• Ryan Milligan | Building a Business on Honesty and Transparency
    POSTED 6.15.21 M&A

    On this week’s episode of M&A Masters, we are joined by Ryan Milligan, Partner of ParkerGale. Guided by their principle – “products that matter, cultures that last” – ParkerGale is a small private equity firm that focuses on profitable, lower middle market technology companies and the convergence of private equity and software. 

    “Let’s just be transparent, and let’s just give everyone the answers to the test,” Ryan says of the empathy he has learned in the market – take the competitive advantage off the table and make it about the people. 

    We chat with Ryan about his journey to building a successful company and culture in ParkerGale, as well as: 

    • The excitement of working in the lower middle market 
    • The importance and art of measuring culture
    • How a “Chief Worry Officer” can fit into risk decisions and dynamics
    • Buyer diligence and reps and warranties
    • The future of software post-pandemic 
    • And more

    Listen now…



    Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Service. 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 Ryan Milligan, partner of ParkerGale. ParkerGale, is a Chicago based private equity firm that focuses on lower middle market technology companies, and is guided by their principal: products that matter, cultures that last. And on a personal level, I’m especially pleased to have Ryan here today because it was ParkerGale’s podcast, which is entitled The Private Equity Funcast that opened the entire private equity world to me four and a half, five years ago. And I’m eternally grateful for that. So Ryan, welcome to the show.

    Ryan Milligan: Thank you so much, saying thank you so much for having me. It’s always fun to hear. Hear that. And we get in the history of that a little bit. But no, this is a treat. So thank you for having us.

    Patrick: Now, we’ll get we’ll get into the funcast and ParkerGale, and just a lot of groundbreaking things that you started doing years ago ahead ahead of other private equity firms on a lot of levels. So I’m really looking forward to it. But before we do that, let’s talk about you. What brought you to this point your career?

    Ryan: Yeah, good question. Um, yeah, a lot, a lot of a lot of things along the way. But no, I mean, I’ve always I had always, you know, for us for kind of software, or things are software and private equity, you know, in the in the convergence of those things. And, and then, you know with ParkerGale became more and more is becoming more and more the convergence of how do you run, having a perspective on how you run a small software company as well. So, you know, kind of the convergence of those things, I always had an interest in software and tech, I mean, back to, I went to Boston College, and I worked at the help desk. So my job and my job and in college, just to pay for, you know, for meals, I guess I’d call it was cleaning out antiviral and anti spyware and all that stuff from you know, unknowing, fellow students’ computers and things like that. 

    But then, I was a finance degree and went into went into investment banking blindly, you know, not really understanding what that was, and that was drinking from the firehose, but, you know, kind of horrible at the same time, so that had that cocktail for a couple couple years. But then I joined it, you know, a group that became the software team at, at a larger private equity firm, and we were having fun together, over really, for me eight years, was kind of my tenure at that spot. And that’s really when we decided that, you know, we like this thing, we’re doing these small software businesses and how you run them and, and having a perspective on that, and how you how you build a company, how you build a culture, you find people you want to work with, and live with for five, six years, and hopefully do good things. 

    And that manifested itself in forming ParkerGale, and then those are the things that you know, he referenced the funcast, but that’s those are the types of things that we spend every day talking about in our walls outside our walls publicly, privately. And now we feel like we’ve got something going on at ParkerGale, that we’re just trying to do things a little differently every day and be really good at the types of things that we’re looking for. So that’s that’s what led me to this in a nutshell.

    Patrick: Well, what really is striking is your first introduction with software is working on a help desk. So a lot of the goal of companies and folks both in and outside of technology, if you’re trying to help customers, you’re trying to solve problems. And you were at the granule granular level, then of solving people’s problems. And you’re, you know, a technologist dealing with non tech people. So that must have been real impressionable for you.

    Ryan: Yeah, I get you know, we talk a lot about empathy. So, yeah, it definitely helped me build empathy for for people’s problems. And then also the people trying to solve those problems and things like that. So for sure.

    Patrick: Well, let’s transition over at ParkerGale, and I always ask my guests, you know, to get a feel about culture of a firm and so for this kind of come up, find out why they came up with the name they came up with because unlike law firms and insurance firms that name their firm after their founder, there was no Parker and there has been no Gale at ParkerGale.

    Ryan: Yep, that’s correct. No, it’s funny, and I appreciate you asking us because it’s actually been it’s probably been three years since since we kind of told this. I’ve told this story. So takes us back. So a nice little trip down memory memory lane. But yeah, we did have a few rules. You kind of already went there. You know, we said no bodies of water, no ski, ski hills, no cross streets, you know, things like that. And we actually, you know, we had a lot of internal discussions. There’s, so story a little bit, but one of my partners so Jim Milberry, who you know, well, was the godfather of the PE funcast and and then Devin, he pulled Devin in and they kind of got that whole thing started. But Jim is a boxer. 

    So you know, we were, Jim is I was a professional boxer, I boxed on the amateur level. But you know, we were thrown around things like Dempsey Capital for Jack Dempsey, and lots of different names. But what actually exists in our bones is, you know, we do these personality tests, and actually a lot of us like in aesthetics, of all things, if you can believe that. And Devin, actually, my partner kind of came up with this idea, but it was based in Chicago, and Frank Lloyd Wright, the architect has Chicago roots. And he had a career that was going well, but he kind of saw what he was doing. He wanted to do more of it and do it independently. So he kind of branched off and started his own thing. 

    And we were looking at ways to kind of play off of that. And in Chicago, in the Chicagoland area, there’s a couple houses still even two are ones called the Parker House. And then there’s one called the Gale House. And those names kind of jelled off each other well enough, and was available. That’s always important to check before you solidify your name. But we kind of made that our thing. And it was it was a little bit of the attitude, a little bit of the aesthetics, a little bit of the Chicago roots. And all that kind of came together that said, this was something we came up with together, not on the backs of just one name, or one idea and things like that. And it’s kind of stuck with us ever since. So that’s that’s where we came in. That’s how ParkerGale was born.

    Patrick: You know, I think is a great iconic reference because is homage, to your area of Chicago. And also, I mean, I would tell you coming from California here that is the most trendy style of architecture now by state of California in the last maybe seven, eight years. So you went from, you know, the mission style to the Mediterranean style, you know, and and now it’s a Frank Lloyd Wright, which which is there and I would say that the little history note nugget for you on Frank Lloyd Wright is he designed the city hall for the city of San Rafael people outside of California called San Rafael but it’s San Rafael. So it was highlighted in the movie Gatica. So I know you guys like doing a lot of movie references in your thing. So that’s mine, to Jim Milberry is getting that good.

    Ryan: No it’s great. It actually and it paid off. So I’ll expand on the story a little bit. It’s already it’s already paid off. You know, you talk about karma and stuff like that. So I grew up in Iowa. I grew up in Des Moines, Iowa. I was born in Chicago grew up in Iowa, though, and we were looking at we own a company called DealerBuilt now. DealerBuilt  is based based in Mason City, Iowa. Like 10s of 1000s of people not very small town. Okay. My dad had a lake house in Clear Lake which is attached to Mason City. So I’ve been to Mason City. Nobody’s, been amazing city. Well, so I go to visit DealerBuilt, Jim and I drive to DeakerBuilt offices. Turns out the only hotel in town is the last Frank Lloyd Wright standing hotel in the country. So we’re meeting with the founder and the CEO. We breakfast in the restaurant at the last standing Frank Frank Lloyd Wright Hotel in the country. So that was like, we’re just everybody sitting there. Both sides like huh, okay, like this, this is probably supposed to happen. So anyway, it’s fun when things like that come together.

    Patrick: It is really nice how they circle around. Give me a little bit more background with regard to ParkerGale. You’ve got the passion and in capability and skills, and the appetite for technology, you can get a hardware software. Why the lower middle market avenue because you’ve been around for a few years, you haven’t ramped up, tell me about your commitment to the lower middle market and your targets there.

    Ryan: Yeah, it’s just yeah, we like again, it comes back to the convergence of software, which we like and we think that’s a trend that is just a good one, it’s a good space to be involved in. Obviously, the last 12 months has pushed the world to a place where we’re relying more and more on software every day, to do the work that we’re all trying to do. So that existed, you know, we do like getting involved in these, you know, it’s for us, it’s either a founder own situation where there’s a transition, or corporate carve outs, or maybe a consolidation and bringing things together. But for all of those there’s a certain level of business building and scaling and kind of work that needs to be done where there’s products you know, it’s products that matter cultures that last we’re kind of adding process sticks to that as well because we’ve been expanding our our ops team. 

    But we just like that work that we you know, we like we like the space we like companies that are doing well but need resource. And that’s what we bring to the table resource in a perspective. For companies that are succeeding, but to continue to succeed, there’s a certain either level of resource and some perspective that they need to continue on. And we’re looking for the convergence of those things. So we think we’ve built a firm that knows how to find those, how to engage in those conversations the right way, in a way that is received while on the other end. And people feel like, we care. And this is all we do. And this is what we’re looking for, that we have credibility, to get that deal done, we have credibility to make that transition the right way. And that gets into how you do it in the culture that you’re building and how you take care of people and things like that. 

    But then also, like harder skills, perspective about products and how products are built and what customers are looking for, and how you learn from your customers and build that back into the product and all those feedback loops. So we do come into this with an operational bend that we think is fun to engage in and and help and and bring all those things to the table. So and then for us, yeah, we it’s hard to do all that stuff. If you get too big, because there’s, you know, private equity firms, private equity, by its nature is kind of their the incentive is to get bigger and bigger and bigger, because there’s fees and things like that. So there’s kind of a gravitational pull out of this space. And we, because I think we’d a lot of conversations about it in the formation of our firm, are we ever religion to stay where we’re at, within reason, and keep doing just more of this thing better? That makes sense. So yeah, that’s kind of where we’re at why we operate where we do?

    Patrick: Well I appreciate how you fight that temptation to scale up as things get bigger. And I also appreciate the commitment you have to the lower middle market, because quite frankly, if you’re an owner and founder, you’re not doing this, I’m gonna we’ll talk about this over and over again. But they’re not experienced in doing M&A they’re experiencing experience in doing what they do. And when they come to some inflection point, they don’t know where to turn. And unfortunately, what will happen is, if they’re uninformed, they don’t know where to look, then they’re going to default to either a strategic that may not have their best interests at heart, or they’re going to look at an institution, and it’s just brand name, I heard about them, let’s go there. 

    And they will, you know, be underserved. They’ll get overlooked. And I think they’ll get overcharged. And the more that we can highlight organizations like yours, that it not only, you know, know what you’re doing, you can deliver on execution. But you’ve got the passion, you really want to do this. And you’ve had the experience, because I’ve heard this on your podcast, where you’ll have recommendations, you’re dealing with owner owners and founders that built something from nothing, but they did it their way. And that’s that whole learning curve and new experience they have as they bring in outsiders to come and get them to that next level. And you’re so experienced in that.

    Ryan: Yeah, I think and and that is yes, that’s and it’s finding that balance of understanding what got them there. And then Brent, how you how you bring your perspective to the table in that way. But even before that point, I mean, that is a good that you kind of just described why the funcast exists. And if you look at our website, we try to be we try to do a lot of writing. And when it really comes down to is transparency. So yeah, we do think our strategy, our approach to all that was, you know, I think private equity was getting to a point where it was trading, you said it, they haven’t done this before, they don’t understand what it is they don’t understand what they’re getting into, necessarily, because they haven’t been through it before. 

    And some private equity folks, I do think treat that information gap as a competitive advantage. Well, we kind of said, let’s just be transparent. And let’s give everybody the answers to the test. Like just put it out there. The lemons problem, the fact that you understand more than the person you’re selling to and all that like that, just put it out there, explain to them what it means explain to them what it how it’s going to be have, you know, forecast what a tough conversation looks like. Forecast what you’re trying to accomplish, and why. You know, the more people have heard exactly what the deal is, before a decision is made, the faster you can go because there’s no surprises and people know what they’re getting into. 

    So it’s kind of do that lead with our lead with our implied you know, competitive advantage. Just take that off the table. Talk about what we’re going to do and and then you got to be able to back it up and then do that do those things over five or six years and then you know, we’re now you know, we’ve been doing this for a while so then we can refer back to the people that heard it at the beginning. They’ve now been through a full cycle and a success story and say they call them. So that’s that’s kind of been our approach.

    Patrick: All now since you’ve opened ParkerGale. I learned about private equity and mergers and acquisitions. Well, I mean, the number of PE firms has just exploded. We’re we’re an account of north of 4000, private equity firms in the US. Majority of them are targeting middle and lower middle market. And so they’re as, as more competitors come into this space, what I like about a space filling up as it becomes sustainable, because you have to have innovation, and services, quality wise go up, costs go down, things get more efficient, a lot of good benefits come out, you know, for competitive advantage. And ParkerGale is unique in this and that you have made some innovations in focusing years ahead of the competition. I’d like you to talk about this, because in this modern era, now, people are talking about the importance of culture. 

    And they’ve been paying lip service to culture, you know, the last 10 years, but there’s a competitive advantage to it. And so now, people are talking about it more, but it’s still more art than science. And your organization, you’ve spoken about this. I invite you to go and take a look at private equity funcast episodes with you’re actively working to measure culture, and not only identify it, or define it, but measure it. And so why don’t you talk about that, because that’s something that you bring to the table that, you know, everybody’s all into closing a deal. But it’s it’s the it’s the post acquisition, you know, that’s where real magic needs to happen. And so talk about the efforts you have done in the strides you you’ve taken.

    Ryan: Sure, yeah, I think it for us, yeah, it comes down to yeah, it’s taking care of your people, which are really the assets of the company. And, you know, and we’ve we’ve invested in that we, you know, I talked about the the taglines that we come up with, you know, we have, you know, two full time resources basically just focused on the talent practices of our companies and bringing more of those talent practices into our companies. But, yeah, culture is kind of a stew that’s created from a whole list of things that we’re doing that wouldn’t you know, what it comes down to is, you know, within companies communication, you know, consistency, feedback, alignment, you know, all these different things. 

    But yeah, culture specifically, you know, the combination of communication and the consistency and then listening to your organization, I mean, that just comes down to a process that you put in place that goes out into the company on a regular basis, we use a tool called culture IQ, that full disclosure is a portfolio company of ours. So that’s fortuitous, you know, creating this listening organization, that you create a baseline, it basically comes through a survey process, that you go out into the company, and you invite them to respond to a bunch of different attributes and react perspectives and things like that about the company. And that ends up in scores that are baseline metrics for the company and how you’re doing on different parameters. 

    So that might be alignment, that might be communication, that might be innovation, you know, things like that. And you can look at it by team and by a group or manager and things like that direct reports. So if you open up that conversation, and you measure it, you’re listening, and then you look at it, and then usually the best practice for companies is to then look at where you’re strong look at where you want to be stronger. And then they basically commit, create committees to address those things. And a lot of times, we would recommend that the executive team, you know, not even make it it’s not like the CEO is the chair of each committee, you kind of push some of the control of those decisions further down in the organization. You got committees to give some of your star people some authority to work on how do we improve this thing? And what are the actionable insights that would come out of this to increase those scores? 

    And then you do follow up, you know, pulse, checks, from time to time, and you measure it. And our CEOs, actually, it’s kind of fun. Sometimes we’ll put, you know, line graphs of how they’re doing on different attributes, and you show them how they’re doing versus the other leaders of the companies and things like that. And it just turns out that turns out the CEOs tend to be a little competitive. And that’ll get their attention. But then you can ask yourself, Well, why is this one doing this? Why is this one doing this? And you can start to you know, apply pain medicine or things like that to, to each company situation. But yeah, that’s that’s, that is kind of like an overall management, or just measuring tool of the ether that exists in a company, I think. 

    Of all the things that we bring to the table, whether it’s leader, you know, org design or leadership development or manager training, or how you hire, you know, how you onboard all those things are in support of culture as much as the analytical side of measuring culture, I think. So that’s been something that and we’ve been doing this long enough where eventually, you know, I think, through time, then we can actually start to look at some harder data because we haven’t really gone through the exercise yet, but we will have, you look at a p&l and try to Is there any correlation between these improvements and how that performs or this margin or a top line or and things like that. So overall, that’s just kind of been our approach. And the nice thing about that is the intangible that I think is a tangible benefit. 

    But the intangible is that if you are focused on that, you’re actually making those companies a better place to work for the people that are in. So if that’s not, you know, if, as a backdrop, the rest of your career, if all these things that you’re doing to try to generate better returns for your investors, I also happen to make the 40, 60 hours a week that everybody takes away from their family to go spend it a company more enjoyable and better and more fulfilling. Then, you know, I don’t know what’s better than that. If we can kind of converge those two things. So that is a fun and nice thing that we kind of have in the back of our mind. And try to live to is we’re as we’re doing this work in private equity.

    Patrick: And I think with most of the target companies, you’re dealing with owners and founders, how, what percentage maybe, are just looking for an exit? And what percentage are rolling over and saying, hey, I want to I want to see this story play out. So I’m staying I’d like to stay what’s what’s the ratio? 

    Ryan: Yes, it’s it’s across the board, it’s probably seven, I’m going from gut 70. Like 75% are maintaining some participation, and to go forward. Oftentimes, an ongoing advisory board type role. In some instances, there’s either a family situation or just something going on where they want a clean break, and there’s a transition usually do an heir apparent that type of thing. But yeah, when we can, we try to at least maintain relationship and contact in contact with the founder. And that’s probably the split.

    Patrick: I think it’s just another value add that you’re you’re delivering, as it look, owner and founder you’re rolling over, we’re not changing your company, you know, ground wise, we’re gonna sit there and we’re going to watch as the culture, we’re going to maintain it, protect the good stuff, and just see how it evolves. And that’s gotta give them peace of mind. Gives you an advantage over other organizations that may be sitting there saying, oh, we’re the best we’re gonna get you big, you’re gonna make this kind of returning, you know, come on with us because we’re bigger, faster, wider, all that other stuff.

    Ryan: Yeah, we can’t we kind of, we relieve the burden of we caught. Somebody came up with this phrase, the chief worry officer. So there’s a point where you build a business and you’ve kind of done it, you lead the way you lead by example, you’re doing a couple different jobs, you’re now making 10, 15 million in revenue, and it’s profitable. And it’s a good thing, and you feel like you made it you did. But there’s a point where then you start every opportunity you chase feels like a risk to you, you know, every new hire giving up some control, and you start feeling like every of every, then every risk in your mind that you take is yours. 

    Like I’m taking this risk. So that’s the chief worry officer. And we come in and we say, well, let’s, what if you just took that, what if we took that burden on we’ll call it opportunity not risk. And, you know, companies at a point need a hand at their backs and keep going, keep going got to progress. Got to make that hire, make the wrong one, we’ll do it again. You know, that’s, yeah, try to push that train forward. Because if not, there’s somebody else hungry. That was where they were 10 years ago, they’re gonna try to get you know, get back to where you are. And if you’re not pushing that train forward, then then something’s gonna happen. 

    So, so yeah, that’s, that is a dynamic that we kind of sell into and say, hey, you want you wanna just go off into the sunset, we will, you will convince you that you’ve left it in good hands. If you want to maintain involvement. You can put the bag of worries down and ride along and do the stuff you enjoy doing, and have some fun with and not feel like every incremental investment we make is from your pocketbook, you know, that type of thing. So yeah, that’s that is a dynamic that we we often see. And then I think we built our firm well to work with.

    Patrick: I think, I think that that post integration focus that you have here is a real competitive advantage for. Profile wise, give me give me the profile of what your ideal target company is. What are you looking for?

    Ryan: Yeah, I mean, there’s, it’s, it’s kind of, you know, I mean, so software, right, so that’s tons of those that are out there. We’re control investors. So that just means we buy majority only. So that can be 51% in a buy out. Buying out a founder that’s a partial buy can be 80%, it could be 100%. So that’s kind of a buyout. The smaller ones are more but you know, it can be kind of a recap. We can do carve outs from you know, sometimes businesses get embedded in in lost in larger companies. We’ve done carve outs as well. But that’s kind of what we’re looking for. Size wise, you know, 10 to 30 million in revenue, you know, you reference the amount of private equity firms out there. 

    So we’ve started to think through more, hey, should we work with an executive and put a couple things together out of the gate, you know, starting to play play more in that regard and try to create a formidable companies, that might be a couple smaller ones, before they come together. And we’ve kind of built our ops team to be able to support that type of initiative. But anyway, those are the overall parameters for our business they are, they’re probably number in a lot of cash, or at least profitable, they can be loosely profitable. But we don’t want to have a big burn position. They’re nice products that are standing on their own. And there’s a situation where there’s some sort of transition needed transition from a fall founder transition to a CEO, passing it down to an heir apparent. 

    Transition, where somebody wants to step out and somebody else needs to come in. Transition to a carve out that needs a company stood up and needs a lot of resources brought to the table to then have that kind of operating on its own without constraints and doing its own thing. So at the end of the day, that’s what we’re looking for. And then we kind of do our thing with it. And, you know, hopefully have a fun next five or six years.

    Patrick: So and yeah, you’re based in Chicago, but you’re looking at things, opportunities all over the country.

    Ryan: Yeah, really North American. Our headquarters are all currently based in the US. But we do have a lot of satellite offices in either Canada or Europe today. And some effort, you know, there’ll be satellite things that could be overseas and things like that. But yes, really domestically focused for us.

    Patrick: Well, I want to circle around to something you’ve mentioned, where and what’s crazy, we’re talking about the transparency, which is really important to me, because for the longest time, private equity was a members only type of sector and the financial, institutional sections, because if you didn’t know about it, it was really hard to learn if you weren’t in the club, I mean, forget about learning, you couldn’t even reach out to people. And you could, you could demonstrate that by looking at websites and private equity firms where the old days, you couldn’t get any information about team members or anything. Now at least you’ve got not only pictures, but the contact information and stuff like that, which, you know, is a nice development out there. 

    But you also talk about transparency when you’re in negotiations with, you know, these inexperienced M&A counterparts. Yeah, you know, I, I believe that I mean, they’re not, they’re not naive, and, and just not experienced in doing deals, particularly when it’s their own, you know, their own firm, and you can’t remove the human element from M&A is not in a vacuum, there are risks out there. And, you know, you’ve got to lay those out. And there are a lot of times, if you can understand you’re dealing with an inexperienced owner and founder who’s just gone through a very rigorous due diligence process, we will call a thorough, but you know, they go through that process, and then they’re there through that. And then their attorney sits down with them, they have to talk about the indemnification provision, and not everybody explains to them upfront what that is and how it works. 

    But essentially, it’s in to be very simplistic is where the buyer tells the seller, I’ll tell you what, I know, we’ve done this due diligence, but in case we missed anything, and it costs us money, you got to pay that tip. And the response from you know, the very understandable responses. Well, wait a minute, I’m selling the company, you did the diligence, you can’t hold me responsible for something I didn’t know about, particularly years after this happens. And then the experienced buyer is going to have an immediate response is just going to say, yeah, well, I’m betting 10s of millions of dollars, that your memory is perfect. And you’ve told me everything, just not going to do that. And immediately that collaborative environment is at risk of becoming, you know, adversarial and worst case scenario. And the tragedy about that, is that all that can be avoided. 

    And the way you can avoid it is if there’s some risk out there, why don’t we put an insurance policy, the insurance industry came up with a product called reps and warranties insurance, which essentially looks at the diligence the buyer performed over the sellers reps. And for a couple bucks, the insurance company says I’ll tell you what, buyer, if you have if there’s a breach and you lose any money because of the breach, come to us we’ll give you a check. So the buyer has certainty that they can collect seller, two major benefits. Okay, first of all, the policy comes in and is going to replace it some if not all of an escrow. Those are the money that was going to be held back at purchase time, you know, and held for 12 to 18 months. Well now that’s released because you got an insurance policy there. So seller gets more cash at closing. Even better though, they get the peace of mind knowing that they get to keep all their cash because there’s no risk or variable Little risk of a clawback because if something bad happens, buyer goes to the insurance company, not to the seller, and that’s what we call a clean exit. 

    And I would tell you that if it’s done, right, this costs zero to a buyer, because the buyer simply offers this up, you know, this process rather than an escrow or reduced escrow. And the seller 99 times out of 100, in our experience, 99 times out of 100, they’ll go with it, and they’ll embrace it. And that speeds, you know, the process and negotiations, it lowers the temperature in the room, and you will avoid, you know, they may forgive the process, but they’ll never forget that feeling. And you can avoid all that, you know, but I you don’t take my my word for this. Ryan, good, bad or indifferent? What’s been your experience with rep and warranty on your deals?

    Ryan: Yeah, it’s been, you know, it’s a tool, it’s kind of part of the, you know, it’s it’s just part of the process at this point for us, honestly. And I would say overall, in a good way, for sure. It’s, I mean, you described it, well, I’ll kind of just take it from the top and give my perspective on it. Because yeah, I think, so much of the time, and attention and angst, in a negotiation does come through these reps and warranties. And my experience has always, they seem like a big deal. In the negotiation, you know, once you’re in the legal docs, and have spent 60, 70% of your time on them, and money, and worry. And just thinking through hypotheticals, and honestly, in our experience, outside of like, you know, certain taxes or things like that, that come up, they’re not ever really touched again, or used to, like, but at the time, it seemed like a really big deal. very stressful, and just gets a lot of time and attention and all that. 

    So yeah, I do think, you know, I was probably a little skeptical at the start when it came up, because I was a little worried about, you know, seller then not feeling like they have skin in the game or, you know, for what they’re saying or doing and that type of thing. But you know, it’s been around for five, six years now, pretty ubiquitous. And I’ve never had an issue. It’s not, I mean, it’s not something I think a lot about, you know, once the deal’s done, it’s part of our process and things like that, and it does exactly what I think you do. You’re talking about you want to if you want to have a tough conversation, let’s have it be about what’s your role is going to be what’s your compensation going to be? What’s this going to be? What’s that going to be? 

    How are we going to work together going forward, you know, tell us a lot of political capital on a knowledge rep for some mundane, you know, employment law, or exhaustive diligence around that this thing that I didn’t even know what it was until the lawyer explained it to me, and why this three page paragraph, you know, needs to be adhere to having that the risk of that spread across kind of every deal, which gets the cost of these things down pretty meaningfully and take all of that stickiness out of what is the deal, which is a lot of work and angsty and a big, emotional moment for a seller and a big commitment on a buyers part. 

    Yeah, yeah, removing all that, from the conversation, I think has been, you know, a nice enabler for M&A transactions in particular, in my sector of the market, for people that are learning about these things for the first time. 

    So anything you can, you know, it’s kind of like a big release valve on the pressure on a seller for sure. For all that type of thing. So now we have good experience, we use them pretty much pretty much in every deal. And and yeah, why would why should somebody have to let millions of dollars sit still for 12 or 18 months when, you know, is when when you look at I think the history of reps being paid out on the the actual risk is quite low. So that’s, that’s just kind of my general perspective on it’s been positive.

    Patrick: Yeah, I think the great development in why you’re really trying to speak about this from the rooftops is that rep and warranty was not available for deals under $100 million 18 to 20 months ago. And there are so many of these lower middle market deals, I mean, as low as $13 million, $12 million that are now eligible for rep and warranty and that’s a real big deal if you can save somebody a million dollars on a $15, $16 million deal and and the only way the word gets out about that is through the these kinds of conversations. And so I appreciate what you have there. And that’s the next you know, foray for us is not only just getting on the checklist for acquisitions, but for add ons and now it makes sense when not only you’re doing the big you know, platform but then you get the add ons and so that it you know, people don’t know about unless we put it out there. 

    So you know, I appreciate your perspective on this. Now Ryan, as we’re, you know, talking about now we’re getting I mean, we’re blinking it, we’re going to be in the mid part of 2021 where Clearly, I think at the beginning of the end of the pandemic, I probably won’t be eligible for a shot for another four months, the way things are going California, but, you know, give me a perspective on what trends do you see out there for the rest of the year? And this is technology, ParkerGale, what do you see?

    Ryan: Yeah, I think so I’ll start with just kind of the software side of things. Yeah, I think software has been a good place to be. You know, it’s more important than ever, for everybody to do their jobs, you know, at the end of the day, so. So that’s a good thing. And that’s gonna sustain. Now with that, there’s gonna be more competition, more capital, more firms and all that. So it’s a good time to be a seller of a software business, you know, as well. So that’s something that we need to get navigated. But underneath all that, just talking about what, what I think, is interesting, you know, people want data at their fingertips. 

    And that’s kind of right data at the right time. So I think there’s been more, we invest a lot in b2b enterprise software, those are a lot of there’s a lot of data and systems of record, and you have to go find it, things like that. But I do think just thinking about right data, right place, right time, and the efficiency and getting to that whatever it is, you need, you know, even in your even you can tell Microsoft even as Apple, you know, people use email and phone every day, when you see autofills and it guessing about things and stuff like that, like that, that all gets and that’s not easy stuff that’s going into long histories of databases and things like that, kind of bring it into the surface. So that’s that really is kind of an analytic trend.

    Patrick: Real helpful for passwords, though.

    Ryan: No passwords, that’s a whole other topic. Well, I’m gonna stop talking about passwords. Everybody needs to, yes, security is a big thing. Um, but um, that gets also into automation. So, machine learning, and AI is an overused term. But it is becoming much more practically important. I do think and necessary. So loosely speaking, automation, automating tasks, having things just happen in the background, things that happen again, and again, taking the human element out of it, and having a machine do something for you learn and then do it again. Building that into your technology, I think can really help a user and that’ll be all finished up with kind of my lap. But that that theme of a user is a big theme, I think for software as well. Dashboarding. So that’s another way of just saying like bringing to the surface. 

    So having one place to go to just see the things that you care about. That’s something that we’re trying to embed a lot into, into a lot of our software solutions, and things like that. So I think dashboarding is is a big topic around how you present data in an eloquent way. But really what all these things are, there’s a theme here, what it kind of comes down to, I think, is UI and UX. So you know, user interface, user experience, how it looks and feels, and the front end of that is just more and more important. And then so late, that’s where the pandemic really comes in. So, quick aside, my dad’s in his 60s, and he was one of those holdouts that he probably didn’t have his email on his phone until about two years ago, okay, like he fought it tooth and nail. 

    He had a flip phone, all that stuff. Well, he uses zoom now. Okay. So he’s familiar, and usability and that interface. And so it basically did a couple things. One that is becoming more and more important every year as people that are used to phones and how how easy that is to use, get graduated and, you know, leadership positions. At the same time, we just forced people that were less comfortable with technology to get comfortable. So I think there’s like this big convergence of people who care, we’re going to use more technology and care more about usability. So I’m less focused on like new uses of software, but more of the execution of the software that I bring into market and how users experience that software, if that makes sense.

