 can can hit and completely derail you know, everyone’s plans, I think the thought of being able to, to achieve an exit and not, you know, wake up in what, you know, may very well have been a nightmare ever again, is is very attractive. So, you know, I do think it’s going to take a little time post election, you know, let’s kind of let things shake out and people can wrap their heads around how, you know, tax policy may or may not change in the near future. But I think that I think that we will, we will see a a nice uptick in deal flow, and things should look good.

    Patrick: Despite whatever happens with the election. And right now at this stage, we have no idea. But one thing is irreversible, I don’t believe manufacturing is going to go back out as well.

    Jessica: Yes, I think I think that’s exactly right. I think that, you know, what the pandemic did, given, given so many companies, you know, everywhere have global supply chains, and the pandemic led to so much disruption that I think being able to source, you know, all of your components, inventory, etc. From here, you know, in the US has become a key priority when maybe it once was not. I also think there are certain trends in manufacturing like robotics and automation that, you know, have been growing and have been front of mind for a lot of companies and all of a sudden, it’s, you know, maybe maybe we better get going on this. And so I think there are some definite sub sectors within manufacturing and industrials that are going to that are going to really pick up steam as a result of the last several months.

    Patrick: Yeah, and I think the other thing was manufacturing is on top of the game more user friendly and so forth. It’s actually going to be safer going forward as with the robotics and the automation too.

    Jessica: Yes, absolutely. 

    Patrick: We have a lot of that look forward to all this has really been great. Jessica, thank you so much for sharing with us. How can our audience members find you and LFM capital?

    Jessica: Sure, so LFM we are at Encourage anyone to to check out our website which is brand new, by the way. And I am So feel free to reach out.

    Patrick: Jessica, thank you so much and best of luck with everything going forward in 2021.

    Jessica: Thank you, you too. Thanks for having me on.