    Patrick: So you’re going there going from can we do it to? How do we make the experience better?

    Ryan: Yeah, how do you do it? And we do like that, because that’s an that gets into an exit. So we don’t need to like recreate the world, or do sciency stuff, we can bring some science elements into it, but it’s really about understanding how that is how they want. It’s not creating new technology. It’s it’s changing the way people interact with it, which is less revolutionary, but it is, I think it is making people’s experience and their lives better and how they interact with that. So those bringing that into older spaces, or more tired spaces are ones that weren’t given attention. Because it’s kind of boring and stuff like that, I think is an interesting trend. 

    For us to go re examine and think about how the companies we own even that’s a big topic is how do we listen to our customers, learn from our customers, not guess what they want, or just let them figure it out? How do we create that feedback loop, filter that into our product owners and our developers and then give that back to them in a better way. I think that’ll be important. So those overall, those are the big trends. We like to space overall. You know, I wish there were less people like me looking at it. But we like where we are. And that’s how we’re kind of playing.

    Patrick: Well, there’s no shortage of opportunities out there, because there’s a lot out there. And there’s, you know, everything is easier. I mean, you see is the website and they were tracking that when you did, you know, ecommerce, and purchasing online and so forth. So yeah, that’s gonna keep evolving. So you know, very, very well done. Ryan Milligan of ParkerGale, our audience members find you. 

    Ryan: Yeah, we try to be easy to find. Yeah, I mean, anybody can send me an email to Our website is We do have blogs, and we publish on our LinkedIn, you know, our perspectives and thoughts and things like that. So we try to be open to receive people however they want to reach out. Don’t be a stranger. We tried it, we say, you know, karma, like we try to just be I’ll take any conversation, we try to be as helpful as we can to as many people as we can. Because we all view ourselves as having at least 20-30 year careers left and something I do today, might pay off in 15 years. So if we can be helpful down the road, even if it’s not, you, we’ll get introduced to somebody that helps us get introduced to somebody and that’ll be cool for us too. So happy to help, happy to listen, happy to engage and reach out anytime.

    Patrick: If anybody wanted to go in an anonymous low profile insight to really get a feel for this organization, its members, its culture and everything. Highly recommend Private Equity Funcast and is everywhere that the podcasts are available, but highly recommended great stuff. There’s no shortage.

    Ryan: Yeah, it’s on Apple, and Google Play and you know, all that stuff. And yeah, there’s a fun one going on right now. It’s that date this but the there’s a March Madness, business books edition, where our ops team are all debating the best business books and people can engage with that. So yeah, check us out. We try not to take ourselves too seriously and have some fun from time to time as well.

    Patrick: Fantastic. Well, Ryan, thanks again for joining us and best of luck to you guys the rest of the year.

    Ryan: Thank you. You know, I appreciate you being a listener and engaging with us. So best of luck to you.

  • Representations and Warranty Insurance Post-Pandemic Trends for 2021 and 2022, Part 1
    POSTED 6.8.21 M&A

    As vaccines roll out and COVID-related restrictions are lifted across the country, it’s time to look at the impact the pandemic has had on the use of Representations & Warranty (R&W) insurance to cover M&A deals… and what to expect in the near term.

    R&W insurance, of course, transfers all the indemnity risk to a third-party – the insurer. If there are any breaches of reps and warranties post-closing, the policyholder, usually the Buyer, simply files a claim and gets paid damages.

    The use of this specialized type of coverage had been steadily growing and becoming more widespread pre-pandemic. Even lower middle market deals were being covered.

    Just as M&A deal-making contracted, there was a reduction in the number of R&W policies being written in the first three quarters of 2020. But by the fourth quarter, it had rebounded and even surpassed 2019 levels. That trend continued into the first quarter of 2021.

    In fact, according to the BMS Group’s Private Equity, M&A and Tax 2021 Report:

    “As the initial challenges of operating amidst a lockdown were managed, deal volume rebounded strongly in Q3 and Q4 was the busiest quarter ever in the M&A insurance market. As we go to press, early indications are that M&A activity has levelled up somewhat but nonetheless we expect 2021 to be a record year for M&A insurance.”

    Thanks to a rush to get back to deal-making, as well as the previous pre-pandemic growth, I expect a rising trend to continue as more dealmakers – both Buyers and Sellers – realize the value of this coverage. I forecast that this rebound will continue into 2022.

    That doesn’t mean there won’t be key changes.

    First thing to mention – especially if you have been hesitant to use R&W insurance – you should know that it’s well established and popular.

    The BMS Group report highlighted that:

    • 90% of those who use it are either very satisfied or somewhat satisfied with their coverage.
    • More than 2/3 have a favorable opinion of how claims are paid.
    • 78% of respondents had used this type of insurance six or more times.
    • Four out of 5 PE firms use R&W coverage on a majority of their deals.

    Key Trends in R&W Insurance to Watch

    The pandemic is going to impact how R&W policies are written, cost, and other factors. But some of this would have happened anyway – without COVID – simply due to the increasing popularity of this coverage.

    The COVID Impact Is Limited

    While it’s still early to make a final judgement, it appears COVID hasn’t had a catastrophic impact on the R&W market.

    As it states in the BMS Group report: “Despite the increase in claims frequency and severity, premium pricing has remained relatively low whereas it has hardened across other lines of insurance.”

    Going forward, COVID will have zero impact because it’s “known.” R&W insurance covers the unknown. Underwriters won’t necessarily issue blanket exclusions for COVID-related issues, but they will take it into consideration.

    Limits on the Rise

    Another trend to watch for: Expect buyers of R&W insurance policies to buy more limits. In the last couple of years, Buyers have been securing policies at 5% to 10% of transaction value, which is largely to just cover the escrow. Problem is if you have a $100M deal and a $10M policy, what happens if you have an $18M loss?

    The eight million over the R&W policy is uninsured.

    As a result, Buyers are seeking to transfer more risk. So, look for them to buy more Policy limits, or select “hybrid” Excess Policy Limits only or Fundamental Reps (the cost of which are a fraction of the R&W pricing). Because there’s no remedy for anything uninsured, as the Seller is off the hook.

    In the event there is a breach, and the amount of loss is significantly higher than the amount covered by R&W insurance, Buyers are beginning to make claims of fraud or misrepresentation against the Seller… because they know the Seller has a D&O policy.

    If there is a loss that exceeds the R&W policy, Buyers are looking to recoup some costs through the Seller’s D&O policy. So it’s no surprise there has been an increase in fraud lawsuits.

    D&O policies don’t pay for fraud. However, that exclusion only happens if fraud has been proven in court. The defendant has to admit they knew of fraud in court, or there must be a final judicial finding that fraud existed.

    Up until then, the insurance company pays defense costs. If they settle, which is often the most cost-effective option, the insurance company pays the settlement. As part of the settlement, Sellers don’t have to admit fraud was committed.

    This is why Sellers are being required to secure a D&O tail policy (if they don’t already have D&O in place) – Buyers should insist on it – and why they also need a R&W policy.

    Costs Are Going Up

    As more R&W policies are purchased, the cost will go up.

    The rate will go from high 2% to mid 3%. And it’s already beginning to happen. On a minimum premium deal like I do, it’s already at 3%. A $5M policy is $150,000 to $175,000. But on a $20M limit policy it’s going to be at $600,000 whereas last year it was closer to $500,000.

    PE Firms

    There was a serious contraction of M&A activity in 2020 and the early part of 2021 – no surprise there. PE firms were holding back – not willing to commit their money. Plus, it’s a natural result of meetings moving online, workplaces going virtual, and the like. Many industries slowed down over the last year and lost productivity.

    But now, PE firms, who’ve been sitting on all this cash for a year or more, are ready to start deal-making again. They – and their investors – are looking to start adding value to their portfolios again and rebuilding their balance sheets.

    Since PE firms are so committed to R&W insurance, there was a natural dip in policies being written that mirrored the drop in M&A activity. But R&W has returned.


    Special purpose acquisition companies (SPACs) will also have a hand in this growth in R&W policies being written in the next year or more. There are more than 400 SPACs that must complete an acquisition by 2023 – at the farthest out. That’s deadline pressure.

    SPACs mostly target middle market companies – those $100M or more. As these so-called “blank check companies” start doing deals again, expect to see a spike in R&W policies written.

    The one purpose of a SPAC is to acquire or merge with an existing company – it makes going public easier, quicker, and cheaper than a traditional IPO. And R&W coverage is perfect for these deals because even in the best of times, SPAC founders face tremendous pressure to get deals done within a two-year window. Because R&W insurance hedges risk for both Buyer and Seller it facilitates fast mergers and acquisitions.

    Insurers Scramble for Qualified Underwriters

    A natural side effect of the increasing use of R&W insurance over the last few years is that insurers are seriously understaffed with experienced Underwriters compared to demand for their services.

    There are only so many Underwriters out there with the “know how” to underwrite M&A transactions. And as more insurance companies have entered the growing market, we’ve actually seen them “poach” underwriting teams from other insurers.

    Pressure on Underwriters

    R&W insurance is a complex line of coverage. Even if Underwriters outsource due diligence to an outside law firm, they are seriously stretched for time due to the sheer volume of policies being requested.

    Many policies are being delayed – even declined – due to an insurer’s lack of bandwidth.

    What does this mean for Buyers and Sellers?

    You can’t expect Underwriters to turnaround a policy to cover your deal in a week or even a couple of weeks. Insurtech has not reached the R&W world yet. Although it was possible in the past, waiting until the week before closing to begin the R&W process is as prudent as waiting until April 14th to call your CPA for tax assistance.

    If you’re interested in having this coverage for your deal, you need to start the Underwriting process at least four weeks out so there are no surprises. Don’t come in last minute and expect miracles. Underwriters are people too.

    You can’t push them to the brink without losing relationships. A good Underwriter wants to be your partner; they want to do it right and be as timely as possible. So, start the process sooner rather than later.

    A note of caution: Some insurers advertise faster processing, but they are prone to delays. Best case scenario – you’ll find an insurer to cover your deal on schedule but at exorbitant costs (2-3X the normal underwriting fee) that result in extra expense.

    What Underwriters Are Watching For

    The ideal situation for an Underwriter is to put as few limitations as possible on deal. Their objective is to have as few exclusions as possible because exclusions create friction. But they still need a sustainable product. They must protect the insurance company they work for.

    As a result, we’ll see Underwriters exercising more caution on wide open worded Reps. For example, if there is a Rep with the following wording “will continue to be” or “will continue” – which means post-closing – the Underwriter will read that out as if the wording doesn’t exist.

    In this market dynamic, Underwriters are also watching out for the definition of “damages”. They don’t want to explicitly cover multiplied or consequential damages, which are very problematic.

    But they have been known to strike a balance with policyholders. If, in the agreement the definition of damages is “silent” with regard to multiplied or consequential damages, the proposed policy will match the agreement with the intent that while the policy is not specifically covering consequential or multiplied damages, such damages are not specifically excluded either. This enables the parties to consider such damages in the event of a claim.

    It’s essential for the insurance broker to make clear with the Underwriter that silent doesn’t mean excluded. In other words, if it’s not there it doesn’t mean it’s excluded, it means it’s agreed.

    Where to Go From Here

    As with many things, COVID has had an impact on M&A and the specialized type of insurance that covers these deals: Representations and Warranty. Yet, I expect the true value of this coverage to shine through, and for its popularity and widespread use to not just continue, but to grow and expand.

    Here’s how they put it in the BMS Group report:

    “We remain optimistic about the outlook for M&A insurance and expect it to continue to play a vital role in M&A, especially given how ingrained it has become in the deal process and the part it plays in unlocking both capital and negotiations which have reached an impasse on M&A transactions.”

    In light of these trends, I wanted to offer you a free download of some best practices to consider going forward when it comes to incorporating Representations and Warranty insurance in your next M&A transaction.

    You can download it here.

    If you have a deal coming up or one closing between now and the end of the year, and are open to having a conversation on how R&W can work for your particular deal, you can contact me Patrick Stroth, at

  • Todd Dauphinais | The Key to Setting Your Firm Apart
    POSTED 6.1.21 M&A Masters Podcast

    On this week’s episode of the M&A Masters Podcast, we sit down with Todd Dauphinais, Founding Principal and Managing Partner of Clavis Capital Partners in Dallas. Clavis Capital Partners realized that there was a better model and approach to private equity, and set out to create an investment firm focused on operations, the longer term, and on deploying capital in the most flexible and effective manner possible – the independent sponsor model. 

    We chat with Todd about what inspired him to build Clavis, and where the name Clavis even came from, as well as:

    • The successful effects of the independent sponsor model
    • The importance of strategy for growing businesses 
    • Building a company culture that sets you apart
    • How the rapid advancement of technology can be used for market benefit
    • Rep and warranty policies 
    • 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 Todd Dauphinais, Founding Principal and Managing Partner of Clavis Capital Partners. Based in Dallas, Clavis Capital Partners recognized that there was a better model and approach to private equity, and set out to build a different kind of investment firm. One that was more focused on the operations, on the longer term, and on deploying capital in the most flexible and effective manner possible. And that model would be the independent sponsor model. So, Todd, it’s going to be great to talk to you about this. I’m very excited. Thanks for joining me today.

    Todd Dauphinais: Yeah, thanks, Patrick. I really appreciate it. Thanks for having me on today.

    Patrick: Yeah, before we get into Clavis Capital Partners, let’s give our audience a little bit of context for you. How did you get to this point in your career?

    Todd: Oh, it’s a great question. Thanks for asking that, Patrick. So I started Clavis, eight years ago, I was 43 years old at the time. Up until that point, in my career, I’d spent most of my career in operations, I had been the CEO of a midsize manufacturing firm for a number of years, I had done the kind of the big corporate thing I’d worked for Schneider Electric, which is a European based industrial company. I ran a number of their business units in their M&A team for a while. And I started out my career at Deloitte Consulting, doing strategy and operations consulting. And you know, as I look back, all of that experience, that operations and strategy and even the consulting experience really, is beneficial to what I do today. 

    And when I started Clavis, eight years ago, I like most things, you know, I was looking for, I wanted to take my operational experience and apply it to more more of an investing type model I talked to, and frankly, when I was interviewing with a number of PE firms, and I was looking for that firm that had more than operational background, and then operational bent that that had that was similar to my background. And I really, I couldn’t find it, I mean, I kept running into the same type of person over and over again. And in groups that were really, the backgrounds were much more financial services, financial engineering, investment banking backgrounds. And so you know, I remember the time actually, I was I was at the office of a good friend of mine, and was bemoaning the fact that I couldn’t quite find the job that I was looking for. 

    And he’s the one that finally kind of said, well, then go create it yourself. And so I guess the short story is, I couldn’t find the job that I was looking for. So I had to, I had to invent it. Unfortunately, it didn’t pay well at the time. But, you know, I really had a vision at the time to start a group that was staffed by and lead by operational and strategic people, and really had a vision at that time to create this, and it takes a lot longer than you ever think it will. But, you know, fast forward now our team is all operating and strategic professionals. And you know, we’ve been successful thus far. So I guess it worked out. But in the early days, you never know if that’s if that’s gonna work or not.

    Patrick: Yeah, I was. That is what happens when you get to be our age, and you blink, and all of a sudden five years goes by so you slog it through and blink, and you know, it all be behind you. So that’ll be great. Yeah, that brings it Yeah. And that brings us to Clavis Capital. And obviously, you didn’t name name, the organization Dauphinais Capital, because yeah, you’re more creativity than us insurance, folks and the lawyers out there. So give us a story. Because that’s nice insight into the culture of the firm. You know, how did you come up with the name Clavis Capital?

    Todd: Yeah, no it is a it is a good. It’s a funny story. Um, so the story is that we had rented a house in Sun Valley, Idaho many years ago, my wife was seven and a half months pregnant, and I had a two and a half year old. And on a Sunday night, I took my family out to dinner and came back to the house and this was before Airbnb, and before any of that. I’d rented it from a friend of mine who had a rental service and, and as I get back on Sunday night, I realize I’ve locked myself out of the house. It is, it is locked up tight as a drum and I tried to find a way in the house, I can’t get in the house, and it’s later it’s getting late on Sunday. 

    And I was standing on the back porch, and I’m kind of looking down and just really ticked off at myself for doing this because I couldn’t blame anyone, I couldn’t blame my two and a half year old. And as I’m looking down, I happen to glance over in a flowerbed and in the flowerbed it, I picked up a glint of a metallic object in there. And so I reached down and lo and behold, there’s a key, it’s the, it’s the backup key, and it had been there for a long time. And so and it got us in the house. And and that key is always been significant to me. And there’s a lot you could, you know, there’s all kinds of different things, you could you could read into that, but I kept that key. 

    And so when I started my firm, I wanted to, I wanted to do something that that that involve that key. Well, clavis is Latin for key. Yeah. And, you know, everything key was not only generic, but all of the URLs were taken. And so I had to go to Latin to find, to find an available URL and something like that, that sort of sounded neat. And so that’s that really is the the story behind the name. And it, it really like you mentioned, it, it, it’s part of our culture, and it’s in culture is a big thing for us both in our firm, my firm and, and the companies we invest in, we pay a lot of attention to culture. And so that’s a, that’s a cool little story that we can tell to people, it has some meaning and it obviously, is very meaningful to us.

    Patrick: Yeah, I think that’s fantastic. And there’s a key is iconic for a lot of different different areas, and so forth. And you talk about culture, and there are a lot of people that they pay lip service to culture, but it is a real strength is something you got to focus on, particularly for the type of organization you are, because let’s face it, in the investment world, right now, you’ve got over 4000 private equity firms out there, and more coming every time. Add to that family offices. And then, you know, there are 1000s, I don’t know, it’s very fragmented the sector, but you’ve got independent sponsorship sponsors out there, too. 

    And you have to distinguish yourself from all the others out there. And and culture is a great way because it comes from the heart, you can’t fake it. And so, you know, you and I talked earlier, you mentioned that you made, you know, your website is as you recognize as a better model out there, but you intentionally went the independent sponsor route, and you’ve not outgrown into a fund. So let’s talk about that as a model, what it does for you what it enables you to do for your investments, and how that’s been successful.

    Todd: Yeah, in your right to bring up there, there’s a lot of there’s a lot of competition in this market. And it’s, it is really difficult to, certainly to differentiate yourself or to get that message out. And, and to get people to understand that the and there’s no barrier to entry to being an independent sponsor. That’s the thing that’s most frustrating to me in a lot of ways is there’s there’s no you know, anybody can hang their shingle up and, and just call themselves that, that term. And so I even struggle with a little bit of the what to call ourselves, we don’t call ourselves generally, PE, because we’re not a fund, nor do I have any interest whatsoever in raising a fund. And there’s some specific reasons for that. But what I do for a living, what really gets me jazzed in what gets me out of bed in the morning is not deploying capital, per se, it’s building businesses. 

    That’s where the operational background comes in. What me and the other members of my team are really good at and really, really like, is building businesses. And so the second you raise institutional fund, you are now in the asset deployment business. And your job now is to get that that those dollars out the door, the people who do that for a living, they’re great people, and they they have a lot of fun doing what they’re doing. But they spend their day differently than how I spend my day. I spend my day really working on with our leadership teams and our portfolio companies developing long term strategy, developing, you know, the the plans and the operational plans to really grow those businesses. 

    And so we spend a lot more of our time doing those operational and strategic things. If I have a fun, that’s not what I get to do on a day to day basis. I’m managing LPs. I’m raising money on deploying that capital and it causes you to do some things that you might not want to do. There are pros and cons to both models, no doubt but what gets me really excited is being able to spend dedicated time on our portfolio companies and working with the leadership teams, and sort of being that that right hand person to the CEO of our portfolio companies. So I get, I get the best job really, in my opinion, I have the best job in the world and get to be sort of Kwazii CEO and strategy guy. But without the day to day headaches that I used to have when I was running my own my own company.

    Patrick: You summarize that really well, where you say, look, the day you open up a fund, you become, you know, you move away from what you love doing, which is being company builder, and you go from company builder, to financial engineer, nothing wrong, but there are some people that love the engineering, there are other people that really love rolling up their sleeves. And, and doing that, I would think that would appeal to owners and founders looking at, you know, they’re at an inflection point, they want to move to the next level. And, you know, they want somebody who’s going to actually be with them side by side, and, and work with them. And I think under this model, there’s no dilution of your attention.

    Todd: Yeah, that’s right. And it does, it appeals to the person who is really looking for a partner, not just looking to sell their business to the highest bidder. And there are both types out there, and they’re there, they’re fine. But we are very selective in the types of things that we get involved in for a number of reasons. Number one, we can’t do a whole lot of deals, at the same time, we can only concentrate on so many deals. And that’s really how I want it. I mean, that allows me to get deeply involved in my team to get deeply involved in each individual deal. We also can’t afford to get any one of them wrong. In a fund structure, you know, you may invest in 10, 15 companies in a fund and you know that two or three or four of them are just not gonna go well, they’re gonna go bad, I can’t afford that I every single deal that we get involved in is its own deal. 

    And, and so I can’t afford to get it wrong. So we spend a lot of time really evaluating our opportunities. And that’s where you mentioned earlier culture, that’s where culture comes into this. And it’s not just lip service, because the you can tell a lot about how successful and investments going to be based on the company culture that the leadership of that company has built. And if you go into a place and they’ve got really great culture, you can feel it, it’s it’s not something that’s easy to see, necessarily, but you can feel it, those investments will do nine times out of 10 or 10 times out of 10, those those investments are going to do just fine because they’ve been built right from the ground up. Because the the leadership have focused on building that culture.

    Patrick: I’m curious when you talk about culture now. I mean, it’s one of those you can see it or you can feel it immediately. It doesn’t have to be translated, I mean. Is it that easy? Did you are you able to tune to recognize that real quick? 

    Todd: Yeah, we’ve gotten better at it. But yeah, you you can tell, you can tell. And there’s a couple things that are that are a little bit telltale, when you when you go to even before you go visit, you can usually get some sense of the culture. It’s amazing, you know, just what you can tell by going out to the internet and seeing, you know, how does the website present and what’s you know, what, what is that? Does that talk about culture? You know, we’ve we’ve seen, we’ve, we’ve gotten really intrigued with some companies where there were YouTube videos that the CEO had put out there that talked about culture, you know, if you can, a lot of times even before going out there, you can tell a little bit. 

    Then definitely when you go out on site, and you meet with the leadership team, and you meet with the management, how they talk, how they talk about their company, you can always tell what’s the level of pride in the company, both how they talk, how does the how does the business present. If you walk around the plant, in our case, we do a lot of manufacturing stuff and the plants really clean and people are wearing the logo and stuff that tells you a lot about the pride of the people that the people have in the firm and the culture that they have. If you go there and nobody talks about the employees and it’s a dark and you know really, really

    Patrick: Gritty.

    Todd: Gritty place. Usually that kind of tells you a little bit as well. So it’s more art than science. But if you’ve got a little bit of a trained eye to it and you’re looking if you’re looking for it you can you can see.

    Patrick: Yeah, why now and we know not to focus on numbers or anything but you’re usually going from majority interest and then you prefer having the the owner founder remain with you or are how many others deals happen where the owner just wants an exit?

    Todd: You know, in in every case that we’ve actually done the deal, the owner has stayed with the business. But having said that, because of our operational background, it doesn’t scare us to have situations where an owner might be looking for an for an exit, not only a financial exit, but but you know, he’s looking to retire or to step back or whatever. I tell owners all the time, I’d rather know what your intentions are, I can work around those. And we’ve had a situation we’ve had two situations in our portfolio where the owner wanted to stick around for a transition period a year or two. 

    And they wanted to retire. And, and we were fine with that. And, and we, in both cases, honored that that wish and worked with the owner to find the right leader for that business after the owner stepped away. And we’re not scared of that at all. But in most cases, we’re looking for somebody who’s looking for a partner. And if if they’re looking for a partner, then they’re usually not looking to just sell 100% and go sit on the beach, because that’s, that’s, that that doesn’t work with our model very well.

    Patrick: Gotcha. And, and your focus is on the industrial sector, which before I started this podcast, being quite admittedly, based in Silicon Valley, our view of manufacturing is pretty much limited to the tech sector sector, where you’ve got clean rooms and all these spotless, little germ free environments and everything. And, you know, you’re in that nice, gritty, you know, sector there where the where the real work happens. And I’m surprised to see how, you know, manufacturing and industrials are actually thriving right now. So, you know, you gotta share with me, why did you pick that sector? Is it just your background? Or, you know, other reasons? 

    Todd: Yeah, it’s it’s, a lot of it came from my background to start with, it’s something that I know a little bit about having having run manufacturing businesses before. So I, you know, I was trained in LEAN manufacturing, and six sigma, all of those fancy words that came out of the 80s, 90s and 2000s. But really, our focus is in industrial and manufacturing, not as much because we know something about it. But we really believe in that sector. And in particular, the Renaissance that we believe is, is kind of happening in this country in manufacturing, some people call it manufacturing 4.0, or whatever you want to call it. But we have a specific thesis about what is going on in manufacturing. And what we’re seeing in the reshoring of manufacturing back to the US the kind of undoing of what happened over the last 30 years, when manufacturing, when supply chains got very disaggregated and and placed globally. 

    And that worked for a long time. What we’re seeing now is the market has evolved such that speed to market, rapid prototyping, mass customization, all of these things that are now trends in the market. And it really starts with the consumer, the consumer has gotten really used to having something delivered custom made instantaneously to their door, you can’t do that if you’re manufacturing everything in China. So we and then throw on top of that the world has just gotten a lot more complex and complicated. And you throw in, you know, trade wars and things like that. China, Asia in particular has gotten a lot less interesting and a lot less advantageous. It’s a lot that China has gotten more costly over the last decade or two. And so we’re seeing a lot of people come back reshoring but the manufacturing that is coming back is looks a lot different than the manufacturing they left. 

    And this is where it looks a lot more like your Silicon Valley and your tech oriented businesses then it certainly did in the you know, industrial age when you were talking big plants and and a lot of people there’s a lot of technology now involved in producing goods and prototyping goods and speed the market. There’s a lot more high tech stuff that is is is being invested in and put into ground here in the United States. And so even though, you know, our orientation is manufacturing and industrial, that doesn’t mean that we don’t pay a lot of attention to the technology and the the very rapid advancement of technology that’s occurring in our space. And, and that’s really where we like to invest. We’re looking to invest in more tech enabled manufacturing, and you’re seeing that across the board, it’s it’s really an exciting place to be right now.

    Patrick: Now with and with your, your targets, your investments, you’re usually the first institutional capital coming.

    Todd: Yep.

    Patrick: Okay. So a unique aspects to what you’re doing as an independent sponsor, you had mentioned, you can’t get these these deals wrong, you don’t have that margin for error as you’re going forward. And in mergers and acquisitions, there are a couple things that happen, you touched on with culture is, you know, you cannot remove the human element. This isn’t, you know, Company A and Company B, you know, coming together. This is one group of people agreeing to partner with another group of people. And so, you know, you’ve got that human element. And a lot of times what happens, and I imagine this happens every time in your case is that you have, you’re on one side of the table and you’re an experienced buyer, and your counterparty, the seller is inexperienced. 

    It’s not that they’re naive, they just don’t do this all the time. As they go through the process, you know, particularly when you’re going through diligence, which you’ve got to be thorough, because you can’t afford to miss. They’re not used to that. And then following that process, okay, they come through the diligence, then you sit down, you’re, you know, bringing out the purchase and sale agreement. And then there’s this indemnification clause, and what the seller hears who’s not experienced when when their lawyers reading the indemnification clause, they hear buyer saying to them, okay, I know we just went through this invasive diligence process, but just in case we the buyer missed anything. And that miss leaves us suffering financially, we’re gonna hold you to pay us for any losses we have. It’s just, you know, if we couldn’t find something, we don’t want to be out of pocket with a lemon. So, you know, that’s just part of the business is standard procedure will have an escrow and you’re all set, probably nothing’s there. 

    So don’t worry about it. And for seller that’s not used to hearing that they their response is. Wait a minute, I told you everything. You can’t hold me responsible for something I didn’t know about. Experienced buyers as well, yeah, but I’m making a bet of 10s of millions of dollars, that your memory is perfect. This, this happens in all the deals, it’s just part of the process. And right there, you’ve taken a collaborative situation, and all sudden, there’s this potential for distrust to come in stress, fear of the unknown. And, you know, it’s a real challenging thing, and sometimes derails deals. And the tragedy is that that whole process can can be avoided. And the way that happens is now the insurance industry in the last several years came through with an insurance policy, it’s called reps and warranties, it essentially takes the reps that the seller outlined, that the buyer vetted with due diligence, and the insurance industry simply says like, buyer, if if there’s a breach of at least a financial loss, come to us don’t go to the seller come to us. 

    Buyer has certainty of collection, they avoid the very, you know, tentious part of probably having to clawback money from the seller. And so they’re taking care of. Seller gets a clean exit. A policy attachment point is lower than most escrows. So they don’t have as much money held back in escrow. So they have more cash at closing. Better yet, they get peace of mind. Because if there is a loss, you know, they don’t have to pay it, they’re not going to lose any of their money. And so it just seems to smooth the process over. And the beautiful thing for us is in concept, this was great. But in practice, it wasn’t very useful because rep and warranty was reserved for deals at $100 million transaction value and up. They had very strict eligibility standards. You had to have audited financials, a battery of third party diligence reports and everything. And so it just wasn’t feasible for the smaller deals. 

    Competition has come into the insurance market since the pandemic. And now eligibility for rep and warranty has now fallen to deals as low as 10 to $12 million. And you don’t need audited financials now to qualify. And so that’s the purpose of our conversation with a lot of people out there is to make them aware that this thing that used to not be available is now available for the lower middle market where I really believe it makes a huge impact. Because if you can save somebody a million bucks or 2 million that’s that’s huge. You know, but don’t take my word for it, you know, Todd good, bad or indifferent. What experience have you had with rep and warranty?

    Todd: Yeah, now you it’s a great point, Patrick. The biggest thing for me is it removes a potentially contentious item out of the process at a critical time in the in the process. And you described it well that you know, you get through a due diligence process and now you got this. This this additional thing and to a to a seller who doesn’t do this for living, you know, that feels very bad faith. Yeah, bad faith or whatever. And so the rep and warranty product, kind of smooths that over quite a bit. And, and so we have utilized rep and warranty insurance in pretty much every deal that we’ve done for the last two, maybe three years, I believe. 

    And it does, it does smooth that over. The statistics I’ve seen is it’s that that part of the insurance market has really exploded because it’s for exactly the reason it’s, it’s good for all, you know, both parties involved in the process. And as an M&A professional, I want as little friction in the processes as I can get. And that’s that’s, that’s great. It’s gonna be interesting to me to see, I’ve seen a lot of statistics about the the implementation of rep and warranty policies. I haven’t seen a lot of statistics around the claims against those policies, and how often those policies or those claims get, get paid out. 

    Luckily, we haven’t had any any issues with with with any of our policies and you know, knock on wood, hopefully that is that that remains, that remains the case, that’s not something I want to be an expert in. So it’s a great product, it’s something that just makes the deal process work a lot better on our part. And, you know, I think it’s, it’s something that has been a real boon, actually, to the to the to the insurance carriers who develop this, and it’s become a lot more competitive. In the early days, there were two carriers that were that were that were that had 90% of the market. Now, you got a lot of other options there, which is good for competition.

    Patrick: Yeah, I think it helps because the more carriers are out there, there’s just more variety, where a couple carriers will will specifically target an industry or transaction size, and treat it more favorably, they’re just more familiar, they’re more comfortable with it. And then I would say on the claims side, so far, we haven’t heard anything industry wide reports are coming on, you know what the impact of COVID has been on rep and warranty policies. By and large, though, less than, you know, 10% of the policies out there, maybe 15 to 20% of the policies incur a breach reported, hasn’t been paid, but they just notify the carrier that actually paying this is very small as a very profitable line of coverage. 

    Even with consultation, we only they will see that because the demand is getting bigger, I would just say for 2021, we could probably see insurance carriers, maybe raising their retentions a little and maybe bringing the pricing up just by a little like a point or two, just because the demand is so high. Not because of losses. Which is a nice signal that is going to be sustainable. So we’re very, very happy with that. And now we’re able to do not only platform deals, but add ons. And so I think that’s just the more out there that we can be available, the better the better for everybody. Todd with, you know, where we are right now with, hopefully we’re at the beginning of the end of the pandemic. Now, as we move forward, and people are beginning to move out and get out and do site visits and everything like that. What trends do you see for the rest of the year into 2022? Either industrial, Clavis Capital? What do you see out there?

    Todd: Yeah, the market is is extremely competitive, and I think will remain so. There’s so much capital that’s out there, chasing deals, you know, in a lot of ways, COVID took a lot of what would otherwise be transactable companies off the market for whatever, you know, people were busy dealing with, with COVID related things, certainly industries that were heavily impacted. But it didn’t change the amount of capital chasing those deals. And so we’re seeing all kinds of just perverse behavior in the market, we’re seeing people that have come that traditionally would be more upper middle to large cap buyers come in to come down into the middle market, and even in the lower middle market space, it’s gotten a lot more competitive. 

    And I don’t see that changing. I really don’t the I think that’s going to be with us for a long period of time. The debt markets still remain very, very liquid. And so I you know, I and I don’t see a big correction to that coming anytime soon. So it’s gonna, it’s going to remain very difficult. It’s going to remain a seller’s market. And, you know, I think that’s going to be with us for quite some time. I think the industrial space will continue to be a good space to be in, but I think, you know, a lot of spaces are going to be good spaces to be in.

    Patrick: Yeah, don’t see any shrinkage in the industrial sector, particularly with logistics. So many people don’t realize how to get a good, you know, product from point A to point Point B. And as you said, that’s evolving as we speak now. And there’s plenty of room out there for that kind of stuff.

    Todd: Yeah, absolutely.

    Patrick: Do you think, one of the things I wanted to ask you. Do you think because of COVID, there are a number of companies that may have been out on the market and they they, you know, pull their pulled their chips off the table, they pulled their horns in, and then weathered the storm. And they may want to wait to get 12 months of performance post pandemic, on the books to kind of show where they are to improve their status before they go back out?

    Todd: Yeah, absolutely. We’re, what we’re seeing, and also hearing anecdotally in the market is that the second and third quarter of this year, you know, we talked to a lot of financial advisors and investment bankers and people that represent sellers. And what they’re telling us is towards the end of q2, and into q3 this year, there’s going to be a lot that comes on the market, because you’re going to have gotten that q1 and q2, really q2 of 2020, off the off the trailing 12. And I think that that will continue into q3, and q4 and even into 2022. And so I think you’re gonna see a lot of that, as people have recovered, that you’re gonna just see. 

    And you know, if you think about it, if you have a, a business owner, that’s call it, that’s in their, in their late 50s, early 60s, they’ve now been through three major financial disruptions in their, in their career between, you know, this, and 2008. And even even going back to bite off. At some point people go, you know, what, I don’t want to go through another one of those major disruptions and so and you’ve got baby boomers that are retiring, and the transfer of wealth, the generational wealth transfer, a lot of those in family owned companies is going to happen. It’s just going to the next, I think through the remainder of my career, honestly, is going to remain a heightened amount of activity, both on the on the supply of deals and on the demand for deals out there.

    Patrick: Man I hope you’re right. I really hope you’re right. Todd Dauhpinais with Clavis Capital, really appreciate having you here today. How can our audience members find you?

    Todd: Yeah, um, so a couple different ways. Our website is, is So www.claviscp c l a v i s. C as in Charlie P is in And then on there is all of our contact information, my phone number, my cell number is on there and email address. So that’s probably the easiest way to get us. And we would love to hear from anybody out there that certainly that that is looking to transact. But even somebody that’s looking for, you know, some advice and counsel on what to do we take those phone calls as well.

    Patrick: I think I think that’s a great value to people out there is, you know, there may not be a deal happening right tomorrow. But, you know, having those initial conversations goes a long way. So I really do appreciate you offering that out to the community. Todd Dauphinais, thank you very much. Really appreciate you. We’re going to talk again soon.

    Todd: That sounds good. Thanks, Patrick. Appreciate it.

  • Brooke Ansel | The Benefits of Mezzanine Financing
    POSTED 5.25.21 M&A Masters Podcast

    On this week’s episode of the M&A Masters Podcast, we are joined by Brooke Ansel, Vice President of Prudential Private Capital. She runs a Prudential team focused in the southern United States, but her career path to the investment company was unconventional – it started with the Neiman Marcus buying team. 

    Brooke tells us about how Prudential is more than just a bank – it has a commitment to the lower middle market that might surprise some listeners. Prudential Private Capital focuses more on debt and minority equity, and acts as the private capital arm of the larger Prudential institution. 

    We chat with Brooke about what Prudential Private Capital brings to the table, as well as:

    • Minority equity and mezzanine debt 
    • The Prudential Private Capital ideal client 
    • Investing in growth and being there for the long-term relationship
    • Important misunderstandings to avoid 
    • Optimism for the M&A world Post-COVID 
    • And more

    Listen now…



    Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Service. 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 Brooke Ansel, Vice President of Prudential Private Capital, in their Dallas office. Brooke it’s great to have you. Thanks for joining me today.

    Brooke Ansel: Patrick, thank you for having me. Thrilled to be on today.

    Patrick: This is unique. Usually, we’re talking with either private equity firms or other capital providers in the lower middle market. At the first blush, you think Prudential big institution, large cap, you know, interest only, not the case. So it’s a pleasure to have you. So before we get into that, though, let’s talk about you. How did you get to this point in your career?

    Brooke: Yeah. So as of the beginning of May, I’ll be with Prudential for about seven years. It’s gone by very quickly. Like Patrick, like you mentioned, I’m a Vice President. And I run a team here in Dallas and focused really in the southern part of the United States. But I have what I would call a fairly untraditional career path to where I am today, actually started out of undergrad at Neiman Marcus in their handbag buying office. 

    So after getting a finance degree, that’s what I chose to do. And it was a fantastic experience, I got to learn about a lot of different parts of business, including marketing and finance and inventory management. Among other things, it was great experience, but decided to then pivot and pursue more what I would call traditional corporate finance opportunities, including an opportunity at a large hedge fund here in Dallas, and then at Deloitte. So like I said, kind of untraditional, I think to the role I’m in now, but all great experience. And I would say just a great journey. And a lot of that experience I leverage in my in my role today.

    Patrick: I can say, you can’t understate the importance of experience. And it’s great because you go from school right into where you’re an operations and working on something on a large scale. And and so you get to see a lot of little things, rather than being in some boutique where you’re just narrow in one area. So that’s excellent. Now, as I mentioned before, people don’t necessarily think of an institution like Prudential being active in in investing like this or more of just like a bank. Okay, not the case. Talk to me about this, and how Prudential Private Capital how it’s different from, you know, just a regular bank. And also, its commitment to the lower middle market, which again, complete surprise. And I’m glad you’re here to tell us about that. 

    Brooke: Yeah, I’m so glad to have this conversation, because like you alluded to, a lot of people hear the name Prudential. And they either think of, you know, oh, they’re only investing in public securities, or they just think of our retirement and retirement products, life insurance products. So Prudential Private Capital, we’re a part of that broader Prudential. And we actually have about 100, I think we’re close to 100 years, in terms of our history as the private investing arm for Prudential. And we largely focus on on the debt side, but we do provide minority equity as well. So really think of us in terms of all types of private, private capital. And that’s what we’re doing on behalf of Prudential. So it’s great and that we have, you know, this large balance sheet that we’re investing on. 

    But we have, we can get into this a little bit more, as we talk further. But we have these smaller regional deal teams and regional offices that allow us to get to know management teams, get to know sponsors in our territories. And that allows us to invest, you know, private capital in the lower middle market and middle market space. So we’ve been around for a long time, but I feel like a lot of people aren’t as familiar with kind of what what we do on the private capital side.

    Patrick: Connection we have with Prudential is they start off as a life insurance company. So you got you gotta like that little connection with with the legacy there of insurance and then broadening out into other financial areas. So you’ve got this large institution, and you referenced this real quick as you got a deal team. So you’re a lot more nimble than people think. Why don’t you talk about what the what are the elements that Prudential Private Capital brings to the table? 

    Brooke: Yeah, this is such a great question. And I know you know, one of your prior guests I know alluded to the fact that all capitals and saying no money is greater than any other money, one of my good friends, Heather Hubbard, but you know, I think in terms of our secret sauce, and what we bring to the table is really this idea of our network. And it’s our internal network as well as our external network. So the culture of just our organization, I work with a lot of people who’ve worked together for literally decades and just know each other very well, we can be nimble, make decisions quickly, just because our senior management team has been together for so long and through cycles. 

    Not only that, you know, myself and the other team leaders, my peers, we’ve all been with Prudential for years and know each other well. So we’re able to network be nimble, get smart on different situations, different industries, really quickly through just our internal network within our group. But beyond that, you know, we talked a little bit about our regional office network, you know, I am very focused on really sponsors and companies in my backyard. So I know what’s going on in the market dynamics in my region. And as well, as you know, my colleagues across the country in the world, actually, very similar model, they just get to know people and their markets really well. 

    And then beyond that, I mentioned our global footprint, you know, I have they’re individuals like me who are based in our London office, or Frankfurt office or Sydney office. So we have this global network and and global client base team base, that we’re able just to pull a lot of knowledge from leverage relationships, and help not only kind of our colleagues, but also are the companies and sponsors that we back in terms of the institutional knowledge that we can bring to the table. And then really, the last thing I’d mentioned, separate from just our network, both internally and externally, would be our ability to really bring capital solutions to bear. We do have, you know, a lot of capital to invest, which is helpful, but not only that, we have the ability to invest across the capital structure. So senior debt, mezzanine debt equity, so a lot of flexibility that I really do sets us apart in terms of creating capital solutions to get deals done.

    Patrick: You know, and the other thing is, is, you know, I didn’t realize until we had met that, okay, Prudential, you know, may be a financial institution, but Prudential Private Capital is not a bank. So you got a lot more tools at your disposal. With regard to that, where, you know, your basis of lending or basis of investing is slightly more flexible. Talk about that real quick.

    Brooke: Yeah, you know, um, a lot of our underwriting or really all of our underwriting is more cashflow based, yeah. And so instead of looking at asset values, or we’re frequently really underwriting to cash flows, so that in itself, I think creates some more flexibility in terms of the capital structures that we can look to provide. So while we also partner with a lot of banks to in terms of, you know, oftentimes there’s a senior facility and either we’re providing fixed rate long term debt along that big facility, or we’re providing mezzanine and junior capital, so, so just, I like it really an apple and an orange in terms of my commercial bank, banker friends, but great ways that we can partner together to get to get transactions done.

    Patrick: Yeah. And the other thing that works out pretty well as you don’t have the regulatory constrictions or constraints that banks have, you can get out there. And the other thing I think, is appealing, particularly and we can talk about this with independent sponsors, which is an emerging class of equity out there is that you’re not interested in majority investments, you want to stay minority, which is very helpful. I mean, there are those that want an exit, there are others that hey they want to come in, they want to make an acquisition, they want to be the majority. And that fits right in with your appetite.

    Brooke: Yeah, absolutely. A lot of what we do, at least on the equity side is minority equity. But also in situations where you can stretch the balance sheet a little and provide mezzanine, a lot of people will either call it an expensive debt or cheap equity. Okay, so yeah, so in certain situations, there really is the ability to provide mezzanine, it’s less dilutive to owners, or there may be situations where, you know, the owner doesn’t really want to give up control, but they need to whether it’s take some chips off the table, they want to make a big acquisition, they need to buy out a shareholder. There are a lot of other reasons why, you know, junior capital is important.

    Patrick: When you bring it you bring it that way. Now, we brought up the topic of independent sponsors, which is kind of a segue into, you know, your ideal client. Why don’t you give us a profile on who does Prudential Private Capital best serve? 

    Brooke: Yeah, so you know, it’s really across the board, Patrick. We, we work with a lot of sponsors, both small and larger funds just because of, you know, our minimum check size starts really at 15 million, and then we have the ability to invest up to a couple 100 million. So we do work with smaller, kind of first time funds, some of the larger private equity funds, but then we also work a lot with management teams on a direct basis with companies. So our, I would say, you know, it’s a pretty broad, a broad range of clients that we work with consistently, though, it’s, it’s people that really value relationships, and value potential and what we bring to the table and really want a long term partner that they can trust, build a relationship with, which I think you know, a lot of our clients definitely saw the benefit of that during COVID. 

    Any potential client that I’m talking to, I would say, call some of my clients that we worked with during COVID. And they can talk about how we were patient, we listened a lot of dialogue during very, you know, very challenging time for many of our clients. So that’s a long way to answer your question. But, you know, we work with a lot of different types of firms, different sizes of firms and companies, but consistently, it’s folks that really value relationships.

    Patrick: Yeah, well let’s not gloss over this COVID thing you just you just referenced quickly is, you know, with Prudential Private Capital, your your capital is more patient, and you’re going to find ways to make make your investments and your clients successful. So your cut, you’re kind of, you know, aligned with them in the interest, and you’re not trying to just roll them out and get him get an exit, you’re, you’re invested in their growth. And I think being there for the long term really helps with relationships. 

    Brooke: Yeah, absolutely. I do think that our approach is it, like you said, more of a long term kind of approach, and with some of our clients, you know, we’ve been invested for a very long time and have had long standing relationships with them. And, you know, in periods of destructive of disruption and uncertainty, that just is so so important. And I think, you know, also think about just our regional office model, the fact that, you know, I’m either in the city or a short car ride away, and not sitting at a, you know, not in New York location, you know, I mean, it’s, I can’t, I’m really kind of in in their backyard. While we couldn’t necessarily always be with each other in person, I think there is this element of, you know, close by in a more normal world, being able to respond in person, if that’s what it requires, and just relationship oriented, not transactional oriented.

    Patrick: Well, and as you talk about relationships, I mean, you cannot disregard the human element, particularly when, when we’re involved with investing in mergers and acquisitions, and so forth, where, you know, it’s not Amazon, buying Whole Foods, this is a group of people choosing to work and partner with another group of people. And for an ongoing relationship. And, you know, ideally, one plus one equals six, and so is important to, you know, nurture those relationships. And one of the things that happens with mergers and acquisitions, where, you know, there’s there’s a recipe for failure is where you have an experienced party on one side of an M&A deal, usually the buyer, and an inexperienced party that are not naive, they’re just an inexperienced, that’s the owner and the founder that have gone through an M&A deal. 

    And things that are routine to the buyer, are scary, and, and, you know, disrupting to the, to the inexperienced player. And so there’s a recipe there for a lot of tension, a lot of unknown, just from a misunderstanding. And you know, one of the errors that comes in a lot as we see in mergers and acquisitions is where buyer goes through a very invasive due diligence process, and then following that says to the seller, okay, well, we’ve got this thing called an indemnification clause, where, and this is what the seller buyer saying, just in case we missed anything. This this clause says that I can claw back money from you if there’s a thing that blows up post closing that you didn’t tell me about, and I might have missed intelligence. And also the seller is like, wait a minute. I’ve just shared everything with you. I’ve answered all your questions. 

    How can you hold me responsible for something that I didn’t know about? To where the experienced buyers as well, I’m making a bet 10s of millions of dollars that your memory is perfect, and that you’ve told me everything. And you can get through that a bit and the seller will eventually you know the deal gets closed and the seller will forgive the process but they’ll never forget the feeling they had and something like that situations completely avoidable because the deal can be insured, there’s an insurance product called rep and warranty insurance where it steps in the shoes of the seller and says essentially, look, if any of the seller reps get breached the reps that the buyer performed diligence on, didn’t find anything. 

    And those breaches cost the buyer money, the insurance company, not the seller will go ahead and make the buyer whole buyer has certainty of collection. So that’s all good, they’re set to go sell, I guess, clean exit. And usually, not only did they get more cash at closing, because the policy attaches at a lower point. So there’s little or no need for an escrow. But like a peace of mind that, hey, I get to keep all the money that I got fantastic, let’s move forward. And what was pre COVID, rep and warranty insurance was restricted to deals north of $100 million in transaction value. And then just prior to COVID, the threshold, the rules for eligibility dropped all the way down. 

    So deals as low as $10 million are eligible for insurance now. And so it’s a great way for, you know, even minority players to have their interest covered on this as well. And so it’s been just a boon for the M&A in the lower middle market space, which is why we were trying to get that word out. But as a reliable tool, don’t listen to me, Brooke, good, bad or indifferent, tell us about your experience with rep and warranty for your clients.

    Brooke: Yeah, I mean, I would say that it is really just become the norm and a part of the natural conversation to at least talk about is this something that is necessary in the transaction or not. And, and I would say just consistently, like you mentioned, there, there are benefits to both the buyer and the seller. But more importantly, it can just help the speed up the timeline of the transaction, and help the buyer and the seller, get the deal done. So I just think that it is becoming more mainstream and and definitely a product that is, you know, a few years ago, you know, people were talking about, but now it’s just I feel like it is just a part of the M&A world now. Very interested to hear that now then the threshold for deal sizes has come down. So that’s, that’s exciting to hear.

    Patrick: As we’re going through this year, right? At this point, we’re recording, I just mentioned to you in the pre recording talk that I just got, my daughter got 16 year old got her first COVID shot. So we’re I’m confident that we’re at the beginning of the end of the pandemic here and bring it back to work. And, Brooke, from your perspective, what do you see going forward for the rest of the year be it M&A, Prudential?

    Brooke: Yeah, I’m, I’m with you, I am very optimistic about the outlook. For the balance of the year, I just got my second shot. And I really think that things are opening up. So definitely optimistic for the balance of the year. But as it relates to M&A, I mean, what I’m hearing from my network for people that are really involved more on the front end of the process in terms of sell side and investment banks, that they are very active. And it sounds like there are a lot of companies that, you know, maybe were in market pre COVID, or because of COVID had decided has decided that they want to explore strategic alternatives. And really, their focus was, you know, let’s get through kind of 12 months with really good trend lines, good performance, good, trailing 12 month kind of performance. 

    And then let’s go to market. So I’m really optimistic that it’s going to be a busy second half of the year for M&A. And clearly the capital markets, there’s still a ton of capital available, whether it’s in the public markets or the or the private markets, and Prudential actually, we just raised our sixth mezzanine fund. So we have more junior capital to put to work which we’re very excited about. So I think that you know, q4 of 2020 was extremely busy and people have kind of taken a taken a little bit of a breath either they’ve been closing deals that didn’t get closed by the end of last year, or they haven’t taken a deep breath and I’m I’m certainly gearing up for a busy second half of the year.

    Patrick: You know, I think that a couple things that happened was the dry powder and private equity didn’t didn’t blow away during COVID the other the other issue is the other thing that didn’t stop all a lot of things in life stop time didn’t and so got a lot of owners and founders out though that everybody got a year older. I think I agree with you that there may not be just rushed to market because you know, there might be buyers taking advantage of trying to get a discount because you know past performance and you know relying on earnouts or something post closing calculation right? 

    I agree with you I think there are going to be a lot of companies that just they want to hold until they get that 12 month trend line and and get that get those our arrows pointing up into the up into the right and and it’ll improve their position a bit. So that’s a well noted. Brooke, tell our audience how they can find you and your group to learn more about Prudential Private Capital. 

    Brooke: Yeah, so the easiest way is just our website, which is pretty easy. It’s And then me personally, I have a LinkedIn page there get it’s Brooke Ansel. And you can find me on LinkedIn and I try to post interesting content from Prudential and when you know welcome to connect with anyone to talk further or network regarding M&A and, and capital availability, so.

    Patrick: Yeah, I will vouch for Brooke also, the emerging independent sponsors that used to be called fundless sponsors, her relationships in that area if you’re if you’re an individual investor, I think the connections that Brooke has and the relationships and the resources she has available is ideally suited for that class. So definitely give give Brooke a call. Brooke, thanks again very much for for this it was a pleasure having you today.

    Brooke: This is a lot of fun. I’m a big fan and consumer of podcasts. So to be a part of one is was a lot of fun. So I appreciate it.

    Patrick: Now you can start your own.

  • Jon Finger | The Benefits of Building Relationships with Independent Sponsors
    POSTED 5.18.21 M&A Masters Podcast

    Our guest for this week’s episode of M&A Masters is Jon Finger. Jon is a Partner at McGuireWoods LLC in Dallas, and his practice focuses on private equity and corporate transactions. He and his partners were the first in the area of independent sponsors to create a private equity practice dedicated to independent sponsors. Jon and his partners also created “Deal-by-Deal”, a podcast that focuses on the independent sponsor community of the M&A market.

    Jon says, of this independent sponsor relationship, “Many of these sellers are selling their baby – this has been, and will be, their legacy. Finding independent sponsors who are really appreciative of that is a big part of what we look for in our network for the clients that we want to be working with.”

    We discuss the importance of building a network and prioritizing the independent sponsor relationships, as well as:

    • The difference between independent sponsors and other buyers
    • Perceptions of private equity
    • Finding creative ways and best practices to partner with independent sponsors
    • The ideal client of the independent sponsor community
    • Hybrid models of independent sponsors and private equity funds
    • 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 Jon Finger, Partner and McGuireWoods. McGuireWoods is a full service law firm with over 1000 attorneys and 24 offices throughout the US and beyond. Jon’s practice focuses on private equity and corporate transactional matters from McGuireWoods, Dallas office. It is in the area of independent sponsors, where Jon and his partners were the first to create an M&A practice and ecosystem dedicated solely for this segment of private equity. So it’s a real great pleasure to have a true pioneer in a new class of business for private equity. Jon, thanks for joining me today.

    Jon Finger: Thank you, Patrick. Pleasure to be here.

    Patrick: Now, before we get into the practice of with independent sponsors, which literally did not exist until you guys came along, let’s start with you. Tell us how you got to this point in your career. 

    Jon: Sure. Really appreciate appreciate you giving me the opportunity to join you today. So I’ve been I’ve been practicing for about about 20 years. And about halfway through my career, which had predominantly been representing lower middle market, committed private equity fund clients, we saw a lot of activity within that independent sponsor community. And at that time, it was still evolving. The models obviously been around for some time, but it was really, I think, evolving into what has become today. And it just happened to be around the same time that myself and a few of my partners were changing law firms. And around that time, what we dedicated ourselves to was building our network. And so we had this network of capital partners, family offices, private equity mez funds, etc. 

    And as we built that network, what we found was, there was an incredible intersection with the independent sponsor community. And so as we were building the network, and our practice was evolving, what we like to think was our secret sauce was our ability to introduce investment opportunities to our network of capital partners. And so we were going to trade shows, we were calling on companies, we were doing all these different things. And we saw a lot of great success out of that. The reality is, it’s very time consuming. And so ultimately, what the a bit of a lightbulb moment was, the independent sponsor in our network can be doing a lot of that spadework if you will, for us. So as we started to see, okay, if we spent more time harvesting our independent sponsor relationships, and really finding opportunities that they had, that we could then introduce to our capital partner network, it really made what we were doing much more efficient. 

    And so we weren’t having to necessarily go out there, find those investment opportunities, we were leveraging the independent sponsor community. And so what really led to where we are today, I hearken back to that where it was a situation that we were at the intersection of capital partner, and deal opportunity. And so it really allowed us to differentiate ourselves with our network. And we we continue to do it today, with I think, really good results. And that that was probably the biggest pillar of what led to where I am in my practice today, where a lot of my work is, is with independent sponsors.

    Patrick: And let’s get a little bit more detail with the independent sponsors. How are they different from private equity or other other investors or acquirers out there?

    Jon: Sure. So lots of different ways, no doubt. I think the first thing I tell you is, of course, you know, every independent sponsor is different. That’s the beauty of it. That’s the fun of it. But as a general matter, right, independent sponsors don’t have a committed fund that stands behind them that they’re able to draw down capital for each deal. So you know, the independent sponsor, let’s say they’re putting in 500 grand sometimes seven figures. The reality is, most videos we work on me independent sponsor is putting that level of capital. And there’s another, you know, $10-20 million in equity capital and obviously lender coming in. 

    So the biggest difference right is they don’t have that committed fund behind them. What that also means is, it allows the independent sponsor to really identify the capital partner that makes the most sense for each opportunity and each situation. And so, you know, use the word the scope bespoke if you want. Luckily, I got the right on the second try there, but so it allows them to bring more of a bespoke nature to each opportunity that gives them that flexibility and differentiates them from a traditional private equity fund. Another I think area that I would want to really highlight with the independent sponsor is it’s a segment of private equity. But there is a perception out there with some sellers, that it’s, you know, big, bad private equity, right? And what does this mean for my business, and so a lot of our independent sponsors, really had the ability to play off that, and, and just, you know, many of them are entrepreneurs, many of them sold their business, and now they’re looking to acquire a business. 

    And just that ability, I think, that they demonstrate to relate to those sellers is another way that they’ve been able, I think, to differentiate themselves from more institutional, private equity. And, and it’s, it’s really something where I think the independent sponsor has also capitalized on these market dynamics, if you will, where you have the sellers, and you know, it’s it’s definitely a robust M&A environment, as you know, but there are a lot of other things that it allows the independent sponsor to come to the capital partner, and also have a situation where you can really be creative with the economics that the independent sponsor is, is receiving on each different deal. And so, you know, maybe it’s not a two and 20 structure, right. And so there are a lot of those different optionality, if you will, that the independent sponsor brings brings to the table, I’m sure we’ll, we’ll talk more about some of those things. But I think high level, those are probably some of the bigger differentiators.

    Patrick: Well, I the perception out there. And this is why it’s so important, I’m so happy to have you here in the lower middle market with with sellers that need to know about all these different options out there on alternatives is where to go. Unfortunately, a lot of organizations, they, the owners, and founders who aren’t in M&A every day, if they don’t know any better, they default to, you know, a strategic, which may not have their best interests at heart, they may default to an institution, or you know, they may be fearful of private equity, and just shut the door on that completely. And that’s, that’s not at their advantage. And so it’s very important to understand that there are these great options out there. 

    And you know, quite frankly, until I learned more about your practice, I had a notion about independent sponsors where they were the sole source of capital, and so they only targeted smaller deals, they didn’t have the, you know, the reserves. No, they tap on that, and then they can leverage that to their interest, which is also I think their interest is is aligned with with the sellers. Explain how you guys develop this practice, just from the ground up. I mean, it because, and we’ll get into this a little bit more, but I mean, this is a pretty fragmented sector.

    Jon: That’s the beauty of the sector. From my perspective, it is it is an endless ocean of opportunities for us to develop relationships, and add value to be independent sponsors. I think, as I look back on how the practice developed, you know, again, the reality is this model has been out there for a long time, back when it was, you know, a guy or gal with a deal who just, you know, was raising capital from his neighbors. And then it was called fundless sponsor, right, which I’ve really tried to push hard to get away from that one, because, you know, it does have a bit of a pejorative nature, but the reality is, it’s not true. I mean, these independent sponsors, yeah, they don’t have a $300 million fund behind them, but they’re writing meaningful checks on these deals. 

    So, you know, I think that evolution of, you know, bringing helping bring credibility to the market was something that really helped us develop the practice, but I think a few things I would point out kind of getting back to what I was talking about before. What we have the ability to do is, is really eliminate a lot of the friction in the system where, you know, independent sponsors may have the need to hire a placement agent sometimes right? For a given situation. And there may be instances where, look, what we’re trying to do is connect our capital partner relationships with our independent sponsor relationships. To be abundantly clear. We’re lawyers, we’re not bankers, we can’t get paid introductions, introductory fees, placement fees, so that friction’s gone, right, we’re just trying to put the right groups together to get deals done. 

    And so that was a really, I think, powerful message and continues to be. But of course, one of the things that independent sponsors always struggle with is dead deal risk, right? That’s part of the equation that they don’t have the ability to just have $100,000 dead deal expense and just draw down from a fund to pay it. And so, for us, it was being selective around developing relationships, that we really wanted to have 5, 10, 20 years down the road, and be creative with ways that we could truly partner with those independent sponsors. And so whether it’s discounting fees or finding other creative solutions, where it’s not okay, just write me a check. That ability, I think, to be shoulder to shoulder with the independent sponsor was was really powerful. What we did with our network was, as we found different opportunities to connect our networks, we created essentially YPO for independent sponsors, which are regional chapters of independent sponsors that get together, share best practices, and and ultimately find opportunities to connect people with deals. 

    Those chapters led to us developing our independent sponsor conference a few years ago, which in 2019, we had over 800, solely independent sponsors, and capital partners. And it was a great opportunity to get everyone together. And it was all people who wanted to be there because of who was there. Right. And, and that obviously had great benefit to us, not from a charging registration fees, but from a developing our network and our client base. And so that has really, I think, allowed us to take a leadership position in the independent sponsor community, and develop that practice, where I do think we’re regarded as the preeminent firm with independent sponsor transactions, either on the capital partner side, the independent sponsor side, and really just knowing what’s market, right. And that’s a critical component to all of these deals. We’re in the middle of our latest deal survey. 

    So we’re leveraging both our expertise, but now we’re taking that opportunity to get input from our network of what’s market on all different sorts of components of the deal. And so that’ll be coming out down the road. And then I think the last thing I would tell you about really being a true partner to the independent sponsor is, in the next few months, we’re going to be launching, which is our, I think, what we’re trying to do is find that next way to develop a true platform for the independent sponsors and the capital partners, that has a lot of great content, and really allows us to demonstrate, again, that leadership position within the community. And so that’s kind of, you know, starting from day one to where we are today, I think some of the, the hallmarks along the way that have really allowed us to grow the practice.

    Patrick: One of the things I really appreciate what you’re saying I’m I’m a marketing guy at heart, I really enjoy messaging and the importance of communication. But, you know, you built the practice, largely not on just the relationships, but just the trust that you’re going to execute. You’re not getting paid just to be around and do introductions, but you’re literally your interests are aligned with the independent sponsor, and you want the best for them and it’s a small community, so clearly you are doing something right, because all you have is your reputation and you deliver. And execution I think is is important, particularly for a lot of firms out there, where they may have a lot of resources, have a lot of other things to offer and make a lot of noise, but at the end of the day it’s execution. 

    And this is a class of private equity that cannot afford as you said, you know, misfires And so that I think is critically important that you’re coming in and you’re delivering that. And then just through that great reputation now, the community is expanding, and you’re not sitting back. McGuireWoods is finding more ways to add value through information and best practices so that more deals happen faster, smoother, cheaper, happier, and and that aligns a lot of specialty firms. And so it’s such a pleasure to have a firm like yours to highlight on that. Now, one thing I will say is I’m very proud of our platform here at M&A, M&A Masters Podcast. But we’re not the only podcast out there that is talking about mergers and acquisitions and everything. Jon will talk about your your show, because that’s actually how I found you, 

    Jon: Sure. No fantastic. So one of the I think ways that we’ve been trying to transition and continue to grow a lot of what we’re doing. A couple of my partners, Greg Hawver and Rebecca Brophy really are spearheading deal by deal. And so it’s a podcast that’s focused on the M&A environment, but in particular, the independent sponsor community. And so we’re really trying to, I think, highlight, a lot of best practices within the independent sponsor community, also highlight different independent sponsors and capital partners. But to your point, particularly with what’s been happening in the pandemic, having that ability to find different ways to connect with your network, they’ve done an incredible job. And it’s, it’s, it’s definitely something we’re super proud of.

    Patrick: Yeah, I consider the silver lining of the pandemic, the evolution of, you know, the the Zoom, and the podcast and the communication, because there are messages out there. And it’s just, you know, finding the right channel where there’s an area of interest. And I will tell you, there are over 1 million podcasts out there. And there wouldn’t be that many if there weren’t such a diverse amount of interest out there in need for information. And something that’s, you know, quite frankly, quite, quite easy to deliver. Jon, let’s talk about, you know, give me a kind of a profile of your ideal client with the independent sponsor. I know very similar to there are other things out there. If you’ve seen one independent sponsor, you’ve seen one independent sponsor. Is is there, you know, for others that are listening out there, give us an idea, what’s the ideal profile of a client from McGuireWoods with this practice?

    Jon: Sure. So to your point, is, is definitely spot on. So within the independent sponsor community, there’s no question that there’s no one size fits all for what the what the ideal client for us is, in the sense that a lot of our clients in the independent sponsor world spun out of blue chip, private equity firms, they have that pedigree of doing deals, and now they’re doing deals as independent sponsors, they have been, and I think, will continue to be a great client base for us. At the same time, a lot of our independent sponsor clients are entrepreneurs who founded and sold a business. And now they want to go out and do it again, maybe they’re looking at bigger deals, maybe they sold their business to private equity, and started to understand that model better. And frankly, a lot of our independent sponsor clients who’ve been wonderful, are true CEO level talent, that, you know, maybe they made a lot of money for private equity. 

    And they have a Rolodex within a market or within a segment to say, I want to go out and do a roll up in this space. And that allows them with that domain expertise to really be a powerful and successful independent sponsor, and a great client for us. I think, when I look at some of the, I think, common characteristics, I would look at the independent sponsor who really wants a different value proposition who isn’t just looking for a lawyer that can draft a document for them and, you know, get them to closing. We’re looking for the client that really wants us to be their partner. And so whether it’s to the point about helping them find capital, helping them find, build out that executive team, helping them find the right provider, I mean, frankly, for services they need in conjunction with a deal. 

    We’re doing a lot with our CPA network, as you know, and I’m sure we’ll probably get into later, the prevalence of rep and warranty insurance on basically all deal sizes is huge right now. And so, where they say okay, who are the right firms to talk to, to go out to get a policy, our ability to say, okay, we’ve seen Patrick in action on X number of deals, and he’s really the value add guy around what’s important in this policy? What’s your history? What’s the claims history with this insurance? So I guess what I would say is that ability for us to really help develop the ecosystem and find independent sponsors that value, that benefit that we can provide is always huge for us. 

    But building those long term relationships, right, it’s we want that client, that’s not just coming to us for one meal, that over the next 20 years, we’re going to do 3, 4, 10 deals with them, and develop that trust. And that relationship, that’s probably the most important thing. And then ultimately, right, just doing the right thing, just finding people who they’re going to treat people, well, in particular, these sellers, many of these sellers, right. They’re selling their baby, right? I mean, this has been, and will be their legacy. And I think finding independent sponsors that are really appreciative of that is a big part of what we look for in our network. For the clients that we want to be working with.

    Patrick: Well, there’s a couple of things you brought up there that we’re definitely going to segue into. And, one of them is, first of all, you cannot remove the human element with these transactions. You know, most people out on the street, they think M&A, they think Amazon buying Whole Foods. Company by company. This is people working with people. And you know, within that you got humans that are fallible, and there’s fear, there’s greed, there’s all these other emotions that come into these, you know, life changing in some cases, transactions. I mean, they’re they’re very, very big deals for people. And you cannot dismiss that. And so you’ve got that element where you met with reps and warranties insurance, the amount of risk, these deals do not happen in a vacuum, there is tremendous financial risk that can be out there for the seller, who is personally financially liable to their eventual buyers. 

    And when a business owner is not used to M&A, it comes a realization that it is they can’t hide behind their corporate veil, it is their personal assets, their wealth, their retirement, literally their house could be at risk. And that realization comes to them a lot of times after they’ve gone through due diligence, they’ve been trying to work with the other counterparty and work together. And all of a sudden, boom, I’m responsible for you with my wealth for something I may not have known about. And in the typical response for a real, savvy, educated, experienced buyer is, well wait a minute, I’m making, you know, 10s of millions of dollars bet that your memory is perfect. And I’m afraid I just can’t do that. And so you’ve got that conflict where you’ve got a buyer that doesn’t want to get stuck, you know, with a lemon, and the seller doesn’t want to be kept on the hook indefinitely, particularly for things they don’t know about. So you’ve got that natural tension that can devolve to being adversarial is really a danger out there. 

    And what’s been great is the insurance industry came in with an insurance policy that transfers that risk away from the deal parties over to the insurance company. And the benefit to a buyer is, hey, if you have a financial loss as a result of the breach of the reps, you have certainty of collection, and you’re not going to have to clawed back and have ill will toward your target company who is probably now partner of yours, okay, for the seller. The policy can replace 90% of an escrow. So less money from the purchase price is being set aside and goes right to the the seller’s pocket. So they get more cash at closing, even better to get the peace of mind that they’re going to keep more money because there’s not going to be the risk of a clawback and as you know, is a product that has stood the test of time and is being used, you know, quite a bit now throughout the M&A community. 

    The news that I want to share out this is that this product was reserved solely for deals that were $100 million transaction value and up, you had to have thorough diligence, you had to have, you know, audited financials, you know, do extensive third party diligence of which was very, very expensive, so it wasn’t a fit for the sub 100 million dollar deals. That’s changed, thanks to technology, thanks to competition, eligibility standards for rep and warranty insurance have never been simpler. The cost has never been lower. And the claims it’s been sustainable where the claims have not overwhelmed the industry so we can see these lower rates continuing for a very long time. And there may have been players in the M&A space that maybe thought about rep and warranty a year or two ago, and had a not so good experience. That’s not the case now. And the more people understand about that, the better. But again, you don’t have to take my word for it. Jon, good, bad or indifferent. share with me your experience with rep and warranty.

    Jon: Sure. Excellent. Give you you know, I won’t choose your word I’ll tell you mine, right. It’s been it’s been phenomenal. And I think what I would say you hit on it, but I think my biggest takeaway that what, what I appreciate, and frankly, what my clients appreciate, is, if you’re doing a $20 million enterprise value deal, you can get rep and warranty insurance. And frankly, I’m doing one right now, that’s about 14 million. Right. And so, I think that that’s definitely something that my clients have not really understood as well as they should have. It’s not just the 50, 75, $100 million deal, you can really get a policy on a $20 million deal. That, you know, frankly, a lot of the time, as you alluded to the sellers rolling over, right, maybe they’re the CEO, whatever they are, and the idea that there’s going to be some sort of friction, right, or post closing dispute is just, it’s heart wrenching. It’s difficult in whatever word you want to choose. And having that ability to, for lack of a better phrase offload the risk, right. 

    But it’s, it’s to me, it’s less about offloading the risk. It’s offloading the friction, right? It’s, it’s having that ability to say, okay, let’s really focus on what’s best for the business going forward, let’s focus on growing the business. And if we ran into a issue with a customer, let’s not be focused on was there a breach of a rep, let’s focus on how do we make that relationship better. And so our experience with rep and warranty it with, if I look at my deals, it’s it’s probably two thirds of my deals, it’s probably maybe more, maybe less. But you know, two thirds of my deals have rep and warranty insurance. And it’s a great product. It’s it really has developed and mature, where it’s an incredible tool for all the reasons you stated, but I just can’t I can’t overstate the impact of having the ability post closing, not to have that immediate dispute, particularly when, as we all know, that first year that integration period, that can be the most difficult, challenging, time consuming. And frankly, it can it can really have a determination about how things and how relationships evolve. And again, just taking that out of the equation, to a, to a full extent, or a partial extent, is extremely helpful. 

    Patrick: Yeah, what’s real tragic, and, you know, these disagreements are all avoidable. Yeah, you know, insurance is not the magic bullet is gonna cure all ills, but just having that there lowers the temperature in the room. And then, you know, as we go on with life, I mean, there’s so much concern in M&A now about, you know, communication and culture and those types of areas that we didn’t think about 10-15 years ago. And so anything we can do to enhance the relationships, I think, is a definite net positive. Now, john, as we’re talking today, you know, we’re getting through the first half of 2021, we’re, you know, fingers crossed, we can see the end of the pandemic out there. I mean, it’s, it’s possible now, more so than before, you know, and in this, you know, circumstance, you know, what do you think, what trends do you see either for independent sponsors, specifically, or for M&A in general, for the balance of 2021? What trends do you see?

    Jon: Sure, I think that maybe I’ll think a bit of the easier one is this is a very robust M&A environment. And I don’t think anything on the horizon for the next nine months, leads me to believe that’s going to change anytime soon. There’s just so much in the way of tailwinds going on with the economy going on with the reopening trade, etc. So I think generally M&A, it would be very surprising if we didn’t have a very strong year. On the independent sponsor side. I think you’re going to continue to see a few things. One, the the attractiveness of the deal by deal model in the independent sponsor framework, I truly believe will continue to grow over the next however many months and years. And so much of that comes back to, there’s so much dry powder out there, people are desperately trying to find different opportunities to get capital to work. 

    There is undoubtedly on the capital partner side, an interest in diversifying their private equity dollar investments, right. And so maybe they’re not going into the next Apollo or BlackRock or whatever it is, and finding an opportunity to be have more discretion over where their money is going. You know, and maybe it’s understanding the be independent sponsor oftentimes brings more proprietary deals brings more attractive deals, but at the end of the day, brings deals with the capital partner can say, yeah, I want to put my money behind this one. And that’s a different construct than just putting money into a private equity fund. So I really do think you’re going to continue to see that demand side from the capital partners. And then the independent sponsor, there’s a lot of reasons of course, why the model is so attractive. And it’s going to continue to be so and I think you’re going to continue to see increased supply of independent sponsors out there. 

    And so those factors together, I think, will generate a lot more independent sponsor transaction activity. Another trend I tell you that we really see and have seen is a bit of a increased focus on what I would call hybrid structures. So there’s definitely some good things about the committed private equity fund model, there are some good things about the independent sponsor model. And a lot of our capital partner relationships and clients are looking for as well as independent sponsor relationships. And clients are looking for opportunities to bring the best of both to their structure. And so there are a lot of different hybrid structures that we’ve been working on, that both sides of the equation are very interested in. And I think that’s going to continue as we project forward. 

    The last thing I’d probably put out there around the independent sponsor community is I have seen as the proliferation of independent sponsors continues, I have seen a greater focus with our independent sponsor community on being a bit of a more of a domain expert, and focusing more of their attention on I’m not just looking for a deal in manufacturing, business services, consumer healthcare, technology, you know, I’m going to be a SaaS guy, or I’m going to be looking at opportunities where I can bring my manufacturing expertise to bear and so I do think that the generalist independent sponsor will always have value. But I also feel like we’re going to continue this see this trend of independent sponsors being more focused on certain industries, where it ultimately just I think, allows them to bring greater value to their capital partner relationships.

    Patrick: Well, I think the idea, first of all, that continuing innovation and iteration of the structures is is really encouraging because it’s not just one way or the other, let’s find a third way. And that seems to be prevalent. And I think that naturally, as you have more buyers coming into a space, you know, as with anything else, you’re going to have to differentiate yourself. And and I think that only as more value. More competition is always is always a real good thing. So great, great insights there. And we got to keep an eye out for that. Jon, how can our audience members find you and McGuireWoods, not only you know, for the McGuireWoods Dallas, but also for the upcoming conference that you’re going to be having? I believe it’s in October. And if you can restate again, the podcast.

    Jon: Sure. So the podcast is Deal by Deal. Those will be coming out on a very regular basis. Our conference will be late October, in Dallas at the Ritz Carlton again, we have some really neat improvements going on this year. For more information. Pretty simple, And then also keep your eye out for We’ll be rolling that out in the next couple months as well.

    Patrick: Jonathan Finger of McGuireWoods. It’s been an absolute pleasure. Thanks again for joining us today.

    Jon: You betcha. Thanks, Patrick. I appreciate you.

  • The “Dating Site” for Lower Middle Market M&A Deals
    POSTED 5.11.21 M&A

    Pre-pandemic, the M&A world was all about hitting the road, with companies meeting potential capital providers or Buyers personally in board rooms all over the country. That’s a lot of airline miles.

    But for the last year or so, the majority of business development has been done online. And an innovative online platform that facilitates these sorts of interactions has taken off in a big way.

    Axial makes it easier than ever for lower middle market companies looking to raise money or get bought to meet privately with PE firms, VCs, Independent Sponsors, and even Strategic Acquirers.

    I liken it to the of M&A. Companies that are looking to be bought, or are seeking capital, post a profile and what they are looking for. Buyers and investors do the same.

    Axial also provides “concierges” who help connect appropriate members on either side who could do business together.

    The platform has been widely adopted in the time of Covid. According to Axial, 5,000 companies with EBITDA between $1M and $5M privately marketed their deal on the platform last year.

    Lower middle market companies, many of whose founders and management teams are not well-versed in M&A, can also hire advisors through Axial to help them find potential deals and walk them through them.

    And here’s the thing: Even as travel resumes and we move towards business as normal in many parts of our lives… don’t expect in-person business development to go back to the old way. Firms have discovered just how much they saved on travel during the pandemic. And how effective the Axial platform is at facilitating relationships between Buyers and Sellers.

    Any attachment Acquirers and investors had to conferences and other face-to-face meetings at almost every step of the deal process is fading.

    As Mark Gartner of ClearLight Partners put it back in Sept. 2020:

    The game of staffing up one or more business development professionals to focus their energies on literally the exact same strategy every other private equity fund is employing is simply dead. The famous investor Sir John Templeton once said, ‘It is impossible to produce superior performance unless you do something different.’ This is sage advice as we usher in business development 3.0 and say farewell to the following activities that are sort of like rocking chairs – they give you something to do but don’t really get you anywhere.”

    Gartner cited the following strategies as “dead”:

    • The conference circuit
    • High volume/low value city visits
    • Book collecting

    These strategies, of course, still have some sort of place going forward in M&A, but it will be radically different. I think most PE firms will reserve travel for when deals are further along… and make first contact online. And Axial is ideal for this new strategy. They’ve more than proven they can handle these deals and facilitate them quite nicely.

    Take this example…

    Trinity Consultants is an air quality consulting firm out of Dallas that has made more than 20 acquisitions in the past 12 years. But most of those deals were in the air quality space. They turned to Axial to find deals in new industries and from new sources.

    As the company put it in a case study on the Axial website:

    “Axial brings deals to us and helps us think about the realm of possibilities that could make sense.” 

    Working with Axial, led Trinity to acquire ADVENT Engineering, a life sciences engineering consulting firm. Says the ADVENT CEO of the deal:

    “Without Axial, there’s no reason the company or their banker would have heard of us, and no reason we would have heard of them.”

    It’s deals like this that make Axial so powerful…and the leader in this space. Over the last 10 years, it’s grown into the largest online platform for buying, selling, and financing private companies.

    The Paradox of Choice

    Common wisdom is that the lower middle market is underserved… that these small companies are the redheaded stepchildren of the M&A world and all the services are geared towards bigger companies.

    Peter Lehrman, founder and CEO of Axial, has a different view. He says the problem is there are too many providers. There are all different types of investors and service providers who are vying to do business with lower middle market companies.

    The Buyer’s universe for lower middle market companies includes 4,000 PE firms, tens of thousands of Strategic Acquirers looking to grow inorganically, thousands of family offices looking to invest in something other than the stock market…and even Independent Sponsors, individuals who, backed by private equity, are looking for companies to run and take to the next level.

    The problem is, says Lehrman, is that potential acquisitions in this space actually have too many choices, and it’s tough to navigate them and find the right providers and potential acquirers. And that’s precisely why Axial focuses on this space.

    As he told me in a recent interview:

    “I think the lower middle market has a level of dynamism to it that makes it a market where information problems plague Buyers and Sellers, that make it harder for Buyers and Sellers to find one another, to be found by one another, and to assess one another as counterparties and partners.”

     “There are 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 ‘category’ of private capital markets.”

    This reminds me of some relatives of mine from Ireland who were visiting recently. They needed aspirin, so I sent them to the chain drug store down the street from my house. They came back empty-handed. Faced with 30+ different varieties of pain relievers they couldn’t make a choice.

    Adds Lehrman:

    “I don’t think [the lower middle market] is underserved. I just think it’s very, very hard, as a business owner, to know how to sort of assess all of these potential partners to work with. And I think that’s actually the bigger challenge. It’s not that there are not enough people serving the lower middle market.”

     “It’s about helping the owners and entrepreneurs navigate that huge list of choices. They’re looking at say 100 private equity firms, and they’re thinking ‘What am I going to do, 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 there’s too much choice, and they need help slicing through those choices by getting their hands on good information and good resources.”

    The paradox of choice in action.

    Potential investors and acquirers of lower middle market companies also face difficulty. These small businesses are scatted around the country… and there are tens of thousands of them owned by private equity. And as some firms grow and enter into the middle market, new entrants come in. It’s a constant churn.

    It’s no wonder that a platform like Axial, which uses technology to connect potential partners, has become a go-to for savvy dealmakers.

    Next Steps

    Of course, no matter how Buyer and Seller came together, there is a unique insurance product, which has become available to lower middle market deals only in recent years, that is a must have for M&A transactions.

    Representations and Warranty (R&W) insurance, which transfers indemnity risk to a third party (the insurer), has been…

    • Recognized as advantageous for both Buyers and Sellers
    • Shown to speed up negotiations and eliminate potential bad feelings between the parties on each side of the table
    • Opened up to smaller deal sizes, especially to the lower middle market transactions
    • Reduced in price

    I specialize in this type of insurance, and I’d be glad to discuss how it can specifically benefit your deal. Please contact me, Patrick Stroth, at

  • Scott MacLaren | The Keys to Longevity in Private Equity
    POSTED 5.4.21 M&A Masters Podcast

    Our guest for this week’s episode of M&A Masters is Scott MacLaren, Partner of The Sterling Group in Houston. The Sterling Group is a private equity firm, one of the oldest in the country, and currently has $4 billion of assets under management. 

    Scott did not start off in private equity – he studied at the United States Military Academy at West Point, started business school after serving in the Army, and then finally found his private equity calling after working as a consultant. He started recruiting heavily for the middle market, and has now been with Sterling for seven years making investments in the industrial sector. 

    We chat with Scott about his path to The Sterling Group, as well as: 

    • The competition of the private equity market
    • Establishing longevity in a growing industry
    • Finding excitement in investing in “unsexy” markets
    • Simplifying life-changing events
    • The predictions for industrial markets and partners after the pandemic
    • 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 Scott MacLaren, Partner of The Sterling Group. Based in Houston, Texas, The Sterling Group is a middle market private equity firm that builds winning businesses for customers, employees and investors, and Scott it’s just a real great pleasure to have you here. Welcome to the show.

    Scott MacLaren: Thanks, Patrick. Appreciate you having me on.

    Patrick: Now I’m looking for I’m looking forward to talking about Sterling and your approach to a lot of things, but before we get into that let’s set the table. Why don’t you talk about yourself. Tell us what got you to this point in your career.

    Scott: Yeah, no absolutely. And you know my path to private equity was fairly non traditional. So I did my undergrad at the United States Military Academy at West Point. I went there because I wanted to get a good a good education but also wanted to serve my country. And I entered before nine 911 so that definition of serving the country certainly evolved over time. I graduated went to US Army Ranger School and met my platoon. Served as a platoon leader, spent 15 months deployed to Iraq during the now famous Troop Surge. And while I enjoyed leading soldiers and I liked the Army, it wasn’t what I wanted to do forever. 

    So after completing company commander in the army I applied to business school and went to Wharton and you know to be honest entering business school, I didn’t really know exactly what private equity was. I went into business school with the intention of being a management consultant or an investment banker or one of those you know traditional jobs you would think about in business school. It was probably my second year before I fully grasped what private equity was and that’s when I really started to focus and shift my efforts that way. The tough part was getting hired in private equity straight out of business school when you have a military background and no banking or consulting experience, it was really difficult. 

    So I decided to go to BCG and do consulting immediately after business school and get some of those hard skills that I felt like I needed to make a transition into private equity. And you know I enjoyed working at BCG and I enjoyed the projects that I worked on. Most of my clients were Fortune 500 companies and I thought about staying but you know what I didn’t like was it there was no ownership. You know you you work a lot of clients that are Fortune 500 companies. You run into middle managers there who are very risk averse and a lot of them you know we’re just trying to continue their career, so they could get to that retirement point. Collect that pension or you know maybe they weren’t risk averse and they liked your proposal and you liked your ideas but as a consultant you’re just too expensive to keep off from implementation. 

    So you never get to see a finished product or even if you do get to see the finished product, you personally don’t have upside in that. And so as I was thinking through where I wanted my career to go I really focused back on private equity and started recruiting heavily for PE in the middle market where I felt that my skill set that I had developed both those soft skills that I learned leading in the military which I think are directly applicable to leading and driving improvement in the company. And then those hard skills that I picked up and consulting. And so after two years you know I started applying and started to talk to firms and fortunately for me Sterling Group took a bet on me and I’ve been here for over seven years now. Have closed almost 30 transactions, which a handful of which has been platform investments. And then the vast majority or a large portion have been add on acquisitions of various sizes.

    Patrick: Well I hope you never get tired of hearing this but first of all and from the bottom of my heart thank you very much for your service and good for you to see how you managed to progress through this from zero background into creating opportunities for yourself. And I completely understand if you get to a point where you want to have passion and you want to make a change or make a difference or at least have some kind of impact that you could feel. You just kept looking you didn’t just settle down on it so that brings you over to The Sterling Group and as you, let’s talk about Sterling Group from from what you and I gathered in our first conversation, it’s among, if not the oldest, private equity firm in the country so tell us about Sterling

    Scott: Sure so The Sterling Group we are a Houston, Texas based operationally focused middle market private equity firm. We make control investments in the industrial sector. We define industrial is manufacturing, distribution or services companies. We’re investing out of our fifth fund which is a $2 billion fund that we raised last year. A typical target for us is 100 million to 750 million total enterprise value company, and we primarily invest in founder or family owned businesses or corporate carve outs. We also occasionally buy assets from other institutional investors, but that is less prevalent compared to the other two types of companies. And we currently have 10 portfolio companies. Sterling was started in 1982, as you pointed out, one of the oldest private equity firms in the country. And the gentleman that started his name is Gordon Cain. 

    Gordon was an operator and he had run chemical plants for many years. And in his 70s, he decided he wanted to be an entrepreneur. So there’s there’s hope for all of us to be an entrepreneur eventually. So he started buying businesses in in spaces that he knew well. And, you know, this was the 1980s. So it was sort of a wild west era of leveraged buyouts. And it was a newer concept, the LBO was, you know, very new to a lot of folks. And there were certainly a lot less firms doing it versus today. And in 1987, Gordon acquired several chemical plants and grouped them together and called them Cain Chemical. He paid about a billion dollars at the time, got 97.5% leverage from bank on the deal. Something you could never do in today’s LBO market as things have progressed, but again, sort of the wild west era, and he put 25 million of equity on top of that, for the for the total purchase price. 

    They bought the companies. Gordon, obviously being an operator knew how to operate the companies. He implemented an esop an employee stock ownership program, so that the employees, 1300 of them, could participate in the upside of the investment and really got the employees together and on board with driving improvement in the company and increasing the profitability. Less than a year later, they sold the business for 2 billion to Occidental. So they made 44 times their original investment. More than 1000 employees made $100,000. 57 became millionaires. And keep in mind, that’s a 1988 dolllars, when when those amounts were were fairly significant. Not that they are not significant now, but but that’s big money, for sure. 

    Patrick: Yeah, that’s real money. Yes.

    Scott: Yep. You know, the employees, it’s funny employees took out a full page ad in the Wall Street Journal thanking him a Harvard Business School case was written about his team. But that was really the most notable point beginning of Sterling Group. And they continue to operate and do deals all the way up until 2001, in sort of what I would call past the hat fashion. So you know, they would go talk to a company about buying them doing an LBO. And, you know, to get the equity, they would pass the hat around to friends, collect it up and get the deal done. And that worked for them. And they were quite successful with it for a number of years, until a point where the number of private equity firms had increased in the space. Competition was more significant. 

    And other private equity firms had raised institutional dollars in committed funds. And so then that pitch changed a little bit in the sense of, if you’re a seller, are you going to sell to the person says, don’t worry about it, I’m gonna pass the hat around and get the money or some of that has committed institutional dollars, saying no, my investors are contractually obligated, and we have this money. And so that is when Sterling started raising committed funds. Raised the first one in 2001. I joined in fund three, and it was an 825 million fund, we did fund four, which was a billion and a quarter, and now we’re on fund five, a $2 billion fund.

    Patrick: Clearly, you’ve got a track record of success, and you’ve got the longevity. You’re flexible, flexible enough to make a change as the market and, you know, keep keep a step ahead of the competition. So well done for you and Sterling. But Scott, as you know, there are over 4000 private equity firms out there today. You know, what does the Sterling Group bring other, you know, in addition to its legacy, what do they bring to the table that the others may not be doing?

    Scott: Yeah, in 4000 is the first time I’ve heard that number, but that is a big number. So I’m gonna tell you just in the seven years that I’ve been in the industry, the number of new firms that come every single year, it clearly is an industry that continues to grow. But you know, what we do, we have been around for nearly four decades. In the big three differentiators, I always point folks to one, we are operationally focused, and I’ll talk about that in a minute. Two, we push incentives deep within an organization, and we are a true partner. I’ll talk about that a little bit more in a minute. And then lastly, we have 40 years, almost 40 years of experience. And through those 40 years, we’ve interacted with a variety of different companies on a variety of different initiatives. 

    And we have a playbook that we can bring to the table that we know helps to generate and create value. Just on that first point operationally focused. I think a lot of private equity firms like to say they’re operationally focused. And you know, folks say, Well, what does that mean? In you know, the firm saying, are they actually truly operationally focused? And I’ll tell you what that means to us at Sterling. And look, we invest in industries that that are inherently not sexy. And we find that exciting. I mean, we we own companies that make trailer axles that that make bathtubs, I mean, things that you just don’t think about, but we all love it. We’re all operators at heart. We roll up our sleeves and we get to work right alongside our management team. You know, just an example of this, we have a program that we call The Year Away. And this is a little unique compared to all of our peers. I don’t know anybody else that does it. But every, every investment professional that joins us out of their MBA program, we send a portfolio company for a year, where they embed with a management team. And they work on the most important initiatives at the company, and report to that CEO at the management team. 

    And we do this for a variety of reasons. But we think it’s a very invaluable experience, because allows our people to learn how to drive change, improve an organization and create value at a middle market industrial company, which is an environment, I can tell you, as I spent my year away, it is different than the Army, it is different than certainly working in investment bank in New York, it is different than being a consultant for a Fortune 500 company. And it’s an experience as an investor, if you’re out there looking and partnering with middle market, industrial companies, you ought to have that on your resume in order to be really a true partner, and understand the companies and the way they function. And what is feasible to get done with those companies, when you invest in partner with them.

    Patrick: I think before you get to the next part I clearly operational is in your DNA just from the founder story, okay, and to incorporate and inculcate your investment executives in there, where you’re embedding them for a year, that only, you know, builds familiarity for the professionals in there that get familiarity from the management team that’s working with them. And it just shows you’re going to some additional loyalty and commitment that’s in there, both sides because of that year away. So I would picture you know, the the physician being sent off to Alaska, you know, once once he got his degree, and he stuck there for a year, but I think is a very, very positive and unique way, and you’re walking the walk with your own people. So I think that’s fantastic.

    Scott: Agree. No, it’s everybody that’s done the year away comes back, I think with a completely different perspective about what is feasible, and you’ll never look at investment the same way. You’ll never look at a middle market company the same way. And we’ve never had a CEO turn down the opportunity to have a you know, post MBA quality investment professional join their team and report to him for a year. Could be because we pay for it. But it also could be because they know that person’s driving value. But it’s been a really successful program for us in developing our folks here at Sterling.

    Patrick: Great. Now your next point, the second one.

    Scott: Yeah. So we push incentives deep within the organization, because we want to be a true partner, you know, just like Gordon did in the 80s, with the esop. And of course, we don’t do esop’s now there’s some tax implications to that. But one of our big tenants is to push options and equity, deep in our portfolio company so the employees can participate in the upside. We think managers who are owners operate with a different mentality, and they’re able to embrace improvement initiatives, and incentivize to grow profitability. And option payouts at our companies can be, you know, quite large, how to deal that, that we exited recently that I was involved in, we had over 80 option holders, in those 80 option holders made more than $30 million in option proceeds. 

    And so, you know, for some of these managers, it could be a life changing amount of money, it can pay off mortgages. And you see people understand that at the beginning of your investment, and they will work hard and drive toward that goal of an exit of growing the business of improving the business to get an exit in order to achieve that. And it’s a that is probably one of my favorite parts of the job, to be honest.

    Patrick: I think it’s also real generous move. I mean, it’s it’s strategically brilliant. Because if you’ve got buy in from the rank and file, okay, and you’re all going in the same direction, you’ve got, you know, communists of purpose, what better way to do it, and then you get the the outcome. I think the other thing that you touch on this, and I sincerely believe this is that mergers and acquisitions represent the most exciting business event out there. Some people would argue it’s IPOs. I think nothing has a greater chance of being a life changing or even generational change than a M&A transaction. I’ll tell you, you know, Scott, if you and I are doing our jobs, these life changing events happen. They happen faster, they happen cheaper, they happen simpler, and they’re happier. And who wouldn’t want to be part of that?

    Scott: Agreed. Couldn’t agree more, Patrick. Absolutely. And then just lastly, so 40 years of experience, here at Sterling in it’s certainly what we have what’s called our seven levers, which are the seven areas over the last 35 to 40 years where we’ve learned there are opportunities to drive value creation. And so we sit down with the companies that we partner with, and we go through an entire strategic plan and layout when we’re gonna pull each one of these seven levers throughout the lifecycle of that investment, and get the employees and the managers on board with doing that. And we have experience from other companies where we’ve done this and can leverage that experience from the past, to help the companies that we’re working with now, to increase the probability of success on pulling each one of those levers successfully and growing the business. And so for me, those are the three big areas where I think we differentiate ourselves. You talk to other people, they may have different opinions, but those are the three that we certainly focus on. 

    Patrick: Well, tell me, you know, as we talk about mergers and acquisitions, usually, you know, the folks on the outside of M&A think they think of M&A as what they read in the newspaper, where you have Amazon buys Whole Foods. And in reality, it is a group of people choosing to work with another group of people. And the objective is one plus one equals five or six. However, these deals don’t happen in a vacuum, there’s risk. And when you got human beings involved, you got you know, fear, greed, worry, a lot of a lot of these elements out there that that the outside world doesn’t know about. And you know, quite frankly, a lot of the target owners and founders who don’t go through M&A day in and day out, they get surprised when they go through a due diligence process. And then at the end of that they get informed by their attorney. 

    Well, here’s this indemnification provision we need to talk about. And then they learn, wait a minute, I’m personally liable financially to my buyer, if something I have no idea about, and they didn’t find in diligence, will cost them money post deal. Wait a minute. You know, and all of a sudden, you get that injection, that you’re not able to hide behind a corporate veil. Your future, your wealth is at risk. And that can create not only worry and fear, but some distrust. And the tragedy is, you know, these types of interruptions and so forth. You know, they’re they’re reasonable, but they’re avoidable. I mean, on the buyer side, look, they don’t want to be stuck holding a lemon. 

    And on the seller side, they want to be, you know, on the hook indefinitely for things that are out of their control. And they’ll they’ll protest, but an experienced buyer is going to say, well, you know, you’re asking me to bet 10s of millions of dollars that your memory is perfect. And I just can’t do that. Well, what’s been nice is that the insurance industry came in a few years ago, and introduced a product called reps and warranties insurance. And what it does is it looks at the seller reps in the purchase sale agreement, polls the buyer to find out what diligence the buyer did to make sure those reps was accurate as possible. And then they say, hey, for a couple bucks. If something blows up, and buyer you suffer financially, don’t go to the seller come to us, we will give you a check. Just show us the loss. And we will go in. Buyer has certainty of recovery. 

    So their downside is now been hedged. They also avoid the real uncomfortable situation of having to claw back funds from their their seller. On the sell side. Number one, they have more cash at closing because rather than having a large chunk of funds being set aside in an escrow account for cash on hand, the insurance policy covers 90% of that. So not only does the seller get 90, 90 plus percent cash at closing, they’ve got the peace of mind when they get to keep it because that risk of a clawback is now gone. It’s out with the insurance industry. And it’s it’s revolutionized mergers and acquisitions to the point where well your targets are in for your platforms are 100 million dollar transaction value and up, you’ve been very, very active in add ons, deals that are way under 100 million probably isn’t as low as 15 to 20 million. This product rep and warranty wasn’t available for those until now. 

    That’s now been something that’s been coming along now, in the same benefits for the larger transactions are now being available to the smaller ones. Which is great because saving two or $3 million for an owner and founder on a small deal. That’s a huge, huge difference. You know, but you don’t have to take my word for it. You know, Scott, good, bad or indifferent, tell us about your experience with rep and warranty.

    Scott: Yeah, so over the past seven years, it was funny when I started in private equity, you know, rep and warranty insurance. It wasn’t it wasn’t that prevalent, you know, certainly it’s existed. It was used on select deals. But over the past, you know, five or so years, it’s really evolved. And I’ll tell you now, we’re at a point where I can’t think of the last deal I did where we didn’t have a rep and warranty policy. And as you mentioned, even on the smaller deals, it used to be you would have difficulty finding underwriters, to quote the smaller deals. People would say 20 million TV was kind of the mark, and now we’re at a point we quoted, we had, you know, put one out to market a bit ago and we have four different underwriters quote a deal that was under $20 million of TV, which is just really impressive and tells you how far this market has come. 

    But to your point in terms of what it’s allowed us to do, it creates doing a deal, particularly with um, I wouldn’t say it’s sellers, who aren’t normal sellers. So, you know, founder and family of businesses, they may only do one transaction in their entire life. And that transaction they’re looking at, and they’re looking at that, you know, the the purchase agreement, which is 100, you know, 120 page document. And lawyers, and I love lawyers, and we can’t do our job without lawyers, but they’re very good about making you think about that 1% scenario. And so you’ll get founders and family owned businesses that think of that purchase agreement, talk to the lawyer, and just get so petrified of, well, okay, I’m gonna sell the business and you’re gonna give me money. 

    But if there’s a clawback scenario, or a large portion of my money is going to get put in this escrow account, which earns, you know, very little to no interest and we don’t have access to it, it creates friction. In thinking back to before rep and warranty was as prevalent as it is, the conversations that we would have with sellers at that point in time. We’re fortunate to not have those conversations anymore, in the sense that we can have an insurance policy that backs them up on that it says, look, you were on define how much you were on the hook for you are on the hook for an ordinary rep amount of X. And anything beyond that the insurance company is going to pick up. And oh, by the way, your escrow is only going to be this many dollars versus in the past, you saw escrows that were 5%, maybe 10% total enterprise value. 

    Patrick: Yeah. 10% we saw.

    Scott: Yeah, really big numbers that you when you’re thinking about calculating your proceeds, in your mind as all sellers do. Especially if they’re rolling in the deal and putting equity in incremental deal go for that was a large portion of the proceeds that we’re going to take off the table, right. And so the progression of rep and warranty insurance has alleviated a lot of those burdens. And like I said, I don’t see it going away. If anything, I just see it becoming more and more prevalent, more and more underwriters out there. And it continuing to be a part of of every single M&A transaction. 

    Patrick: Yeah, I mean, we’ve been really striving to get this on the checklist, if you got rep and warranty, at least is on the checklist. Now it’s something that you know, can get addressed on each deal. May not be a perfect fit for every particular deal. But the fact that it’s there is something to look up look at and and quite frankly, I mean, it is a tragedy if you’ve got avoidable situations where you’re taking wear and tear on people’s soul, because they get so fearful. It can be avoided. And here’s how it goes. And I would say on this on the on the buyer side, my goodness, the in a lot of cases, particularly where the buyer has leverage reps and warranties at no cost because 99 out of 100 sellers will pay the entire cost just to get the benefit of the of the indemnity indemnity transfer. They really really do appreciate it. Scott, now tell me because I had referenced this slightly, but we are talking about industrials, because you’re in Houston. So you’ve got the energy sector over there. 

    Scott: Sure.

    Patrick: Give me give me a profile of your ideal client. What is Sterling Group looking for now?

    Scott: And be very clear. We don’t we don’t touch anything in energy. So it’s odd to be done here in Houston, and be one of the few private equity firms that that doesn’t touch the energy space, we touch the downstream a little bit but midstream, upstream, different types of investing different firms. It’s just, you know, Houston’s where the firm started. And we’ve stayed here, but the vast majority of our companies are outside of Houston, and certainly you know, most outside the state of Texas. But an ideal partner for us and ideal company, that would be a target is a good business. In a consistent industry. Typically, like I said earlier, usually not a sexy industry, usually an industry that folks don’t typically think about, that has a management team, whether it’s a founder or a family of corporate carve out management team that wants a partner that can help make a step change in their business and work with them to make that step change. 

    Or that has a you know, an industry that they know well that wants to partner with someone and go out. And can you continue to acquire competitors continue to grow through acquisition, we do many buy and builds. And oftentimes we’ll bump into founders in industries that think that they’ve created the best mousetrap. And oftentimes they have, and that allows them to go out there and swallow up competitors, or get the competitors to join the team. And then continue to grow and get the benefits of scale. And we’d like that playbook just as well. And we’ve partnered with with many folks in doing that.

    Patrick: So they the partners, you’re looking for our management teams where they’re looking to, you know, they’ve reached perhaps an inflection point. And they want to stay on and see this through or do you have other situations where owner, founder, they just want out?

    Scott: Yeah, we have we see both, probably equally as much. There are certain situations where you have bounders that have run the business for forever, and we’re looking for retirement. And and that’s fine. And oftentimes we’ll have those individuals sit on a board of directors and continue to help and advise and find a CEO that we all trust can run and grow business. But equally as much we see folks out there management teams that have gotten their business and grown it to a point where they know that that next level is a complexity that they’re uncomfortable with, and they want some help navigating that and growing the business. Or that next level requires capital that they may not have access to. Like I gave the example of out there doing a buy and build in an industry and that’s something that we can help them with and put in place a program that helps them do those add on acquisitions in an efficient manner. You know we’ll have portfolio companies that have made 12 13 14 acquisitions in their lifecycle with us.

    Patrick: It’s just I can imagine the inflection point for them is they’re they’re too big to be small but they’re too small to be enterprise.

    Scott: That’s a good way to put it. Agreed. Agreed. In looking at enterprise it can be daunting sometimes.

    Patrick: And that’s the resource the private equity provides on that so that that’s fantastic not to mention the second bite of the apple for owners and founders. So there’s a real great value proposition which is why you’ve got the big growth in these PE firms by numbers so forth. Scott we’re well into 2021 right now we can see only the beginning of the end of the pandemic. Give me your thoughts or what trends do you see for manufacturers or for the industrials for Sterling Group as we go through into the next year or two. What do you see down the road?

    Scott: Yeah, no it’s a good question. Yeah we’ll see I can make some predictions who knows if we’ll be right. I would say in the deal making environment first, I think we see a return to in person meetings. You know we have been doing deals throughout the pandemic, closed a couple last year, we’ve closed a couple of the beginning of this year. And started off a lot of Zoom meetings and folks but it’s really hard to get to know management team over zoom and it’s there’s not a replacement for an in person meeting when you’re getting to know a management team and getting to know a partner that’s going to be a significant partner for the next 5, 6, 7 years of your company’s of your company’s life. 

    So I see us returning back to these in person management meetings and we’ll see how that goes. I think there are other folks who disagree, but we’ll see. And I think the pace of deals right now it’s already back to I think pre pandemic levels. The number of deals out in the market right now it’s been surprising. From a more macro perspective um I can tell you what I’d really like to see. I really like to see us get an infrastructure bill done investment in infrastructure would be very beneficial to some our companies that we own in the space and I think much needed for us. So we’ll see how that turns out but it would be a nice tailwind to the the current environment we’re seeing with our businesses.

    Patrick: For any of you out there that are in the industrial sector and you’re looking for some way to partner up and get past that inflection point really should look at The Sterling Group. Scott MacLaren how can our audience members reach you? How can they find you?

    Scott: Yeah so our web pages and I’m on there. My email’s on there. Feel free to reach out. Happy to talk to anybody and certainly always happy to talk to any potential companies out there thinking of partnership.

    Patrick: Yeah let me highlight that also with the website because there’s more than one Sterling out there in the financial sector so it is And Scott absolute pleasure meeting you. Great to hear about the story. Again thanks for your service, and we wish you all the best going forward okay. Thank you.

    Scott: Thank you. You, too, Patrick. Take care.

  • The Rise of the Independent Sponsors
    POSTED 4.27.21 M&A

    You have PE firms… you have Strategic Buyers… you have VCs…

    You have Independent Sponsors.

    These are individuals looking for a deal. They have money and experience, and they’re looking to buy a company.

    They differ from other M&A players in key ways.

    A PE firm reaches out to investors, builds up a nest egg and then, with that pool of money, buys a series of companies… They might buy at $20M, put $10M into the company and then sell for $150M to $200M – a nice return for the fund and the investors.

    They’re buying to build a portfolio for the benefit of their investors.

    But Independent Sponsors often don’t worry as much about portfolios or building a fund…

    In fact, they used to be called Fund-less Sponsors.

    A common perception in the M&A world is that anyone without a fund behind them doesn’t have the money to do deals.

    But Independent Sponsors do, although they are often not the sole source of capital…

    They find a target, put it through their vetting process, and then they go to PE firms or other sources of money as potential investors.

    The Independent Sponsor’s point is that a PE firm has cash it needs to put to work – why not with me? The Independent Sponsor has done the legwork and found a viable target.

    Typically, PE firms and other investors struggle to find good deals in today’s environment. They cold call owners/founders, go through their referral network, or work with investment banks to find targets. It’s not a terribly efficient system.

    Simply put: Independent Sponsors find deals but might need capital. PE firms and other investors have capital and are looking for deals.

    So it’s a win-win.

    Jon Finger, a partner with McGuireWoods whose practice focuses on private equity and corporate transactional matters, is a big believer in Independent Sponsors. As he puts it, we learned that going to trade shows, calling on companies, and the like is very time consuming. The lightbulb moment for us was that the Independent Sponsor in our network can be doing a lot of that spadework if you will, for us and our network. So if we spent more time nurturing our Independent Sponsor relationships, and really finding opportunities that they had, which we could then introduce to our capital partner network, it really made what we were doing much more efficient.”

    The match made in heaven with Independent Sponsors is made even more powerful when you consider the potential advantages Independent Sponsors may have with target companies.

    • Independent Sponsors can have more flexibility to take their time in harvesting opportunities and closing deals.
    • This extra time, says Finger, “allows the Independent Sponsor to really identify the capital partner that makes the most sense for each opportunity and each situation.”
    • An Independent Sponsor may be able to effect a more personal approach that target companies find appealing. The Independent Sponsor is often a former CEO in the industry. There is a rapport… relationship building… a spirit of collaboration.
    • Independent Sponsors may have a variety of structures that other investors may not have access to by virtue of requisite investment criteria or regulations that constrain how they are able to invest.

    Who Are Independent Sponsors?

    Independent Sponsors are so diverse… coming from many different backgrounds and points of view.

    Often, they are former CEOs or top executives. They know the industry they are investing in. They have contacts… they know the landscape. That makes them ideal “judges of characters” for what targets to invest in.

    Finger works extensively with Independent Sponsors. He explains what makes them so effective:

    “A lot of our clients in the Independent Sponsor world spun out of blue chip, private equity firms. They have that pedigree of doing deals, and now they’re doing deals as Independent Sponsors.

     “[Many] are entrepreneurs who founded and sold a business. And now they want to go out and do it again. And frankly, a lot of our Independent Sponsor clients are true CEO level talent, that may have made a lot of money for investors in the past. And they have a Rolodex within a market or within a segment to say, I want to go out and do a roll up in this space. And that allows them, with that domain expertise, to really be a powerful and successful Independent Sponsor.”

    The Drawbacks to Being an Independent Sponsor

    Independent Sponsors face a serious issue. They cannot afford to have a deal go south. If they spend $100,000 on due diligence and other expenses, they are out that money if there is no sale… because negotiations fell apart, for example.

    A PE firm with a $150M fund can more easily pursue deals that don’t pan out. They can bat .700 or .800. But an Independent Sponsor must bat 1.000.

    There is a way Independent Sponsors can mitigate that risk.

    Representations and Warranty (R&W) insurance can actually reduce the friction in the negotiations of Reps. This specialized type of insurance covers any financial loss from a breach in Reps. That gives peace of mind to the Buyer. And the policy can replace 90% of an escrow. So less money from the purchase price is being set aside and goes right to the Seller’s pocket. Good to get more cash at closing, even better to get the peace of mind

    Another benefit is that the post-closing integration process is more successful because there is no mistrust and animosity in the leadership of the acquired company. They feel they were treated fairly in the deal, and they have cash on hand.

    Both parties can move forward together, which is key to a successful and profitable acquisition.

    R&W coverage helps close deals and integrate the companies.

    These days it’s more widely available than ever, even for sub-$20M deals.

    And thanks to competition, eligibility standards for R&W insurance have never been simpler. The cost has never been lower. And the claims have not overwhelmed the industry, so we can see these lower rates continuing for a very long time.

    As a broker specializing in Representations & Warranty insurance, I’d be glad to discuss the benefits of coverage for your specific deal. Please contact me, Patrick Stroth, at

  • Grant Jackson | Investing in the Right Side of Healthcare Change
    POSTED 4.20.21 M&A Masters Podcast

    Our special guest on this week’s episode of the M&A Masters Podcast is Grant Jackson. Grant is the Managing General Partner of Council Capital, a middle market private equity firm based in Nashville, Tennessee. Their mission is to be the best healthcare private equity firm, with their focus on investing in the right side of healthcare change.

    We chat about the underlying goal of improving the healthcare system, as well as:

    • Providing access to vulnerable populations, including those with disabilities
    • Asking the important questions about the future of healthcare
    • How Council Capital identifies businesses that will scale
    • Maintaining the highest quality even when businesses grow and expand
    • The difference between venture capital and private equity
    • 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 Grant Jackson, managing general partner of Council Capital. Council Capital is a middle market private equity firm based in Nashville, Tennessee. Their mission is to be the best healthcare private equity firm, with their focus on investing in the right side of healthcare change. Grant, great to have you. Welcome to the podcast.

    Grant Jackson: Thank you, Patrick. Great to be here.

    Patrick: Now, before we get into Council Capital, on your specialty in focusing on being on the right side of healthcare change, we’ll start with you. How did you get to this point in your career?

    Grant: I grew up in in of all places, Africa, under a dictator came here and really started from scratch from scratch. A lot of people helped me along the way and generally without there being anything in it for them. And really think America’s unique in that regard. Started in M&A consulting and post merger integration. But quickly realized that I wanted to be partnering with great entrepreneurs and supporting them in growing really valuable businesses, which meant getting into private equity, I hadn’t had any kind of draw towards healthcare that came later. And so to get the private equity at the time, that really meant you had to get an MBA, that’s not true anymore. But it was back then. 

    So I went to Northwestern’s Kellogg School, graduated, during of all times bust, and got fortunate that there was at least one company, one firm that was willing to hire me into private equity, but literally one. And so I quickly took that job, and got into private equity. The surprise to me was then how quickly I developed a passion for healthcare. And I knew that I needed to make my career around investing in companies that improve the healthcare system. I’d always felt that advances in science and disease were important. But they always were held up as the most important things. Whereas I felt like we were only capitalizing on 10% of the potential of all of the technological advances we’ve made in healthcare, and that the other 90% really comes from improving the healthcare system. 

    And that’s really what I’m passionate about supporting and doing. So, my career has been about following that dream, which has ultimately led me to, to Nashville and to Council Capital, which at the time was a very small fund. But one that had what I felt was a really strong approach. That I felt I could scale as, as the firm’s leader. And I have been at Council for 12 years now, we’ve just launched our fourth fund, with an investment that we closed just a month ago.

    Patrick: Well, going into Council Capital specifically, and I like to ask this of my guests, because we get a feel for the culture of an organization when you drill down and figure out unlike law firms and insurance firms that essentially name their companies after the founders’ last name. Tell me about Council Capital by beginning with how did you come up with the name, and then give me a quick profile of your organization, and we’ll get into strategies and so forth after.

    Grant: Yes, happy to. So the name I get no credit for the name, the name was, was created by the founders of Council Capital, who had a vision for improving healthcare, by investing in companies and they felt that the best way to do that was to find real experts, get them to invest their own money into our fund have real skin in the game, and where their money goes, then you will have their hearts. And so we put together the original CEO Council, which was a council of people who had been there done that in house in in healthcare. And that formed the CEO Council, hence the name Council Capital.

    Patrick: Then with your focus, because you’re not focusing on upper middle market or middle market, you’re looking at the lower middle market. And I kind of think about with health care, a lot of people that aren’t familiar with health care think they think of it just on these institutions, side. Hospitals and large physician groups have large health plans. That’s not it. There’s a universe of smaller organizations within within the business of healthcare. Talk about your direction because you’re focused on the lower middle market.

    Grant: Yes, what we do is we make buyout investments of healthcare companies. We can grow fast, we don’t use that much leverage. And we’re able to achieve those fast growth rates partially because of our council model. But also, because we’ve used our CEO counsel, that group of 34 people who’ve really built really valuable healthcare companies, to help us figure out where healthcare is going, and thus, where growth will be the highest. And so that has led us to focus focus on important or in today’s world, essential services, that are usually providing access to vulnerable populations or under managed high cost populations, and at the lowest cost point of care. 

    And so these are naturally, companies that move care away from high cost settings, often with people don’t want to be particularly in COVID, in places such as hospitals, inpatient behavioral health units, and toward caring for people where they live. And that’s why we have, for example, investments supporting medically fragile kids, which is one of our ideals, autism, those with intellectual developmental disabilities. And so, you know, think of us as investing in any company that improves the healthcare system, we can do that by investing in a company that actually provides care itself. Or it could be a to a services provider or a technology provider to those care providers, or it could be anywhere else in the support ecosystem around healthcare. So there are just a tremendous amount of different ways you can support the growth of building great healthcare companies.

    Patrick: Well, I think what’s great about what where your focus is, with the lower middle market is, you know, my belief is that there are so many of these lower middle market companies under under 30 million under $50 million in transaction value that they don’t know where to go, when they reach some inflection point, and they’re too, too small to be big, but too big to be small. Where do they go next. And if they don’t know about organizations like Council Capital, then they will default and look to a financial institution. Or even worse, they could just surrender and capitulate to a strategic that doesn’t necessarily have their best interests in mind. 

    And so the more people can understand and learn about Council Capital, and all the resources you bring to bear for that specific class of business, I think is is fantastic. The issue though, when we look into health care, which is different from any other business, because you’re dealing with people’s lives, people’s health, okay, and so there’s a different standard that they have. And you’ve mentioned it a couple times already, but talk about the paradox out there of, you know, making an investment in healthcare that is efficient and profitable, without sacrificing quality of care. How do you balance that?

    Grant: I don’t look at it as necessarily a balance, the way we look at it, is that we start by saying, where is healthcare going in 10 years? We then back away from that and say, what does that mean about the best starting place for us today? What kind of company should we be investing in. And then we look for companies with several attributes, it starts with, they have to be if they’re a care provider, they have to be providing great care if they’re a service provider, they need to be providing great support services. And if they’re a technology provider, they have to provide great technology. Once we understand that they are doing what they are meant to be doing great, then we look at the unit economic model and their ability to scale. And it’s an end rather than an or it has to be that they have both. 

    Once we have that, we look at it and we say what the entrepreneur printer has done is the most difficult part we believe, and that is to start something up and create something with great quality, a good unit economic model and limited compliance risk. And then the way we’ve built Council Capital is to be able to support them in scaling it from there, which oftentimes because they’ve built their capabilities around that first part of building a company, what we’ve done is we’ve said, what do we need to do to one identify those kinds of companies and then support them in their growth. And so the way that we’ve built the council model has been to specifically help support those companies, wherever they need it within growing from there up to a company with more scale, and so that includes several elements. One part of that is the CEO Council. 

    Which, just going into that a little bit more deeply, we’ve got 34 of them. These are people who have generally built very large successful valuable healthcare companies, billion dollar healthcare companies, the who’s who of their respective industries. In in healthcare, a lot of people have said, well, you’ve got the LeBron James and the Michael Jordan’s of, and then they named their individual sub specialty. And what we do with them is they have invested more than $140 million of their personal capital into counsel into our funds. So they are directly investing into, you know, the entrepreneurs business. So if you think about that, relative to having an advisory board or something, you know, where somebody doesn’t really have skin in the game, the CEO councilmembers have real skin in the game. And then they’re motivated to help that entrepreneur that company to scale. 

    So there are a variety of ways in which they help us with that, whether it be strategy on the board, helping with connections, relationships, basically helping the company punch above their weight class, so that you can take something with great capabilities, but enable them to behave as if they were a billion dollar business get the credibility of as if they were a much larger business. So we’ve done that with the CEO Council. And then, you know, we are we’re always evolving our business. And so what we said is, what else can we do, as it relates to building capabilities to help support these these businesses in their growth. So we built a value creation function that, in addition to the CEO Council, also builds brings a whole lot of other capabilities. So it, it helps people scale their human resource function, their finance function, their technology function, etc. 

    And we have a lot of very simple case studies to be able to demonstrate to people the kind of value that that has, in terms of helping a company really grow and scale in the right way. So, you know, a lot of times, small companies, as they scale, they lose their quality, quality of care, etc. And what I find when I speak to entrepreneurs, is they’re often worried about partnering with somebody, because they don’t want to see a dilution of the quality. Whereas what I think we can demonstrate to them is that we will help them to solidify that quality, and ensure they don’t lose it as they scale. And that, to me is the beauty of building a great, valuable, scalable company is that you want to hang on to what was special, when the company was small, great clinical quality, great service quality, great technology quality, and figure out how you scale that which is, is different than what you do when the company is small.

    Patrick: I think one of the things that you cannot understate the value of what your bringing with with that counsel model is that and again, we’re dealing in healthcare, as you’re growing, you’re dealing with institutions out there as prospective clients or opportunities or whatever, who better to get access to those institutions, than members of your council who they’ve got credibility, because they put their own money behind these ventures, they’re not just speaking it up. And that eliminates a lot of obstacles. So if anyone out there listening today is considering, you know, making a move, I’ll tell you that a resource that Council Capital brings to the table that is literally unmatched out there. And I think that’s just terrific.

    Grant: Patrick, to that point. Healthcare is an enormous industry, but in some ways, it’s quite small. And so just to help people understand what that CEO council really represents, those 34 CEO council members plus our strategic investors, so all of those are investors in our funds. They directly represent over 60% of the managed care lives in America. And over 60% of the for profit hospital beds in America, similar statistics in behavioral health, a range of other sub sectors within healthcare. 

    But what that really means is that if there’s a relationship that the company needs, we are going to be able to access them directly through our investor network. And our investor network is really leaning on our credibility. They’re looking at us to be the stamp of approval for the company we invest in because their reputations on the line, and because we haven’t violated that trust that we have with them are investors, it means that that credibility goes a long way, when they stick their neck out their own reputations on the line to go to bat for a small company.

    Patrick: Let’s underline one other thing about this. And this is just an undeniable fact. Let’s talk about the importance of Nashville, Tennessee, in the healthcare world.

    Grant: Yes, Nashville really is the biggest healthcare market in the United States. I always thought that it was big when I lived elsewhere. And then I came to Nashville, and I realized that was much bigger than I’ve previously understood. It’s also well organized, which means that you have a path to navigate the system. So what we found is that we can invest in companies around the United States, and then give them access into Nashville and what that gives you access to is not only the biggest market within healthcare in the United States, but Nashville companies often have the benefit of working with each other, which means that you can avoid mistakes, figure out what the right approaches to doing things are often. And so you really get access to a lot of that, you know, that thought capital

    Patrick: Well then, tell us Grant, give me a profile of your ideal target. What are you looking for?

    Grant: Well, we really want a business that is great at what it does. So whether that’s great clinically great service, great technology, that they have a good unit economic model, they have to be going in the direction that we believe healthcare is going. So I often look at people ask me, what’s the difference between venture capital and private equity, for example, and the what what I respond with is, oftentimes venture capital is looking at the right side of change in healthcare, but they are looking for things that might work in 10 years. And not all of those things are going to work now. So the success rates going to be be lower, which is fine, because that’s part of their business model, the way we look at it, in terms of what does right side of change, mean for a private equity fund investing in the lower end of the the middle market in healthcare is that we want to invest in things that represent the future of healthcare, but they have to have business models that actually work today. 

    And therefore, you’ve got a company that has products that they’re selling today, solutions that they’re selling today. And they can be profitable, and they can grow it today. But as the winds of change pick up, then they’re just going to have more and more wind at their back. And so it’s going to accelerate their growth over time. But it’s a very important distinction, in terms of what we look at, relative to what a lot of other great healthcare funds might be looking at, it’s just a different focus. While markets, clinical quality, etc, are important and table stakes. What really enables us to be successful with these businesses, is having great leadership that we trust. So the quality of the management team is really important. 

    We’re not looking at people through necessarily a traditional resume based approach, we’re really looking at them as what capabilities do they have to take this company from, where they are now, going forward, and we need to be able to trust them with that. And so increasingly, what we found is that we can back people up, they may not have been there, done that on every single element of what we need them to do in the future. But as long as we feel that they are really capable individuals, then we can support them in a lot of the ways that they want support going forward. You know, we never want to run companies, but we can create that a toolbox that we give them access to. So that they can help themselves to the toolbox to really help them scale their own business. So, you know, great leadership and having a great relationship with that leadership is critically important for us in a deal.

    Patrick: When you’re looking at investments and acquisitions in in healthcare, you know, everything can fit everything can look right. But you know, these deals don’t happen in a vacuum. And so there’s always risk involved. And a lot of the, your counterparties are probably first timers in the M&A world. And so they get the experience very new experience of learning about that risk and how it applies to them personally, they can’t hide behind the corporate veil. They are financially at risk to a prospective buyer. In the event something blows up post closing that even the best diligence just didn’t pick up. And you’ll have your seller target, arguing, hey, I can’t tell you something or be held responsible for something I don’t know, I told you all I know. 

    And contrary, buyers gonna look and say yes, but we’re investing 10s of millions of dollars, that you have a perfect memory. And so, you know, there is going to be indemnification agreements, there are going to be these tools out there to transfer risk, and so forth. And that can introduce a bit of stress and tension between the parties where it didn’t exist before. Because of that, and it’s just the the issue of fear of you know, those types of losses. I’m very proud that the insurance industry has come in with a product to transfer that risk away from the parties. And it’s called rep and warranty insurance, where the insurance company essentially looks at the seller reps, compares the seller reps with the buyers diligence of those reps for accuracy, and then makes a decision says, hey, for a couple bucks, I’ll tell you what, we will take that risk that indemnification obligation away from the seller. 

    And we will take it so that if something does explode post closing buyer, you have peace of mind that you will recover, we will pay the pay the loss for you seller, you get a clean exit, it’s been a rapidly moving product that has now come down to the lower middle market transactions, which is very welcome news. I’m curious grant because this only became available for sub hundred million deals in the last 16 to 18 months. Good better and different. What experience have you and Council Capital had with rep and warranty insurance?

    Grant: We’re not as experienced as a lot of our much bigger private equity brethren, with respect to rep and warranty insurance, but that’s really because it was serving a much larger market. We’ve since been paying attention to it because we’ve realized that it is suitable to the small you know, the smaller end of the market, which is where we play. And so we we look at it as as something to consider on whatever deal we are looking at. And it really is just going to depend on the facts and circumstances of the deal. But it does give you the ability to be able to both close on the deal in the manner that we need to and give the seller the ability to take more money off the table up front. And without us really giving up much in the process. So I think it can be can be a great way to navigate a potentially significant issue between a buyer and a seller.

    Patrick: Yeah, I think it’s a case by case it’s maybe not a fit for every single deal out there. The one thing is welcome news is healthcare was one of the sectors that the rep and warranty industry did not like to deal with. It’s heavily regulated. And there were a lot of other exposures that the underwriters just didn’t know what I’d get their hands around. And I think that over time with great experience and a little bit more understanding, particularly getting the right brokering to negotiate with the underwriters and show them that there are exposures that aren’t really relevant to every healthcare company. 

    There are ways that your solutions can be found. And this is, you know, consistent with one of the things that you came up with where you don’t have the dilemma of, you know, profitability versus quality of care, you can have both. And I think that’s one thing that’s encouraging about this sector with with insurances. things continue to develop in favor of the policyholders out there. So we’re very, very, very happy about that. Grant, as we’re getting into, you know, the first half of 2021, now times flying, I think it’s safe to say we’re looking at the beginning of the end of the pandemic. Give us give us perspective, from what you see, what trends do you see in M&A either for Council, Capital, healthcare, the economy at all. What do you see out there for the rest of the year?

    Grant: Well the market, in healthcare for deals that really are in these sectors that we view as right side of change in healthcare is very hot. So there, I think what the pandemic did was it highlighted the vulnerabilities in healthcare, you know, what kinds of companies could have issues and people focused on you the areas that that had strength. A lot of those are markets that we’ve already been invested in, and will continue to be invested in. So it just means there are more funds out there looking for investments in those markets, which leads to more competition. I think the key for us, is making sure that we find ways to adequately communicate what we are like as a partner, you know what we bring to bear and let the entrepreneur then, you know, determine how they would compare us against any other alternatives which we which we welcome.

    Patrick: Grant, how can our audience members find you and Council Capital?

    Grant: Best way is through the website and really through our leader of business development, Jon L’Heureux, who’s also his contact information is is on the web on the website. And we’d love to meet entrepreneurs who are growing great healthcare businesses.

    Patrick: Yeah. And I’d say you’re yours is one of the better websites out there. I just looked at websites from private equity firms from five, six years ago where it was, it was almost password protected, and they had so little information on there. Now your organization is easy to find easy to navigate, easy to reach out. So I think that’s user friendly is good because you do not want to be the best kept secret in private equity, particularly for healthcare. Grant Jackson, been an absolute pleasure. Thanks again for joining me today. You have a great day.

    Grant: Thank you, Patrick. Thoroughly enjoyed it. Have a great day, too.

  • Dealing With the “Emotional” Side of Strategic Acquisitions
    POSTED 4.13.21 M&A

    It’s a tragic story seen time and time again in the M&A world, specifically in strategic acquisitions…

    On one side, you have a Seller.

    A relatively small company. An owner/founder who has worked hard to build the business to what it is. They are elated to have caught the eye of a larger company seeking to acquire them, whether they will take on an executive role post-sale or will take the sale proceeds and invest in a new venture or sail off into the sunset for a much-deserved retirement.

    On the other side, you have a Strategic Buyer.

    Usually, the company is 50… 100… times the size of their target… maybe even bigger. They’ve found a small company that offers a technology they need… or access to a new market… or whatever else.

    Sounds like a match made in heaven. A win-win for both sides. It should be easy enough to hammer out a deal that makes everybody happy.

    However, all too often it doesn’t turn out that way due to fear, distrust, greed… in other words, human emotion.

    Fortunately, there is a way to overcome that element and get these deals done quickly, in a way that is amenable to both sides. But first…

    How Deals Fall Apart

    In these types of lower middle market acquisitions, a Strategic Buyer (or even a PE firm) is experienced in the process of acquisition. They do it all the time. To them, this is just another transaction.

    But the Seller, the original owner and founder of the business, while good at what they do and very accomplished in their industry (which is why the Buyer has an eye on them) … is inexperienced in M&A.

    This is probably the only deal they’ll be involved in in their life. They might even be intimidated by the process.

    Two very different perspectives.

    And this can create a lot of friction that can hamper the negotiations and delay the deal… or even cause it to fall apart all together. And we’re not even talking about disagreements on the sale price, stock options for the executives to be newly onboarded after the acquisition, or anything like that.

    It comes down to the process, and there are several elements at play.

    1. The acquisition itself can be a distraction to the Seller. They’re spending their time looking at contracts, talking with lawyers, pulling together financial and other records for due diligence, and other tasks. This takes time away from actually running the business, which can be impacted negatively as a result. This is very frustrating to the Seller.
    2. Speaking of due diligence, this process can be difficult. First, as a smaller company, they might have had all their records organized in a way that are not easy to pull together. They’re having to dig deep to find the information the Buyer wants. And, not accustomed to what is required for thorough due diligence, it feels invasive to the Seller. They get tired of answering all these questions. (Again, remember that the Buyer does this all the time – they don’t “get” why the Seller might feel this way.)
    3. This is a big one… indemnification. The Buyer says to the Seller: “We went through all this due diligence. We’ve gone through your records with a fine-toothed comb. We know you found the process frustrating, and we appreciate your efforts.”

    “But… in case we missed anything and any of the Representations in the Purchase-Sale Agreement are inaccurate, we need to hold money in escrow from the sale price for a year or two. Just a few million dollars. Oh… and we’ll take that money if there is a breach to cover our financial damages. But that almost never happens, so it’s no problem.”

    This is the last straw. The Seller feels like the Buyer has looked at every single file they have. They’ve been upfront and honest about everything related to their company’s finances, contracts, intellectual property, tax situation, and everything else.

    This indemnity provision feels like an insult. They feel like they shouldn’t be held responsible for something they didn’t know about that the Buyer missed. Not only that, but the owner/founder can be personally liable for breaches as well. That dream retirement could be at risk.

    At the very least, they will not get the full proceeds from the sale for years down the line. They won’t have that money to invest in a new venture, for example.

    From the Buyer’s point of view, they’re making a multi-million-dollar investment and they need to protect themselves. It’s part of doing business.

    But the Seller takes it personally. They feel distrust. They’re confused, stressed out, and upset. They feel taken advantage of by this “big company” swooping in. The air goes out of the room. Human emotion comes into play.

    It turns what was a smoothly running collaborative process into a tense, confrontational one. Everything could potentially be sabotaged.

    And if it’s not, it can still create an acrimonious relationship between the incoming management team from the Seller’s side and their new employer. They might be able to forgive the process, but they’ll never forget what went down. This can be huge as that first year after an acquisition is critical in integrating the acquired company.

    How to Avoid All This Drama

    There is a simple way to sidestep these issues that will make both sides happy and maintain a strong relationship going forward.

    The Seller will avoid the indemnity obligation and potential clawback.

    The Buyer will still remove risk.

    And when included early in the negotiations, it will smooth out negotiations and make the deal-making process easier.

    It’s a specialized insurance product called Representations and Warranty (R&W) insurance. I feel strongly that any Buyer today who doesn’t offer this option to the Seller in a lower middle market deal is not acting in good faith.

    With a R&W policy, the indemnity obligation is transferred away from the Seller to the insurer. And the Buyer has certainty they will be made whole if there is a breach. They simply file a claim with the insurance company – and these claims do get paid.

    It’s a no-brainer, especially when you consider that:

    • This coverage in recent years has been made available for lower middle market deals, including those with transaction values as low as $10M.
    • The cost has been decreasing as more insurance companies enter this market. And when you deal with a “boutique” broker that specializes in this type of coverage (instead of the big companies that offer R&W among hundreds of other products), the cost for commissions and fees is even lower because they have much less overhead. The starting cost for a LMM R&W policy today is just under $200K (including fees and taxes).
    • And especially noteworthy for the Buyer, when offered this coverage, most Sellers will happily pay for the policy once they realize the advantages it offers them. It’s a small price to pay for the peace of mind knowing they won’t be on the hook in case of a breach… and can take home more cash at closing.

    Still, some Buyers are hesitant. They want to limit the time and effort they spend on the deal, especially on some of the extra due diligence R&W policy Underwriters might ask for. They might feel like using some of that leverage as the bigger company and simply leave the Seller on the hook.

    That’s very true. However, let me stress again that I feel that is borderline bad faith on the part of the Buyer not to at least offer this coverage. And it’s in their best interest to do so, as it’s a strategic way to show good faith and will reap rewards in the form of smoother deal-making and a good relationship going forward.

    The Seller no longer feels “bullied”… they feel like the Buyer has their back. And that is priceless.

    Next Steps

    Even experienced Strategic Buyers might not be very familiar with Representations and Warranty insurance. They might have heard of it, but only know what it used to be several years ago, when it was only offered for larger deals and the costs were higher.

    A lot has changed with this specialized insurance product in recent years. It’s more affordable and more widely available.

    I’d be happy to get you up to speed and share how this coverage could specifically benefit your next deal.

    For details, please contact me, Patrick Stroth, at

  • 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.

  • Why Buyers Should Embrace R&W Insurance to Remove Seller Fear
    POSTED 2.2.21 M&A

    For lower middle market companies looking to be acquired, these owner/founders, often of businesses they have built from the ground up, are looking for a once-in-a-lifetime liquidity event.

    They are ready to sail off into the sunset, perhaps into retirement or perhaps another business venture that will require as much capital as possible. They want to truly cash in from the sale and walk away without further obligation or liability.

    At the same time, while they are experts in whatever their business does and passionate about their company, they are not well-versed in the world of M&A. You might consider them “unsophisticated” Sellers.

    This creates an atmosphere of fear in these Sellers that can make them reluctant to move forward, especially when they realize they are personally liable to the Buyer if any losses are incurred post-closing from a breach of the Seller reps. But, as you’ll see in a moment, Buyers who take the right approach can remove that fear in one fell swoop.

    What are these Sellers afraid of?

    There could be issues with ESG (environmental, social, and governance) that could come back to bite them years down the line if a lawsuit is looming. Unfortunately, often these companies have not taken out Directors and Officers Liability insurance, which would protect them and pay legal costs and any claims due.

    Any number of issues not uncovered in due diligence, such as IP infringement, tax problems, or others, that are no fault of their own, could crop up. In these cases, the money from the sale held-back in escrow could be at risk. This chips away at the major cash payout they were expecting. Money beyond escrow could even be clawed-back in some cases.

    Not to mention, there is a lot of uncertainty in the new U.S. government administration.

    They feel their future wealth is in danger – in more danger than ever before.

    What a Buyer Can Do

    Buyers can take away that fear by hedging the Seller’s risk with Representations and Warranty (R&W) insurance. This specialized type of coverage transfers virtually all the risk away from the Seller over to an insurer.

    This insurance removes the need for indemnification provisions in the Purchase and Sale Agreement and for a major part (typically 8% to 10%, sometimes more in cases where the Buyer believes there is more risk) of the sale price to be held back in escrow, which makes the Seller happy. If there is a breach in any of the Seller Representations and Warranties, the Buyer simply makes a claim with the insurer. And there is no chance of claw-back.

    And claims do get paid consistently, Buyers should understand.

    This process also eliminates the need for such extensive negotiation in the lead up to the sale because there isn’t so much back and forth between lawyers for the Buyer and Seller. (Which can have the added benefit of saving both parties on legal fees.) In many cases, a Seller will be okay with a more Buyer-friendly agreement because R&W coverage has so effectively limited their risk.

    As you know, Buyers want broad indemnification provisions to cover any potential loss, while a Seller’s goal is to narrow what breaches are covered and the survival period. With R&W in place, and a third party (the insurance company) paying for losses, no need to argue. In fact, some industry watchers maintain that deals with R&W in place are eight times more likely to close.

    Previously, R&W coverage was the province of major deals – hundreds of millions or billions in deal size. But in recent years, Underwriters at many major insurance companies are taking on transactions as low as $15M.

    And it’s very affordable. Right now, you’re looking at a rate that is 2% – 2.5% of limit, including underwriting fees and taxes, which is a significant drop in what it cost just a couple of years ago. The rising popularity of R&W insurance among savvy PE firms, as well as some Strategic Buyers, means more policies being written. And there are more insurance companies than ever offering this coverage. That has brought the cost down.

    Better yet for Buyers, because of the removal of risk and peace of mind, Sellers are more than happy to pay for R&W coverage. Given the choice between accepting risk and the escrow that goes with it, Sellers will eagerly cover the costs, making R&W essentially “free” for Buyers!

    It’s clear that for Buyers in the lower middle market space, the advantages of R&W insurance far outweigh any minimal additional cost and additional due diligence required by the Underwriters (which probably should have been done anyway and doesn’t necessarily add significant time to the process).

    One important thing to note is that large Strategic Buyers – we’re talking the Apples and Googles of the world – have more than enough leverage that even if a Seller wants it, they are not likely to agree to R&W coverage. For them, any losses from something going wrong when acquiring a lower middle market company are just a drop in the bucket.

    Lower middle market deals are right in the sweet spot for R&W. For smaller Buyers who understand that the fastest way to grow inorganically is with key acquisitions, it’s the perfect vehicle to bring Sellers to the table. As more Buyers focus on this space, it’s essential for them to have R&W to be competitive.

    Buyers should bring up the concept of using R&W insurance early on, with a provision made at the Letter of Intent stage. It’s a gesture of goodwill of sorts that soothes concerns the Seller may have. Of course, knowing that any losses post-sale will be covered gives the Buyer peace of mind as well.

    As mentioned, with this coverage in place at the beginning, negotiations are much smoother and go more quickly.

    In the current climate, lower middle market Sellers are running scared. Buyers bringing R&W insurance into the equation will go a long way to gaining trust, making them feel secure and ready to go forward with the transaction.

    It’s important to deal with an insurance broker well-versed with Representations and Warranty insurance and its role in M&A. While some of the bigger providers do offer this coverage, they focus the majority of their time and energy on bigger deals.

    I specialize in securing this coverage for lower middle market deals, and I welcome your questions. If you’re a Buyer or Seller interested in finding out more, please contact me, Patrick Stroth, at

  • 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.

  • ESG Investing in the World of M&A
    POSTED 1.19.21 M&A

    The concept of environmental, social, and (corporate) governance – popularly known as ESG – has been gaining traction among many investors in recent years. Institutional investors, individuals, Strategic Buyers, and PE firms are all getting on board. It’s become a serious factor in deal-making in the M&A world.

    The idea is that the societal impact or sustainability of a company, how it does business, and the products it produces must be considered before investing. In some cases, these so-called “non-financial” factors (which actually have a lot of financial relevance) are given just as much, or more, weight than potential returns.

    ESG could cover how the company is reacting to climate change, their use of natural resources, their production of hazardous waste and how they dispose of it, or how they treat their workers and manage their supply chains.

    It also includes issues around the running of the company, like transparent accounting practices, the diversity of the board of directors, engaging in illegal or unethical business practices, inappropriate political lobbying, and that shareholders are involved in making decisions.

    People today, especially younger investors, care about the pollution a company produces, the sustainability of its products, its use of renewable energy, and labor practices.

    They’re increasingly investing not just with a return in mind but based on their values. And the returns often follow because companies seen as rating poorly in ESG (say if they mistreat workers or regularly spill pollutants into the environment) in the minds of investors – not to mention consumers – can see their financial performance suffer.

    It’s estimated that ESG investing represents about a quarter of all professionally managed assets globally. It’s increasingly seen as vital to assessing corporate risks, strategies, and operational performance.

    In fact, a 2014 study by George Serafeim, Bob Eccles and Ioannis Ioannou (professors from Harvard Business School and London Business School) found that sustainable companies’ stock tends to outperform that of companies with low sustainability ratings.

    ESG had its origins in a report by Ivo Knoepfel called “Who Cares Wins.”

    Knoepfel, who coined the term and is founder and managing director of onValues Investment Strategies and Research, asserted that considering ESG factors when investing isn’t just the “right” thing to do for society, it actually leads to more sustainable markets. These criteria can also help investors avoid companies that are facing financial risk due to their environmental or other practices.

    According to a report from Winston & Strawn LLP, how companies have responded to the threat of the COVID-19 pandemic has recently become a key ESG criteria. As they put it:

    “COVID-19 has highlighted that companies face much more than just financial market risks, and the failure to take due consideration of such non-financial risks and related ESG factors could spell disaster.”

    The Winston & Strawn report highlighted five ESG considerations public companies must address:

    • More robust disclosures and transparency with stakeholders (customers, suppliers, employees, shareholders) regarding contingency planning and crisis management.
    • Use of ESG rating systems to see how companies are performing on these indicators and how they compare to competitors.
    • Sustainability planning and reporting, including whether there is a long-term strategy to account for marketing disruptions like climate change, pandemics, and other “market shocks.”
    • More diverse supply chains, including the increasing use of more local suppliers and redundancies so that resources don’t dry up in times of crisis. (Think of the lack of face masks early in the pandemic.)
    • The ability to support their workforce in times of crisis, including work-at-home programs, good medical coverage, and other support programs.

    You’ve seen ESG in action. Whole Foods, for example, strives to drive global change in food by seeking suppliers that use organic items.

    But ESG investing is not without its issues. An investment fund could maintain they are only making socially-aware investments, which is all fine and good until they discover that their most profitable investment is doing business with a rogue country or involved in the destruction of the environment.

    What should their next move be? Divest their top performing holding?

    Take CalPERS, California’s pension system for government employees, which has more than $400 billion in assets. It’s under pressure from activists to divest from fossil fuel companies, which are top performers.

    Take away those investments and how will this massive fund pay out to all those ex-employees, their spouses, their kids, and others? It might not be financially possible.

    Besides, the rules are always changing. What is environmentally friendly today might not be tomorrow.

    So, it’s clear that ESG investing is not without its challenges. But going forward, PE firms, Strategic Buyers, and other deal-makers must keep it in mind when eying potential acquisitions. And not just because it “looks good” – it can have a real impact on the long-term success of a company.

  • Sean Edmonson and Adam Deutsch | Transactions with Transparency and Trust
    POSTED 1.12.21 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Sean Edmondson and Adam Deutsch. Sean is Vice President at Tecum Capital, a middle market multi-strategy private equity investment platform, and Adam Deutsch is the Director, Co-founder, and CFO of NewHold Investment Corporation, a holding company and private investment firm.

    Sean says, “Let’s buy companies that truly fit the mold of what we’re trying to build, and not try to force a financial engineering situation.”

    We chat about upholding a family legacy, as well as:

    • Forming strategic partnerships
    • The precision manufacturing and machine market
    • Structuring responsibly for sustainable growth
    • Transparency and trust for better transactions
    • And more…

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth. 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 Sean Edmondson, Vice President at Tecum Capital, and Adam Deutsch,  Director and Co-founder of NewHold Enterprises.  Now, as we record, this news of a vaccine for COVID-19, was just released. And that signals that at the very least, we’re at the end of the beginning of the pandemic. And we can now begin looking forward to getting back to business. To that end, I like to showcase how M&A deals may go forward by following a blueprint of a joint venture like the one Sean at Tecum and Adam at NewHold completed. And they did this in the height of the pandemic shutdown. Sean, Adam, welcome to the show.

    Sean Edmonson: Thank you.

    Patrick: Now, before we get into this particular deal that you guys did in the structure, and your respective firms, let’s set the table for our audience and get a little context here and tell us, Shawn, and then Adam, how did you get to this point in your career?

    Sean: Yeah, yeah, I’ll try to keep it short and sweet. But you know, I think I was thinking about this kind of from the get go. And I think kind of a key function with me is just always been a problem solver. And frankly, enjoyed interacting with people come from really humble beginnings as well. So really kind of learn the value of hard work. And if you want something, you can’t just have it, you got to go find a solution to a problem. So you know, through that, you know, I kind of started off in large bureaucratic organizations, if you will, and continue to work my way down, you know, kind of from upper middle markets, corner, middle market to lower middle market, and a big driver that, frankly, was just the people in the personalities, I just, I think you and a, you can have a very, you can effectuate change in a meaningful manner in a short amount of time relative to when I’ve been at big organizations, it’s tend tended to be quite the opposite. 

    And there’s a lot of bureaucratic rails along kind of decision making. And then I think kind of a key, you know, dynamic of you know, how I got to my point specifically to them was really kind of the personalities of the firm and kind of what we were going for, and we’re relatively young, firm, very entrepreneurial. And I was, you know, from the get go, always given kind of a lot, a lot of autonomy. And I think that kind of bleeds into everything we do. So I mean that it’s really kind of how I got to where I’m at. Now I’ll turn it over to Adam.

    Adam Deutsch: Thanks Sean.  So my trajectory. Look, bourbon, the benefit of a lot of people who are grisly enough to invest and take the time to try to make me better as a professional. My own background is I’m the son of a construction worker of the grandson of a construction worker, my great grandparents were in lumber back in the old country, so to speak, wherever that was, I think, somewhere between the Romanian Hungarian border, and they just kind of get moving around a little bit. So this is going to be in my blood going back very long ways. And I always knew that I wanted to work with small companies and to develop industrial and central services companies. And in keeping on my family’s legacy, I began doing that, like shown in a larger investment banking institutional context before moving over to lower middle market private equity, and the fourth the last downturn, and working strategic triage and turnaround on a basket of predominantly industrial, but also oil and gas and real property assets and portfolios and companies through the absolute worst of it. 

    With the primary takeaway from all of that being one of the lessons that my father taught me, which is that it doesn’t really matter what space you’re in, it matters. Are you a good manager? Do you understand the value proposition that your company brings to the table? Do you understand how to bring to fruition a coherent action plan that has some sensitivity to the affer mentioned, and even through very trying periods, even through periods like this, you see extraordinary managers and extraordinary businesses showing incredible resilience, and new hold enterprises myself and some of my partners are very fortunate to be able to collaborate with a lot of incredible people, people like Sean, people like JD and Mike at FNS, or Erie based precision tooling manufacturer, in order to take 20th century business concepts into the future and through the 21st century, even through these rocky periods in a way that presents a lot of opportunity for value creation, even through unique disruptive periods or things.

    Patrick: So let’s talk about Tecum Capital and NewHold enterprises. The your respective firms specifically now, and let’s start with sharing with us. I always like finding out about this is how did your firms come up with their respective names.

    Sean: So I’ll just, you know, jump in it, you know, t come in Latin means with you, I did not come up with the name, our general partnership did, what I would say is I think it’s very indicative of how we can conduct ourselves. And I was fortunate enough to kind of stumble into a situation where there is a lot of cross cultural alignment with how we go to market. You know, and what I would what I would tell you, I think kind of Adam had in the last, you know, kind of topic of discussion was, we just tend to kind of approach things in a very collaborative manner with with all of our partners, whether we’re lead sponsor, or we’re supporting, you know, groups like new hold, and Adam, I think kind of that’s part of our secret sauce is just walk into the room, you know, in a humble approach, and we’re gonna kind of lock arms and, you know, problem solve, frankly, and, and there’s gonna be bumps along the way, there always is. But I think kind of you come in and authentic manner, and you’re honest, you know, makes it really easy to drive good outcomes, when you have that level of trust. So I think that’s kind of a, you know, that’s at the heart of our business. And I think it carries in how we conduct ourselves out in the market as well.

    Adam: And then for NewHold’s part, we mean hold not in terms of holding, in our holding time, unlike a private equity fund is indefinite, and we’ll marry the length of our holding time to whatever strategy we’re looking to underwrite whatever is in the best interest of our shareholders and our employees. And our managers, we mean hold in more of like a 15 16th century sentence, like an old fashioned hold, we could have potentially put new fortress, but that was kind of taken or Sentinel, but that was taken as well. So that’s new hold the origin of the name.

    Patrick: And both of you have a focus in the middle lower middle market, and I think it is interesting is that your target is on the industrial manufacturing construction area, which is a reflection of your background. So it’s a common fit. I think it’s important that people realize that the reason that I’m committed to working with the lower middle market, as well as with organizations like yours, and highlighting yours, is the value that you’re bringing to these owners and founders of the lower middle market companies where if they just default to brand names and large firms that they’ve heard of, or institutions they’ve heard of, they end up finding out and they know, no better, but they end up becoming underserved. Not being responded to, but at the same time being overcharged. And there are organizations like yours that love these types of organizations that you bring tremendous value at a much lower cost, and have some real not only positive outcomes, but happy outcomes. And so it’s a kin to your appetite that the more we highlight organizations like yours, the better it is for the community in general. So let’s talk about this particular venture that you guys came together on, you know, put you on our radar, okay, and this was a purchase of FSX tools or Fs tool in September of this past year. Either one of you just start off, walk us through the deal, how it started, how you guys came together, and how you saw it through.

    Sean: I’m gonna let Adam lead because I think it is a good kind of first stage into the progression of kind of how we got to where we are.

    Adam: This was a partnership. This was our forming a strategic partnership. With JD and Mike Faulkner of FNS tool, Faulkner and Sons of Erie PA, which is a several decades old precision tool manufacturer, which specializes specifically in providing tooling for high volume, high precision applications, things that you have to make a lot of, but they all need to be right things like contact lenses, things like laundry detergent caps, if any one of those you had an unfortunate experience with that might stay in your mind for a period of time sour your impression of the brand and producing those parts and industry leading efficiencies that had never been achieved before parts that you see all around you. That in some form or another in increasing evolutions you’ve been using throughout your entire life produced in a way that uses less time less water less power than had ever been produced before.

    And that is why a particularly new whole working in concert with our partners have to come first. began taking interest in this area, the precision manufacturing versus other things a little bit more conventional like plastic converting injection molding, compression molding, that are working on behalf of OEMs the space, while the great business has become a little bit commoditized. And we were looking at where can we play, where there’s defensiveness, where there were barriers that we can build around. And we can help? What has been a traditionally mom and pop sector gain increasing share with the value of patient capital? Sean would you like to kind of take over from there.

    Sean: Yeah, no, I’m happy to I mean, I think what I would add to that is the lower middle market that I in my mind, I kind of define lower middle market is kind of three to $10 million of evens up, you know, in terms of budding up into core metal market, it’s really challenging to find quality precision machining shops, within that size parameter, specifically, because you typically need some level of scale to win programs with large, especially when you go direct, you know, in the tooling side, and our business, specifically with cpgs are some of the medical OEMs. So you kind of always do this, you know, you walk this fine line to where we’re oftentimes seeing, you know, I would call them job shops, where maybe they’re really good at what they do, they have a greatly prideful labor force. And they’re probably some of the best in the country. But they’re often flex capacity, on maybe a drug program, that someone won. And they’re not large enough yet to win those programs. And, you know, it, ironically, we just, we hadn’t even met new hold before was an intro through a mutual connection. 

    And then they brought this platform, and he and we had the opportunity to work together on it. And we had, I personally have a lot of experience with precision machining space, you know, almost throughout my whole career, I’ve spent time in and around some type of, you know, precision manufacturing and machining capabilities across firms. And we were right at that kind of precipice that I wouldn’t say of a firm that is large enough and sophisticated enough, and has a demonstrated ability within its kind of lifecycle to go in when complicated programs with kind of global, you know, brands, which is really, really powerful, you don’t see that often in the market. And I think that’s one consideration. But a huge thing about how we got to where we are, and I’m on record saying this and other publications, too, is I personally, I don’t really believe in kind of the highly levered LBO buyout for precision manufacturing, because they tend to work like stairsteps. And you have to continually invest in your capacity to grow and scale and support these programs, even if you’re really good at what you do. 

    And immediately, you know, add them in their collective partnership, they understood this business and looked at it through a similar lens is that it is a nice business, but you need to structure it responsibly as well. And it was frankly, it was kind of it was just a marriage that worked out well, we had a lot of experience in this it was in our backyard. And we liked the way they were thinking about, you know, the structure of the transaction to support the sustainable growth. And, you know, we’ll get to this down the road. But you know, I think one kind of misnomer we’ll, we’ll kind of debunk is, I think there’s a lot of people going on saying, you know, they’re going to represent these buy and hold strategies as a way to entice, you know, owners to sell them their business, but I don’t know if it’s always authentic. And I personally, you know, we also in our control equity arm, you know, we represent family offices. And really, you know, in my mind, what that means is that you’re going to approach things in a more sustainable manner rather than a force manner. And there just was, you know, we checked a lot of boxes throughout the process. And that was, you know, that made it really easy for us to work together, work together. And they were very transparent. And just, you know, we just look at things in a very similar dimension, if you will.

    Adam: Just underscore briefly from the structural perspective, our approach to structuring the deal is effectively a joint venture with control is the only reason we were invited into what was a proprietary process on a company with double digit.

    Patrick: And, Shawn, when you had mentioned that they were quite transparent. Was that new home? Or is that the target company?

    Sean: I think it was both. I mean, I’ll put, you know, as we were joking about Adam, and you know, Kevin, when we first met, but you know, New Yorkers get a bad rap, especially through the lens of a Midwesterner. But, you know, Adam and Kevin and Charlie and their whole team, they just were not like that, frankly, it was just you know, from Got go, let’s do what’s best for the company. And we’re all gonna win. And it makes it really easy when you have, you know, strong entrepreneurs that are really passionate about their business and want that same outcome. And they were equally as transparent. And you know, a really easy example of this is, you know, sometimes you run into these battles of where you have these egos of these business owners, and I think some of its transaction fatigue and defensive them. 

    And they, they welcomed us with open arms, and when Adam and new hold to agree to kind of work together with us, and I brought one of our operating advisors out, and we went in toward the facility, and they were very transparent, open about things. And right out right from the get go, when you build that trust with people, it makes it much easier to kind of walk, what I would say, is a very emotional journey for someone that might only go through this once or twice, right, and you have to kind of be vulnerable as do we. And then all of a sudden, you get to the table. And when you’re negotiating, you know, with your attorneys and kind of working through the things I say aren’t always value add, but it’s kind of just unnecessary evil of going through these processes, you know, that everyone’s intentions are true, right? And that makes it a lot easier. So.

    Patrick: Yeah, well, I think you guys just validate my procession of, of M&A. But before I got experienced with mergers and acquisitions seven years ago, you know, I had the same view that a lot of other non m&a people have is that mergers and acquisitions is Company A gonna buy company be done. And what it really is, in reality is a group of people agree to work and combine forces with a another group of people with the objective being one plus one equals six. And you cannot bypass the human element where you have to have confidence, trust, be looking out for everybody’s interest. And you can’t shortchange that at all. And that’s, that’s the people element where these things are real successful. I like how you talked about how you work together? Because Is there a, you know, possible conflict, where you got one side is a longer buy and hold strategy, and the other one may not want to hold as long but I think it’s because new old has the controlling interest? Is that how you work that out?

    Sean: I’ll jump in on this one, because it’s probably more geared towards us, given we’re operating in a committed fund environment. But you know, the one caveat, I would say is, I think there’s been a misnomer. And it’s become more prevalent over the last, let’s say, five to 10 years, and you’re seeing a whole time of, of investments, even in committed funds extending from, I call it three to five to probably more like five to seven. And then you’re seeing LPA agree, you know, the LP agreements as well, their market extensions are kind of stretching out, you know, years 10 through 12. And so long as you’re getting money back, I mean, if you think about it, if you’re investing years, one through four years, one through five, and you’re still making quality investments, and each, let’s call it time tranche, you know, if you have if you’re building companies sustainable manner, and, you know, you’re just going to naturally have that role. 

    And I think historically, when the environment was a lot less competitive, you know, there is, I think, inherently, you know, less efficiency in the market, not saying that there’s a ton of efficiency in the market now. But it’s continued to get more efficient year by year by year. And I think, you know, sometimes you see on paper, these great financial stories, but then you go and you look at, you know, you know, what kind of makes what drives the numbers. And you might have an assimilation of five companies where the cultures aren’t the same, you have one executive, or you have a C suite overseeing them. And they’re coming together to drive, you know, this business and this brand, but they’re not an assembly, the business units. And I think there’s still a lot of buying build out in the private equity environment. But I think, you know, we tend to, you know, year on opportunistic tuck ins, and, you know, let’s buying companies that truly fit the mold of what we’re trying to build, and not trying to force a financial engineering situation, even though that might drive positive returns. At the end of the day, I don’t want to sell, I don’t want to be a part of selling someone, a business or transitioning out of a business, we work together with the C suite to build that looks good on paper, but in reality, they can’t move in an agile manner. So I think that just want to kind of debunk that because I you’re seeing a lot of personally in new holes, you know, an outstanding example of a group that really kind of means what they say, which is that opportunistic hold period, right, they’re gonna do what’s best. 

    And then further proof of that is you have the entrepreneurs who are rolling meaningful dollars in that transaction. So it’s not like new hold says They’re saying, you know, we’re driving the bus and you guys gotta listen, it’s let’s do what’s best for everyone here. And there’s a bunch of other line parties. But I would say, you know, seller should be aware that I think it’s becoming a, it’s I call it private equity group thing, you see it all the time. And people are trying to steal these authentic and genuine investment strategies, because the sellers, you know, believe it, and they think, Oh, you know, I’m passionate about my business, I’m a long term employee base. And I’m going to transition it over to this group. And the reality is, it’s the same thing as a committed fund, there’s just might be some family office behind them. But at the end of the day, they’re all capitalists. So, you know, you it really comes down to trust, you know, at the end of the day, people can tell you whatever they want, but you got to trust the people you’re working with.

    Patrick: Adam your thoughts?

    Adam: You know, I think I agree with absolutely everything that Trump said, as the private capital markets grow in size, and they grow a little bit in sophistication, what you’re also seeing is that the room for secondary transactions, the areas to achieve incremental liquidity without actually selling the business or selling control, or growing more robust and more diversified. When it comes to partnering with a group of individuals. It’s very much a marriage is founded on transparency, I think it’s founded on taking the time and trusting one’s instincts. But at the end of the day, I would look at a managers incentive structures. And as a seller, as an as a founder owner, I think you need to look at their incentive structures and how they are approaching negotiations and presume that folks will regress, if you will, to what their incentive structures would suggest that they would do, which is why new old and take them, try and achieve complete alignment in the way that we structure everything from our financials to the way that we’re wording the option programs to an employee that may have been with a business for over 18 months.

    Patrick: It’s I mean, to put an analogy was sports. This essentially, like you have a general manager getting players that has one set of objectives. And the head coach has another set of objectives. And they both, you know, say they want to win. But subconsciously, they want to make sure that they’re still employed and get paid. And so they you know, all of a sudden that winning may become secondary to Well, I want to make sure that my stuff was done right. And and I’m not worried about the others is essential, everybody’s going the same in the same direction. Shawn, you mentioned one thing about efficiencies that have increased with with mergers and acquisitions, I think one of those that’s a nice segue into one of the developments in processing and the logistics of actually executing these transactions is where risk financial risk is removed from the parties to an insurance company through an insurance policy tool called rep and warranty insurance. Both of you good, bad or indifferent. Tell me about your first respective experiences with rep and warranty.

    Adam: Go to take this first. Yeah, we’re employing rather than warranty insurance as a default, and it’s something that we certainly advocate for. It’s something that in targeted instances, the buyer is willing to share in the cost of depending on the nature of the transaction, that that’s a negotiating point. And it’s really more of a subject of what levels are appropriate given the size of the transaction. It’s something that we are certainly using as a way to seek additional comfort, but the relationship between the rep and warranty insurance, and the way that the rep and warranty language, which can be one of the thorniest areas of investigation and back and forth as you’re papering a transaction that can be one of the areas where, frankly, you run up on a percentage basis, the greatest surplus and legal expenses as you’re trying to work through the language and where an entrepreneur was selling a business or selling a part of the business is rightly scrutinizing that language can give all parties a greater level of comfort. The product, if you will, is also one that’s gained a lot of participants in a way that you can, with a really great broker price out some very good policies, and then it’s a matter of underwriting and again, you know, choose a good partner to help Shepherd you through that process, but in more instances than not. In very few instances, we are not using rep and warranty insurance in some capacity.

    Sean: I’ll jump in, I echo what, what Adam said. I mean, I, I think a few key considerations I would throw out there on the product. I think it’s hyper effective when you’re looking at p2p traded deals, when inherently going back to one of, you know, atoms, you know, I call them, you know, kind of aha moments, frankly, is, people are going to revert back to how they’re incentivized If a If a manager is incentivized to get money back to his investor group. And they can utilize product like rep and warranty insurance to take more chips off the table, and, you know, drive the returns to their investors, I think it’s a, it’s a no brainer, frankly, I think a few considerations, at least from my perspective, and probably where we invest is, you know, a lot of our deals are, let’s say, 20 to $80 million of enterprise value. So on the low end, we’re kind of butting up, I call it kind of that, that cost effectiveness. And then you also kind of combine that with the fact that a lot of our sellers are not private equity groups, I’d say 99% of what we do is, you know, founder own entrepreneurial, closely held, you know, transitioning out, and for them, they’re not in a fund structure, we’re getting those dollars off the table really matters that much to them. 

    And in most cases, you know, people are very honest and transparent. So when you go through your kind of legal diligence, or your I call kind of your legal underwrite, if you will, there’s not really a whole lot of skepticism. Right. And I will say, that’s the one challenge we have come across when you kind of get sub $50 million enterprise value transactions when you have kind of key risk linchpins. I do think, you know, inherently, there’s that kind of battle with the underwriters that, well, you know, we want to be able to transfer that risk over to the insurance provider. But if you’re going to carve out our key risk, linchpins, you know, and then the seller, frankly, is willing to kind of, you know, increase their escrow and put in a fair and you know, indemnity cap, it there becomes kind of a compelling argument as to both sides. And I think, you know, Adam hit the nail on the head is the inherent legal diligence that goes into getting underwriters comfortable, as equally as consuming and drives a lot of fatigue. So I think it’s hyper effective in the industry, especially as you kind of look at the private equity model of working and growing businesses and then transitioning them to other private equity buyers, it’s a really nice way to transfer risk. And you know, both parties have a, you know, compelling argument as to why they should opt into it. But when you have non PD sellers, selling to some type of institutional investors, I do think, you know, you got to come to the table and look at the facts and understand what the risks are. So.

    Patrick: I think with the big developments since Sean, you and I met back, it’s pre pandemic, so it feels a long time ago, but the development in the marketplace, which is very encouraging for us as we now have a mature market. And so, rep and warranty, as you guys have said is proven to be credible, reliable, and now it’s sustainable. And what’s happening now is as as you’ve got a mature market competition is coming with new facilities, they’re usually what happens is you get underwriters to get to a certain point with one insurance company, and then they leave open up their own facility and get, you know, backed by another very large insurance company that wants to get in into the game. And what we’re seeing with competition, and this is universal is that products and services are improving, and costs are going down. 

    And the nice byproduct for that for for mergers and acquisitions is there is now a whole segment of the insurance marketplace that entertains transactions down at the 10 million to $30 million transaction value where they write a minimal three to $5 million limit policy, the total cost, including underwriting fees, and everything is under 200,000. And in order to attract that market and be able to qualify, they have to be eligible. Well, the underwriters down in that space realize that perhaps not all the thorough diligence that’s required on $100 million deal is is required here. And they have scaled down. And I would say they haven’t lowered standards, but they’ve simplified standards. And so things such as audited financials are no longer required. The quality of earnings reports, legal diligence, also if we’ve got a straightforward risk, particularly in the industrial sector, manufacturing and so forth. Very, very simple. 

    I can tell you with the legacy when we first got into rep and warranty back in the early 2010s. You know, it was a non starter for the tech sector because they excluded in intellectual property rights. I mean, if you’re excluding that key linchpin, then what’s the use of it. So we’ve seen the market mature and that’s been a Nice byproduct, because if you’ve got not only p2p, but you’ve got owners and founders that are used to this process, they may not have all that diligence, particularly if they’re not represented by a banker, you need to have a segment of the market that’s willing to work with those folks and be as flexible as as the buyers are. So we’re very, very.

    Sean: positive to it, I’d throw in there to add to that is, I think you’re seeing that be put into the toolbox of up and coming attorneys that are now probably young, and they’re in their partnership. Whereas more than mature attorneys, and when I say mature, maybe guys are coming to the, you know, the, after the fifth or sixth inning of their careers. They grew up doing deals without it, right. So inherently, they don’t have a bias one way or the other. And I you know, we see that manufacturing, too, right, with engineering capabilities with like, additive things. It’s the same thing. People get trained. And they know they have these tools in their toolbox to drive a transaction home and both parties are protected. It’s a win win for all parties. So I think, you know, I would echo what you said is, we are seeing that I just think inherently with the non p sellers, it there’s I really think it’s important for their counsel to get those reps and have that comfort that we can get it underwritten efficiently.

    Patrick: That’s absolutely, what I want to move on to is just to get your respective opinions in terms of trends going forward. And there are two areas that I want to talk about if you can give this to me. First of all, just because with manufacturing, precision, precision manufacturing, we’re seeing a renaissance in manufacturing in America. And thing, things that activities and services that were being shipped out, are now returning, and we’re realizing that you know what, we need to have this stuff in house. Should another interruption happen globally. And so I’d like your respective opinions on where do you see manufacturing going forward in 2021? And then also your your perspective, what do you expect to see in 2021, with M&A?

    Adam: This is a very unusual time to put it. And I think that there remains a phenomenal amount of uncertainty, even on a post election basis, as we carry this outgoing administration through over the course of the next couple of weeks. And with you know, certain COVID rights in the country where there are, you know, this is going to be a 2021 loosening. And I think that that is going to be manifest in a variety of different ways, with the m&a trends, certainly reflecting that, whether they’re doing that on a leading or lagging basis, I suspect they’re doing it on a leading basis, because capitalists are very industrious and maybe, you know, we are risk takers by nature. But I do think that that’s something that will come to color, the m&a environment as it relates to manufacturing in the United States. This is presenting a tremendous opportunity. 

    And I think that to to make it infinitely bipartisan point, this is an opportunity that we should all appreciate that we should be looking to capture. There is a lot of work that by necessity has been done in the United States over the prior period. A lot of that should stay here, not all of it, but a lot of it should. And as we are looking to in in so many areas, fortify supply chains, and evaluate those and to maybe make them a little bit more efficient, maybe make them a little bit more streamline. I think that there’s a variety of different businesses that sit on the vanguard of helping to drive that I think FNS tools are prime example of a business like that. 

    But as we think through what does manufacturing m&a look like particularly and particularly on the private side, particularly, you know, for those entrepreneurs who were across a variety of different businesses, not just precision manufacturing, but other services that were directly impacted by the goings on in the past, you know, 912 1415 months, and some people experienced that. And even longer before this all plays out, they may be looking to return to some point of normalcy before they go to market. And that is a perfectly fair position to take. I would also say that for those businesses that have demonstrated some resilience, maybe not come through this completely unimpacted it’s not a bad time to be beginning conversations with potential partners who may be constructive in terms of how they’re evaluating the business that would have otherwise been on a strong trajectory.

    Patrick: I hate to digress a little bit from there, Adam, but as you were talking about capital leading rather than being in line Heard I just had a flashback to Wall Street, the movie where Gordon Gekko says, Yeah, Money Never Sleeps out. And it’s just sad that there’s always that dynamic.

    Sean: That’s the third time I’ve gotten compared to Gordon Gekko.

    Patrick: In a good in a good way, Sean.

    Sean: Thank you. I would echo everything Adam said, I, in my mind, I think a huge driver of this, and you said it well, is there’s this Renaissance, and I think a huge driver of this is the increased costs of secondary education in this country. And there’s not a promise that if you get a college degree, all of a sudden, you’re going to get a school and make, you know, greater than, let’s just call greater than, you know, $50,000 and live this, you know, glamorous life. And it is cool to, you know, have some hard skills and know how to make some of these components and work some of these machines, and there’s some, there’s some really technical skills involved with this. And you can make a really strong living in the trades. And I think you’re kind of seeing this inherent Renaissance, where as, as the cost, as the cost of entry is gone up, and it’s become more accessible, more specifically on let’s call it traditional secondary education in this country, you know, people are taking a hard look, you know, in the mirror and saying, you know, do I, do I want to go do this? 

    Or is, or am I going to take on a lot of debt, frankly, you know, to go drink, and have fun in college where, you know, you can, you can have a very fruitful life in the trades. And I think you’re seeing, you know, that in pockets of this country, and that’s allowing some of these businesses to flourish. And then a, you know, a byproduct of that is, you know, when we go through these, I call them Black Swan events are where, you know, maybe security, national security or supply chains are challenged, you can come back to your home base, and you say, Well, you know, we’re starting to kind of see these growing trade schools and apprenticeship programs where we can access these labor pools, and we can, there is a strong base of cost effective manufacturing in the United States, and people pay for it. So, you know, we’re really bullish on it, you know, I think it’s us is probably, you know, one of the best, you know, I’d say, precision machining countries in the world, I, you know, I guess there’s probably, you know, your top two or three, Germany being one of them. 

    And it’s, it’s, it’s exciting to see, you know, kind of that, that, I call it onshoring shift back into the US in it not being looked at as a negative, you know, to work in the trades. And I think we’re gonna continue to see that. And then in terms of kind of m&a, you know, trends going into 2021. I think tax policy, I’ll stay out of the politics side of it, I think is going to drive a lot of expectations of sellers, and you know, what they’re looking to take home as a pertains of proceeds. I think, unfortunately, there’s been a lot of aggressive interest in the precision machining space, specifically. Because it’s a very durable, it’s very durable, there’s high cost barriers to entry. And especially as you kind of go up market, I mean, it’s really hard to replicate. And a short amount of time with these people have taught time is probably the biggest challenge, I would, I would, I would throw out there in terms of competitive advantage, because you can’t just build these things overnight. And I think it really depends on the goals of the sellers. 

    I mean, if your goal is to get out, and take as much money home as you can, and you’re, you’re late kind of in your career, and you want to retire and kind of you know, sail away, completely respect that. But I think, you know, if you’re, if you’re kind of finding yourself, you know, waking up every morning and saying, you know, I know I have something here, but I, I’m not in a position, you know, where I want to push the agenda anymore on the risk curve. You know, there’s really great opportunities for folks like Adam ourselves, and hopefully, you know, more in a joint fashion, you know, to where we can kind of come together help you accomplish some of your succession goals, take some money off the table, and then frankly, kind of, reinvigorate the energy within the company to continue to grow and invest in the business and then you’re able to kind of, you know, de risk some of the sweat equity, and, you know, personal time you’ve dedicated to building what you have. And that’s, that’s powerful, but it is going to be noisy, just inherently, you know, I think I saw there’s over 5000 private equity firms now in the US, and pretty much anyone can put up a shingle.

    Patrick: Most of them are on the lower middle market side, too. Yeah.

    Sean: Yeah. And it’s, it’s a little bit disheartening as well, because you see people, you know, trying to kind of replicate these great strategies that were really put in place in a thoughtful and genuine manner. And I really just think you need to do your due diligence on people and there’s a lot of value I would say is we as an example, typically don’t win deals because we’re paying top dollar, we win deals, because oftentimes the There’s a level of trust. And I think I’ve echoed that a few times throughout. And I would just tell people do your homework on who you’re partnering with, because it might feel good, you know, the first, you know, six to 12 months, when you get a check that might be 10%, higher. But in the grand scheme of things, you know, you probably have a lot of, you know, close friends and relationships, you’ve built pride in your business. And you want that to be transferred into good hands and people that respect that. And I think you just need to be diligent about kind of what that means and what you care about. So.

    Patrick: Well, I think that the supply of prospective target companies out there for private equity stands in the millions, as of today, there are probably about 70 million Americans that are baby boomer age. And so you’re going to see a lot, I mean, hundreds of 1000s of transactions, where you got owners and founders either looking to exit or to offload majority share of their organization. So I think there’s going to be plenty out there for everyone. And when you look at the options out there, you have not just private equity, you have other strategics out there, you have family offices out there, for the larger deals, you now have hundreds of new stacks out there. 

    So there’s this huge environment where buyers and sellers and it’s teeming with opportunities, and the most important message to get out there is to find the right fit. And I think that’s something that you guys have going along with you and particularly for the second year with manufacturing is really outstanding. And I strongly encourage organizations out there not only owners and founders, but other firms that are maybe holding on to some gems out there that they may want to go and reconsider what they’re going to do with those investments and leverage them up or something is to reach out to you too. So Sean first and Adam, how can our listeners find you?

    Sean: Yeah, no I mean, you can find you know, my information at our website, which is And then I think I have my contact info on my LinkedIn as well and always appreciate the outreach, and I’ll try to be responsive as I can.

    Adam: And for my part, I live in Sean’s ‘s basement, but you can certainly find my contact as well as on LinkedIn as well. And thank you for the consider request from Patrick.

    Patrick: Sean, Adam, thanks very much. And we’re gonna be talking again, okay. Thank you.

  • My Why – and Why You Should Secure Representations and Warranty Insurance for Your Next Deal
    POSTED 1.5.21 Insurance

    For many, an IPO is the most exciting event in the life of a business. But I liken it to a team’s top pick in the NFL draft because the IPO itself is just the beginning. There are a lot of expectations for the player (or company) … and it could end up being a bust.

    But in M&A, Sellers are done, they’re exiting. To me, that makes these deals life-changing, even generational events. And who wouldn’t want to be a contributor to that process?

    If I do my job, I make this life-changing event faster, cheaper, simpler and happier for all sides. If that doesn’t get you fired up, I don’t know what can!

    Since I started doing this in 2014, my tool of choice to do just that has been Representations and Warranty (R&W) insurance.

    This specialized product removes the need for an indemnification clause in the Purchase and Sale Agreement and for money to be held back in escrow. It ensures that if there are any breaches, the Buyer can file a claim easily and be made whole in a timely manner.

    In short, this type of coverage transfers all the risk to a third party – the insurer. And, as you’ll see in a moment, this is just a small sampling of its many benefits.

    The first time I was introduced to R&W insurance was with a deal with a long-time owner and founder ready to sell his business for $50M. His goal was to take the money and “ride off into the sunset” to build settlements in Israel. The culmination of a lifelong dream.

    He almost didn’t get there.

    Because the Buyer was worried there might be a breach two or three years after closing and they would have a hard time tracking down this Seller out of the country, they were asking for half the purchase price to be held in escrow.

    I realized we could change the Seller’s life by facilitating the deal the right way. In this case, R&W coverage would allow him to avoid this huge escrow requirement that would see him stuck waiting for the other half of his money for years.

    We arranged for a $20M policy with a $1M deductible. So instead of $25M in escrow, the Seller was given the opportunity to exit the country with $49M out of $50M. What I call a clean exit!

    Since that day, it’s been my mission to provide this coverage for as many deals as possible.

    Why Now Is the Best Time for R&W Coverage

    The use of R&W insurance is more widespread than ever, with PE Firms especially embracing this coverage. There are many reasons why there’s never been a better time to sign up with your next deal.

    1. Sub-$20M deals are eligible
      If you’ve heard of R&W insurance, you may have thought it was only for larger deals. But in recent years it has become available for deals under $20M in transaction value. It’s wide open to the lower middle market.
    2. Case closed
      The debate as to whether or not R&W is good for M&A has been settled. R&W is recognized as a must-have for most deals, and regularly described as a “no-brainer,” especially by those who have used it at least once.
    3. More competition is good for everyone
      As an insurance tool, R&W has proved to be credible, reliable, and now sustainable, attracting new insurance companies each year. This increase in competition brings the same by-products all consumers enjoy in any industry: improved products and services at lower costs.
    4. Price is a non-factor
      Even before competition drove down R&W premiums, the financial and non-financial benefits afforded to both sides of a deal far outweighed the cost. I argue R&W is essentially “free” to the policyholder.
    5. Abundance of opportunity
      Considering the 1,000’s of PE Firms, Family Offices, Strategic Acquirers, Search Funds and now, hundreds of SPACs, most of which complete multiple transactions annually, there are plenty of deals and money out there for everyone.
    6. Accelerates the deal process
      More diligence needs to be done if R&W is part of a deal to make sure nothing gets excluded. But overall, this coverage smooths out negotiations and takes out many contentious elements. When R&W insurance is in place, there’s no need to debate every point of a Purchase and Sale Agreement. If there’s a breach, it’s covered. Deals with this coverage in place are 5X more likely to close.
    7. More money at closing
      Because there is no need for a significant amount of the purchase price to be held in escrow, the Seller takes more money home at closing, whether it’s for retirement, a new venture, or anything else.
    8. Claims get paid
      If you think R&W coverage is like other insurance products, where Insurers are reluctant to pay claims and eager to find loopholes, think again. Insurers do pay claims quickly and without hassle.

    Next Steps

    Lower costs, quicker closings, less money held in escrow… for these reasons and many more, there is no debate. R&W insurance has never been stronger and more available.

    That said, there are hundreds of brokers out there offering this product. But instead of going to the big houses where you’ll just be a number and your deal is not a priority, or your local insurance rep who doesn’t specialize in M&A, you should work with a broker who is “geeked out” about the benefits of Representations and Warranty insurance and really believes in this product.

    I’m one such broker.

    If you’re interested in making Representations and Warranty insurance part of your next deal, contact me, Patrick Stroth, at

  • Sean Alford | Clarifying Strategies and Processes During the Pandemic
    POSTED 12.29.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we’re joined by special guest, Sean Alford, Senior Vice President of Corporate Development at J2 Global, an internet information and services company that includes IGN, Mashable, Humble Bundle, and more across digital media and cloud services segments.

    Sean says, “It’s pretty systematized when you handle the volume of transactions that we handle, you figure out what works and what doesn’t work. And through the course of the 180 plus transactions that we’ve done, we’ve figured out the playbook that works. And there are different playbooks that work for different situations. We’ve got these different playbooks that we’re able to slot into different scenarios, and it helps to have had the reps and to have made mistakes and learn from them and improve the process as a result.”

    We chat about applying strategies to various transactions, as well as:

    • The ideal targets for the different J2 global segments
    • Pressing pause at the start of the pandemic to clarify processes
    • Warranty policies on transactions
    • Fourth quarter 2020 and first quarter 2021 expectations
    • 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 Sean Alford, Senior Vice President for J2 Global. J2 Global is a leading internet information and services company consisting of over 40 brands. Sean leads J2’s m&a program which seeks to acquire and support internet enabled companies in a variety of sectors, including media technology and services. Since 2000, J2 global has completed over 186 acquisitions. That’s a lot of deals. Sean, as the first strategic acquirer to join our podcast, welcome, and thanks for joining me today.

    Sean Alford: Yeah, thanks for having me.

    Patrick: Sean. Before we get into J2 Global, let’s set the table and tell us what led you to this point in your career?

    Sean: Yeah, sure. So I started my career as an attorney at a law firm in New York. I was with the Proskauer Rose firm in New York for a number of years. And I got to know the CEO of Ziff Davis at the time, Vivek Shah through some investing activity that I was doing outside of my legal practice. And through conversations with him over a number of years, I ended up joining him at Ziff Davis to run the m&a program. And you fast forward to now. I oversee m&a at J2 Global, which is the parent company to Ziff Davis, where I’ve been for I think it’s three years now it’s it’s three years would feel like dog years because we’ve done incredible amount, from an m&a standpoint deployed almost a billion dollars of capital, actually north of that in that time, and done about 35 deals in that time. So, so we’re having fun, and we’re doing a lot of deals.

    Patrick: Well let’s talk about J2 Global here and its commitment to the lower middle market, which I feel very strongly about. Talk about why the lower middle market, what the philosophy is, your your your theme in just how you did because one thing is really impressive is just the sustainability where you’re starting at the dot com era, for those in our audience thinking, remember that period, and you’ve been going for 20 years, which really says a lot to the sustainability and the success that you guys have, have had.

    Sean: Yeah, and that 20 year, history clearly predates me, but J2 has, has had a history of programmatic m&a, and it is focused on that lower middle market, which we think is generally underserved. And I think you can look at the way that it’s underserved from two angles, it’s underserved from the business and operations angle, where small to medium sized businesses aren’t always served the same way that large enterprises are when it comes to software tools and applications and services that they need to operate their businesses. But then I think the the market, the acquisition market, the m&a market, for lower middle market businesses, small to medium sized businesses is also underserved without the same amount of capital in the system.

    So we’ve actually benefited from both sides of that. On the one hand, we buy businesses that serve SMB customers. So you look at a lot of our software businesses, the market for them is small to medium sized businesses, we see that as a huge opportunity that’s going to continue to grow and where there’s going to continue to be attractive acquisition opportunities. And then on the other side of it, that is where we spend a lot of our time on the m&a front, we we don’t have to compete with a lot of the large institutional investors, the the blue chip can have 10s of billions of dollars, private equity fund types, the large, multibillion dollar strategics don’t always spend time in the lower middle market, because they’re not set up to spend time on their market. And we are so that’s, that’s been something that’s differentiated us on the m&a front.

    Patrick: Yeah, I feel the exact same way underserved is probably the best description, I would say for the lower lower middle market, which is a shame because I mean, it’s a great opportunity for us, but it is a vast array of opportunities that there are, you know, literally over a million companies in America that would fit that lower middle market definition. And the from the m&a perspective as we see it. They’re at risk of being overlooked, underserved and overcharged for services from institutions and so forth. And so it’s great when you either have a strategic plan J2 Global or boutique firms out there that really want to go and work with with those companies owners in the lower middle market as with other places, they’ve got a variety of places to look for an exit. Okay, why would they think to come to a strategic as opposed to other other maybe non institutional, but other family offices, private equity, other other outlets?

    Sean: Yeah, so there, there are a couple factors that distinguish us from from the competition, if you will, when it comes to m&a. Number one, you know, I think you could compare us to private equity in the sense that we do buy businesses and let them to continue to operate independently. And a lot of sellers like that. They like the independence and we’re set up in a way that allows a lot of the businesses that we acquire, to operate with independence. The difference between us and private equity is that we are permanent capital. So we buy to hold and sustain and grow over time, we’re not under pressure to flip a business or not under pressure to dramatically change your business immediately.

    And we’re patient. So, you know, along with along with that comes our capital structure, private equity puts debt on to the companies that it acquires all of our debt is held upstairs at the parent level. And as a result, the businesses that we own and operate don’t necessarily feel the pressure of interest, service and payments. So that’s, that’s one distinguishing characteristic. A lot of founders like that model, where they can sell into someone and they aren’t banking on an exit five to seven years from now, they get true liquidity at the time of closed now, there may be some structure in our deals where there’s an urn out and certain performance metrics have to be hit. But it’s very different from a private equity model, where oftentimes founders are rolling more than 50% of their net worth into the next deal, and they don’t get the full liquidity at closed.

    The other thing that distinguishes us from a lot of folks is the domain expertise that we have in house. So in the verticals in which we invest, we have sector experts and domain experts who in some cases have been in the space, they were operating for 20 plus years, we have experts in cybersecurity. For our cybersecurity portfolio, we have experts in consumer privacy, for our consumer privacy businesses, when it comes to secure file transfer eFax, and healthcare communications case, again, sector expert piece, same thing goes for health and gaming and broadband. And all of our categories were set up in a unique way where we don’t necessarily have to outsource the diligence, and outsource the planning, and synergizing if you will have the opportunity that a lot of financial buyers have to because we’ve got the in house expertise.

    And I think, particularly when you’re talking about founders, it’s easier for them to have a conversation with someone who’s been speaking the same language for 20 years, but knows the same players who understand the industry dynamics, and doesn’t look at a raw p&l only focused on revenue and EBITDA and free cash flow. While that’s important to us, we’ve got a bench of professionals with deep relationships and sector expertise that then makes for an easier transaction.

    Patrick: I think also, because you’ve done again, 186 acquisitions, you’ve got a whole game plan or a process set up. So I think if if a owner or founder, they don’t do m&a deals every day. So I have a feeling that you’re used to having novices that you’re dealing with. And so your onboarding is probably I would think, as painless as possible. And that must be a great, great advantage as well.

    Sean: Was pretty systematized. I think you’re right. I mean, when you when you handle the volume of transactions that we handle, you figure out what works and what doesn’t work. And through the course of the 180 plus transactions that we’ve done, we’ve figured out the playbook that works. And there are different playbooks that work for different situations. So we know how to work with the bootstrapped founder who’s ready to sell, we know how to work with the private equity fund, who is just looking to exit from investment they’ve been in now for five plus years. We know how to work with the corporate who is trying to carve out a business that’s non core. We know how to work with the venture capital fund. We thought something was going to be a rocket ship and maybe maybe it is or it was but if for whatever reason they’re ready tax. We’ve got these different playbooks that we’re able to fly into different scenarios, and it helps to have had the reps in to have made mistakes and learn from them to improve the process as a result.

    Patrick: I can imagine with strategic acquires versus private equity, financial buyers, if you’re in management, the tradition is that well, if your private equity or financial buyers, they look to retain management, whereas strategics don’t necessarily they’re gonna, they’re gonna put their own management in j two is completely different. You are almost like private equity in that, that you’re going to go ahead and maintain management, I think that just helps them cross that chasm to get to the next level.

    Sean: That’s right, that’s right, we we’ve put a tremendous amount of value on the people, they’re going to join our ecosystem. And that is a critical part of our diligence. And our underwriting is understanding the people who are running the business and understanding the value that they can add to that business under our ownership. So it is important to us.

    Patrick: I was going to ask you originally about give us some examples of the value you’ve created for some of your acquisitions. But I got a pivot from that and ask you what’s different in doing deals. Now post pandemic, you’ve been able to continue doing deals, even though the pandemic, there have been changes. Let’s talk about that real quick. And then we’ll get into the success you’ve had. But what’s changed and what, what happened with you guys with COVID?

    Sean: Yeah, so at the beginning of the year, we were off to our normal pace. And pretty fast clip, we came off of 2019, where we closed 12 transactions came into 2020, with a very healthy balance sheet, ready to keep up that level of activity if not increase it. And then March happened, and the global pandemic happened. And we very intentionally and deliberately paused our m&a program. We believe in predictable businesses, we invest with very high confidence. And we just found ourselves in a position where we weren’t able to do that. We weren’t able to predict other businesses, let alone our own. We weren’t able to underwrite with high confidence. So we pulled back and the good news for us is we don’t have to deploy capital.

    We don’t we don’t have to invest. It’s not the private equity model where we have to put the cash to work we like to, but we don’t put cash to work for the sake of putting cash to work we we underwrite for a high confidence return. And in the second quarter, we couldn’t meet with people in person, we couldn’t conduct our typical diligence. And we had a hard time getting a clear line of sight to the performance and forecasting of any business that we looked at. So we pulled back, we shifted our focus internally, we went through a lot of exploration of our own portfolio and evaluation of our own cost structure and tried to refine where we could optimize internally. We got to the end of the second quarter. And we recognize that we may be in a new paradigm where you have to adjust the way that you evaluate businesses, the way that you do diligence, the way that you meet with companies. And we discovered a lot of the technology that’s in place today, has actually allowed us to do this for years.

    Data rooms are all virtual zooms are commonplace. And they were they were commonplace before, I think we didn’t realize that all of us had cameras in our offices before. And with a global organization like Jay to, I think 80% of the people that I work with are in different locations. So we discovered after some reflection that we are set up to be able to transact in a virtual environment. And we are capable of transacting in a virtual environment, particularly in categories that we know really well, where there are businesses that we’ve known for a number of years, sometimes decades. So we got comfortable with that. And we also realize that, hey, maybe maybe the disruption that we’re seeing is going to be more V shaped than L shaped or U shaped and as we looked at our own businesses, we saw some of the rebound quickly and got comfortable, again, investing in sectors that we know really well and that we can have confidence in from a forecasting perspective.

    So you get to the third quarter, and we turn the machine back on. We have closed now. I believe it’s five or six transactions. Since the start of the third quarter, including one of the largest transactions that we’ve done in Jay to the acquisition of retail me not, which is in a space that we know extraordinarily well, a business, we’ve been around for a very long time. And we’ve we’ve even as a part of the reflection in the second quarter where I said, we shifted our focus internally, we decided to sell a business. We looked at a business, our ANZ, Australia, New Zealand voice business, and there was an interested party, who was able to put a competitive and compelling value in that business. And we decided, you know, what, we’re in the business of unlocking value. And if someone else can value this more than we can value it, then they should be entitled to a transaction.

    Patrick: Well, now you’ve come to this for the people that are listening, why don’t you describe exactly what your ideal target is.

    Sean: Oh, Patrick, that’s a hard question. You know, I think the the ideal target varies by sector. So we have we have operators in all of our different businesses who each have their own m&a problem. And they would each answer that question very differently. And and they really are the folks who answer that question, what makes the most sense within the sector that they operate. Now there are there are also parent level deals. So at the J2 parents, there is another m&a program, which is typically looking at larger deals, they would stand on their own, where there would be an entirely new operating team, those of us deals, we’re really talking north of $500 million of enterprise value.

    So it’s really the once once every few years type of deal, not the bread and butter m&a. But, you know, I think that the question is really more appropriate for our operating executives. You know, I can tell you on the health side, Dan Stone, who’s the president of everyday health is really focused on how to transition into a provider services model where he is acquiring tools and services that help serve the healthcare provider market, digitally enabled internet enabled tools and services, but, but that’s an area of focus for him.

    The answer is going to be very different for Steve Horowitz, who is the president Ziff Davis, is increasingly spending time around game publishing, we have this great business Humble Bundle, which is a distribution channel for PC games. And we’ve found some success in vertically integrating in that world and publishing games that we then distribute. So one of Steve’s focus along with Alan Patmore, who runs Humble Bundle is figuring out what game publishers we can acquire. And what game publishers what indie PC game publishers fit well within the Humble Bundle world. Now flip to the other side, J2 cloud services, the software side of J2, which is run by Nate Simmons. He’s the division president there. He comes from a cybersecurity background. So he is looking to build out the full suite of cybersecurity solutions that can serve the SMB market, which is we talked about at the top of the call is really important to us. Fanatically institutionally, it follows our playbook. That’s the market that we want to serve. So that was a long winded way of saying that they’re much smarter folks than me who can answer that question better than I can answer. Well, you’re spreading

    Patrick: Well you’re spreading over 40 brands already and all these different sectors. You did a great summary there. So that this has been the first time you’ve been asked that question. So well done. With the experience that you and J2 Global have had leading and all of these acquisitions, there are tools and processes and things in the business world that have either come to help or accelerate or enhance the whole m&a process. And one of those being the evolution of rep and warranty insurance where it was once a cumbersome tool for your $500 million deals to where it is now a real slick, efficient product that helps enhance closing. Now lower middle market deals that a year ago wouldn’t have been eligible, but they are now eligible in deals sizes of $15 million. You know, down at that level. Good, bad or indifferent. Share with me the experience that you and j two global have had with rebel warranty on your deals.

    Sean: Yeah, it’s really becoming very common. And we’re seeing an increasing willingness of sellers to pay for these policies, which was historically the realm for us. Why would we add expense to a deal for a policy, we’re finding more and more sellers, particularly financial sellers, private equity sellers, are willing to pay for the cost of the policy for the cleanliness of the deal. And we’ve found that through several reps have this now we’ve done this several times over the last 12 months. It can be pretty, pretty formulaic, and pretty easy, particularly with the underwriters, who we’ve now dealt with on a repeat basis.

    They understand our program, they understand the way that we do diligence, they’re comfortable with our process, which makes these due diligence calls and their own diligence that much easier. And I think it helps also that there’s a very competitive market out there of underwriters who are willing to lean into deals and to, to do, as you said, smaller deals that maybe they wouldn’t have done 18 months ago. So we have, we have found the product to be helpful. You know, I guess we haven’t done enough of these to really get through the full full window, the full back into it. So I think the next call of 24 months, will really tell whether we’re more or less comfortable with this versus a more traditional escrow. But indications so far are that this could become just part and parcel of every deal the same way that escrows were 10 years ago, you just have an escrow, you have a rep and warranty policy, the way deals are done.

    Patrick: Yeah, that’s what we were striving for, we were hoping with the sustainability of rep and warranty is that it’s just check the box on the list of items that need to be done for closing. And I would argue that probably the debate has been settled whether or not to use rep and warranty, it’s now recognized as a must have, unless there’s some element of the deal that’s so problematic, it would be eligible for insurance, but we’re very, very happy with it. Also, just because, in my opinion, m&a is the most exciting business event out there. And to the extent that we can contribute to the success of that life changing event for a lot of people, I mean, who wouldn’t want to do that. So we’re very excited about it.

    We like the competition, because that does two things, as you know, with competition, it improves products or services, and it lowers costs, win win win for everybody. So the next thing is, now as we’re recording this, it won’t be there too later. But we’re at the eve of the election, we’re going through another spike in karate, Coronavirus, tests, and so forth and diagnoses. You’ve been emerging from a quiet period in your m&a and now you’re getting back up to speed, you’re probably at full speed. Look through your window. What kind of trends do you see either an m&a in general, or J2 Global for 2021?

    Sean: I think it’s going to be a very busy year for us. And I think we’re going to see certainly in the fourth quarter, which will probably bleed into the first first quarter, some volatility in the public markets. But that’s not where we spend most of our time on the m&a front in the private markets. I do believe there will be a bit of a pullback in terms of valuation. I think we’re still riding on a high, you know, in part because of what the federal government has done appropriately in propping up the market. So I think we will, we’ll probably see some correction in the private markets that may not make their way into the public markets, which is interesting. I mean, there in my view there is there’s a disconnect between public markets and private markets right now where the same math doesn’t apply from one to the other.

    So I expect we will be very busy, we’re in some categories that are white hot, we are in cybersecurity, which is I think, going to continue to be a very attractive investment category. Now my my hope is that the big players won’t creep down into the lower middle market and create more competition for us but they might on the gaming front again a white hot market where we spend a lot of time with IGN and humble bundle, I think will continue to be busy there I think that sellers will take advantage of the market. And the same thing goes for health. The hcit market is is another really hot market where a lot of companies will will be looking for an exit and be looking for liquidity.

    I expect that to continue into 2021 we are oftentimes opportunistic buyers, and I believe that there will be many others opportunities for us to buy car companies at great prices. In 2021, I think that the wave of available capital is still going to be there. But I do think that companies could run into some challenges if this second wave persists and turns into a third wave. But I do think overall, the disruption that we’re seeing in this pandemic is going to be short term. And by short term, I mean, a couple of years. And we are long term investors, at J2. So we take a much longer outlook on the durability of a business and the sustainability of investments.

    Patrick: Do you see a lot more distressed, m&a acquisitions, or as the pendulum’s swinging back in favor of the buyers then?

    Sean: Not yet, not yet. I have been really blown away at some of the valuations that that we’ve seen since February, in the face of a global pandemic, and unemployment numbers that we’re seeing. The valuations that are sustaining are really remarkable. So we have not seen it swing back yet. And we’re not, you know, we’re not really itching to see the economy crumble, nobody wants that. But I think we are patiently waiting for a buyer friendly market to come back, which I believe that it will, in 2021.

    Patrick: Would there be just a lot more earnouts and provisions like that. So you can kind of as a buyer, in in light of these, you know, frothy valuations maybe go to the target and say, well, we we understand the one Why don’t we see how we get forward once you put your money where your mouth is, and and agree to some some more milestone agreements. Do you see that trend happening more?

    Sean: Absolutely, absolutely. And that’s the way that we’ve been able to bridge the gap in a lot of situations. There There are, we are oftentimes the preferred buyer. So again, through this network of executives, we have in relationships that we have, a lot of times sellers want to sell to us, they really want to sell to us, but they have someone else whispering in their ear about a higher price. They don’t necessarily agree with the plan of that other buyer or trust the other buyer, or whatever the case may be, they really want to sell to us. And the way we’ve been able to bridge and say, Look, we can we can get close to this, this frothy number that someone else is whispering to you about. But as you said, Patrick, you got to put your money where your mouth is, if you’re going to execute on this plan, and you’re going to make this business worth what you’re saying it’s worth, we’ve got to we’ve got to prove it. And where the relationship is strong and where there’s a good level of trust, we’re able to do that. And we’ve got a good track record of paying or else because we set them at levels that we expect will achieve.

    Patrick: Well clearly you’ve got offers that are compelling enough for people to say yes, with 186 acquisitions in 20 years, like I said, it’s still really, really impressive. Tell our audience how they can find you and J2.

    Sean: Yeah, sure, I would encourage you to check out our website, And there is an m&a section of that website and a link that you can click on to get in touch with our m&a team. And we’re always open to conversations with companies in the lower middle market. Happy to to have conversations with founders and sellers and others who you may be interfacing with.

    Patrick: Well Sean Alford thank you very much. Very great story about you and J2. Congratulations for all the success and here’s to you and hopefully you can help keep propping up the economy with these lower middle market companies. So thank you again.

    Sean: I appreciate it. Thanks Patrick

  • Suzanne Yoon | Using Technology to Compound the Effects of Good Capital and Great Operations
    POSTED 12.15.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Suzanne Yoon, Founder and Managing Partner of Kinzie Capital Partners, a private equity firm based in Chicago. Mergers and Acquisitions Magazine named Suzanne 2020’s most influential woman in mid-market M&A, and she’s also been recognized by The Wall Street Journal as a top female dealmaker, shaping private equities both present and future. Just recently, Kinzie Capital Partners was honored by the Private Equity Women Investor Network (PEWIN) as the North American female-founded firm of the year for 2020.

    “Really the start of Kinzie was based on an investment thesis around taking companies that were necessary for the economy, were going through some type of transition, and maybe had some age on them with regards to operations and technology, and being able to handhold, and through governance and technology initiatives, create more efficiencies, and also make sure that the infrastructure is in place to really take a company to the next step and think about growing. That was really our thesis,” says Suzanne.

    We chat about Suzanne’s journey in the financial sector, as well as:

    • Kinzie’s commitment to the lower-middle market
    • The Kinzie Formula: av=f(K+O)T© — wherein accelerated value creation (av) is a function (f) of capital and operational improvement (K+O), compounded by technology (T)
    • Her experience with rep and warranty insurance
    • Her perspective on the future for women in finance
    • 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 Suzanne Yoon, Founder and Managing Partner of Kinzie Capital Partners, a private equity firm based in Chicago.

    Mergers and Acquisitions magazine named Suzanne to the 2020 most influential women in mid-market M&A. She’s been recognized by the Wall Street Journal as a top female dealmaker shaping private equities present and future. And just last week, Suzanne’s firm, Kinzie Capital Partners, was honored by Private Equity Women’s Investor Network, PEWIN, as the North American female-founded firm of the Year for 2020. Suzanne, welcome to the show.

    Suzanne Yoon: Well, thank you very much, Patrick, for having me today. It’s always really fun to be able to tell our story.

    Patrick: I gotta say you’re probably going to be the only guest, and this is a rarity, but probably the only guest that doesn’t want 2020 to end. Congratulations on all the accolades. I think that’s a … all the great work.

    Suzanne: I do want the Coronavirus to end. I will say that. I think it has obviously been a very challenging year for anyone who’s been in investment business, particularly if we have ownership and fiduciary responsibilities to not only our investors but the companies and our employees and their safety. I’m not confident that will all happen in 2020. So in a lot of ways, I am kind of looking forward to 2020 being over so that we can move on.

    Patrick: Suzanne, before we get into Kinzie Capital Partners, let’s set the table. And why don’t you tell us about yourself and how you got to this point in your career?

    Suzanne: So I am the daughter of Korean immigrants, and they really came here with nothing. I was very fortunate to have parents who both loved what they did and were very entrepreneurial. And were extremely focused on our education. And I was reminded every day that we had to work really hard. When I was coming out of school, I really was interested in the financial sector. And probably initially because I had been surrounded by my family, my parents were both in the medical field, but I had a lot of friends whose parents were in business, investment banking, CEOs of companies, and I was really interested in what they did. So I graduated from school and I went to go, I went to work for a large bank, ABN AMRO and then La Salle Bank, which is headquartered here in Chicago, and with a big global presence, went through their analyst training program. Worked on senior and debt financings for middle market companies initially, and then large global companies as well.

    Ended up in a group called Special Assets through my rotational program at the bank. Special Assets at the time was also a place where they, when banks were able to do this in the mid-90s, where they held off-balance sheet private equity positions, so debt that had been converted to equity. And now the bank was managing that. So that was my first taste of, really, what it meant to be the fiduciary responsibility, of being an owner of a security or an equity security.

    And so from there, I worked on a lot of different types of companies, very large restructurings and in bankruptcies, and really what we saw there was what happens when things go wrong. And it was a great, great learning experience for me, particularly as I was very young and had an opportunity to work directly with senior credit officers of the bank at the time. Having long term capital and having control over where your capital is coming from and not relying on the public markets was really important to me.

    And so that was my entree into private equity, where we had more long term commitments from our investors. And we can have the time and the flexibility needed to work our way through issues if we ever came to them. So, that’s really what started my private equity, my pure focus, on private equity. And then from there, I was with an East Coast-based private equity firm. I worked with incredibly talented and smart people. My former colleagues and partners, I have the utmost respect for them. But I am from Chicago.

    And during my time at the firm, I moved back to Chicago as the only managing director outside of the East Coast. And I was traveling quite a bit. And so that was a factor for me, really thinking about where I wanted my roots to be. And being a mother, I’m also a mother of three boys, I felt that I had one foot in Chicago, one foot in the East Coast, and I couldn’t really be in both places at once all the time. So that was a factor in terms of thinking about where I wanted to be. So I knew I wanted to be back in Chicago eventually, and with a team in Chicago.

    This is where you make your own luck in some ways. On the investment side, I was seeing a lot of opportunities in the lower middle market. So some 50 million of EBITDA out of Chicago and the Midwest and really throughout the country that were really interesting opportunities but required a lot of operational improvements or help, because they were either going through some type of generational change or transition, and frankly, they were just too small for my previous organization.

    And so I had an opportunity to partner with my current partner today who is the founder and owner of a 150-person-plus technology and management consulting firm and really leverage them. It’s called Clarity Partners, but leverage Clarity Partners and their resources to be able to provide operational expertise to these lower middle market companies that were going through transition. So that was really the start of Kinzie.

    It was based on an investment thesis around taking companies that were necessary for the economy, maybe had some aging on them with regards to operations and technology, and going through some type of transition. Usually, we are the first-time institutional investor into a company, and through governance and technology initiatives, create more efficiencies, and then also make sure that the infrastructure is in place to really take the company to the next step and think about growing, right? Like, really growing.

    And so that was really our thesis. And that’s how Kinzie was started. My goals of being in Chicago, being part of the community where my family is, and then also establishing a firm that was thinking about the future, right? And how to actually maximize and accelerate value through operational improvements, specifically around technology and being able to bring technological expertise that would normally be reserved for much larger companies to lower middle market companies is very important to me. So that was how Kinzie got started. And I think we’ve been really focused on that since we started.

    Patrick: Well, what’s really striking about your past, and what led you to here, is that you came from a culture of coming into troubled circumstances and you avoided human nature, probably because you were coming in from the outside, but you’re coming in where there are problems. And instead of pointing fingers and bemoaning what led you to the problems, you’re coming and saying, “Right, okay, how are we going to get out of this? What steps are we going to take to do to fix it?”

    And that is consistent throughout your entire career. So I could see that, where maybe you don’t have problems, you’re just not at that next level. And so that’s what you come in with. Kinzie Capital Partners. Now, as we think about it, the one thing that is different between private equity and law firms and insurance firms out there is, they’re boring because they pretty much just name their firms after themselves, okay?

    They don’t even think about it. And you can always get a little insight into a firm if you found out how they come up with the name. So tell me about the origin in the name and then tell me about your commitment to the lower middle market you just mentioned because I think that’s a really underserved, vast opportunity out there.

    Kinzie Capital Partners’ Background

    Suzanne: So speaking of naming the company, I thought Yoon Capital Partners would just not resonate well with, frankly, a market that is dominated by white men. And even the CEOs, the sellers, everyone. I’m teasing about that. But … people ask me that all the time.

    Like, Oh, you didn’t name it after yourselves. And we joke that, my partner, we’re both immigrant kids and we get teased a lot about our last names, right? Even growing up. So why would we name our firm? We don’t want people to tease us, because we were always a little bit on the outside. And so with that said, what I really wanted was to build a firm, and I still want this, that is going to outlast me. And so I never thought naming a firm after me because then it’s all about me, right?

    Or our names were not the right thing, particularly because private equity is really a team effort. And I use a lot of sports analogies. So even within the team, I’m the coach. I think about myself as more of the coach and the strategist. But everyone has a really important role, down to our assistants, and I mean, everybody here. Because we have to manage people.

    And so Kinzie is a street in Chicago, and the street was named after, I’m sorry, it’s actually a bridge in Chicago. And it’s one of the most famous bridges in Chicago.

    So it was the first bridge that was ever built over the Chicago River, which is a really a main thoroughfare in Chicago. And it’s an iconic view, it’s one of my favorite views of the city. But if you stand on the Kinzie bridge, the original bridge was never torn down because it’s now considered historic. So you see the original bridge that was built and this ever-changing landscape of buildings.

    And it’s even very different. The view from the bridge today, looking into downtown Chicago, is completely different than it was three years ago. And so to me, that was very representative. And even 10 years ago, 15 years ago, is just very different if you saw the evolution of what the skyline looks like from the bridge. And to me, that was just the evolution of also thinking about keeping in mind the old and preserving and respecting, right?

    I think that is what is beautiful about tradition, keeping in mind that we are living in an evolving world. And having to keep that in mind. So it’s very personal to me. It’s Chicago, right? Everybody in Chicago knows, they always ask like, Oh, are you on Kinzie street? I’m like, actually, I think I was when I first started thinking about this name. But everyone outside of Chicago is like, what is Kinzie? Is it a person’s name? It’s a bridge. So that’s the story. It’s a bridge in Chicago.

    Patrick: So this is a homage to your Chicago roots?

    Suzanne: It is, It is an homage to it.

    Patrick: While still looking forward. So you’re not stuck in the past. You’re looking forward for the evolution. That’s very, very clever. Well done. With the lower middle market, and you’ve mentioned this earlier, you like to roll up your sleeves and get your hands on that. Tell me a little bit about that, where you see your role with the lower middle market. Because, as I mentioned before, I think this is a huge underserved market and is ideal because, unfortunately, a lot of these organizations, they don’t know where to turn for help.

    And if they go to the big institutions, they’re going to get underserved and they’re going to get overcharged and they’re going to get overlooked. And here you guys are, firms like yours that are at the ready with all the resources of the larger firms, scaled-down, that can deliver these great solutions. So tell me why you picked that as opposed to larger opportunities.

    Suzanne: Patrick, I mean, do I have to repeat what you just said? Because that’s exactly why I wanted to and why I like the lower middle market. I think there’s just a lot of opportunity to take all of the skills that I’ve learned over my 20-plus years of investing and working with different types of companies, much larger companies and the ones that we’re investing in, and then also having the resources to be able to bring to those companies and make very significant moves that these companies would historically not have been able to make because they don’t know how to get to the resources that they need.

    And so, I would say that’s probably the biggest factor for me is it’s very gratifying to work with a management team, or a prior seller, right, that is partnered with us and bring our expertise to the table and really partner with them to think about the future and execute on a vision, a joint vision.

    And a lot of times, the people that we’re talking to or that we’re meeting within the companies that we get excited about, there is a vision already in place, they just don’t know how to execute it. So the idea is there. And so that’s really how I see our job, to make sure that, if we have a collective vision, that we make sure that we execute on that vision.

    Patrick: Let’s get into what’s really unique about you and Kinzie, and that’s the Kinzie Formula. And I’m going to give my observation on this, and I’m not saying this to flatter you or anything, it’s just what struck me about it is the term is a formula, okay? A lot of organizations, they’ll have a process or they’ll have a system or a model and those may or may not work. I love the subconscious feel of a formula.

    A formula is literal, it’s reliable, it’s repeatable. And it’s just a great sense of comfort that you’re coming in with a formula. And we’ll have it in our show notes and it’s on your website, but explain the formula and how it works, where you guys came up with it and how that’s pretty much your core right now.

    The Kinzie Formula

    Suzanne: Thank you. We take a lot of pride in the formula because we spent time really thinking about how we could articulate best, in a formula, what our investment philosophy is and why we think that we are going to be the best fit for the companies that we choose, right? And vice versa. And we really thought hard. And our formula is just this, for the listeners out there who don’t know our formula, it’s accelerated value equals a function, or is a function of, capital plus operations, compounded by technology.

    So what does that mean, right? It just means our goal as investors is outsize returns, alpha, and how you get to outsize returns in alpha is we have to accelerate the valuation of that company. And the way to do it is to make sure you have the right capital structure in place. And add in operational excellence. And we think of the compounding that you have with those two things in place, and you add technology to compound the effects of good capital and great operations. And that’s it.

    Patrick: Yeah, very contrary to the cynical view of private equity, which then I have a formula, it’s just minus, okay? We’re gonna cut, cut, cut, cut, cut until we’re adding value by cutting.

    Suzanne: You know, sometimes that is part of the operational excellence portion, right? Is that you do have to upgrade talent. Sometimes you have to, and especially in long-time family-owned companies, there could be, you know, dead weight, and it’s not good for the culture. It’s not good for a culture to have people who are underperforming and everyone knows that they’re underperforming. So I agree that private equity has this reputation for cutting but I think a lot of times there’s a good reason why that cutting is happening. It’s not just because of costs, it’s because there’s fat.

    And you need to replace certain areas with other people. And every company is as good as their people. So it’s unfortunate that private equity has that reputation because we do it a lot. And I say we because I include myself. We certainly have done that in acquisitions, but we also add people. If you want to grow, you also have to have the right people and sometimes a lot more people. So I think if you look at private equity as a whole, the net add of jobs is probably much higher than the cutting that we all hear about.

    Patrick: Well you actually save companies, because if they don’t change, and if they don’t adapt, their lifetime is finite, and they could be gone, and then everybody’s gone.

    Suzanne: Exactly.

    Patrick: And then as you talk with, in the Midwest and where you’re probably investing, these are companies that could be the lifeline for the community. And so if the company goes, community goes with it. So I mean, there are some very, very important roles there. Suzanne, give us a quick case study, give me an example of where you come in on opportunity and just where the formula came in and magic happened.

    Suzanne: Oh, I actually have one more recently. So, we have a portfolio company called Colony Display. 37-year old-company, the two sellers were actually the founders. One of the founder’s sons had taken over as, essentially the chief operating officer, and then the CEO and he grew up in the business.

    The business had been run a certain way, the knowledge is incredible. And this was a company where the customers loved them because they are so service-oriented. So when we look at a company, their product was excellent and had a lot of customer concentration. But there were no strong financial controls at the company. So we had to make some changes within the financial team and improve financial controls.

    Again, family – it was started 37 years ago, so the infrastructure wasn’t at the point, and I would say, management and executive infrastructure wasn’t at the place that it needed to be in order for the company to continue to grow. So we added. We hired a new CFO, new controller, a head of HR, which never existed at the company prior, despite the fact that they employ anywhere between 250 to 1000 people a year across three different manufacturing plants, manufacturing and assembly plants.

    We made some pretty significant investments into the systems. Communications, new website. Partly through increased sales, the production has improved significantly through some operational improvements we’ve done. But also with the new people hiring, there was also another head of engineering that we brought in.

    And the company will double its EBITDA in a very short period of time through pricing, discipline, and production discipline. And now, I feel the company’s in really good shape to continue to grow on the top line and they could support that with the right infrastructure, right? And human capital and an actual infrastructure. So a lot of work within the first six months and continues to be a lot of work. We haven’t quite owned it for a year yet and we’re north of double EBITDA already. And so that’s great. It’s really fun when all the work you do actually shows up on the bottom line.

    Patrick: So for anybody that’s considering a transition, they really need to talk to you. I know you’re not going to guarantee to double EBITDA in six months, but that is very, very impressive. Well, well, done.

    Suzanne: Thank you.

    Patrick: So, tell me again, one of the elements that’s in mergers and acquisitions that’s come along and is now available for the lower middle market companies is rep and warranty insurance. Used to be a product available for $100-million-plus transactions, it now can come all the way down in terms of lower pricing and simpler underwriting and eligibility rules to where a 10 or $15 million add on can be insured with rep or warranty. I’m just curious, good, bad or indifferent, tell me about your experience with rep and warranty on any of your deals.

    Suzanne’s Experience with Rep and Warranty Insurance

    Suzanne: Well, it certainly cuts down on the time that we are negotiating, right? Reps and warranties and indemnifications and other. And I would say the likelihood of a deal blowing up over those issues is pretty high, generally. And if you spent six months to a year working on a transaction and it comes down to reps and warranty, I think the beauty of reps and warranty insurance is that it puts, in some ways, it’s not that there’s less diligence done around those issues or there’s less concern, right?

    The concern is always there. What it does do is it puts in some time, in a way, a middleman in between you, us as the buyer, and the sellers so that everyone doesn’t feel like, both parties don’t feel like they’re trying to screw each other. Because there’s a high degree of skepticism on both sides around those negotiations.

    Patrick: Yeah, that’s natural, particularly because the timing. The sellers, they’re never prepared for this but they’ve just gone through at best an “intrusive” due diligence process that nobody’s ever prepared for. And then they thought through that, they said, “Well, we’ve told you everything.”

    Suzanne: And then imagine that it’s exponentially worse for a first-time seller. When you say they’re not prepared, that is really an investment banker’s job, in my view, with a first-time seller is to make sure they’re prepared as possible for the incredibly intrusive due diligence process that is going to happen and continue to happen. Even with that, they’re never prepared. Especially with a first-time seller. And so, imagine getting to the reps and warranty insurance, or reps and warranties, not the insurance, but even before the insurance, the negotiations around indemnities and reps of warranty.

    The beauty of that, having reps and warranty insurance, one, I think makes people less skeptical of each other. Do you have a third party really taking a, that has seen everything and really has to underwrite everything? The second is it certainly gives everybody more comfort that if anything goes wrong, we have this, the insurance in place. But I also think the reps and warranty insurance is generally a good process for private equity firms because it does require a lot of third party due diligence, additional third-party due diligence, which we probably should be doing anyway.

    Patrick: Suzanne, tell me, what’s the profile of your ideal target now? What are you looking for?

    Kinzie Capital Partners’ Ideal Target

    Suzanne: So, our profile is 5 to 15 million of EBITDA in the consumer manufacturing or business services spaces. We have a lot of focus on manufactured products. So we do consumer, but not branded consumer. Really, it’s more consumer B2B products. And we like companies that are going through some type of, I think we’re the best fit for companies that are going through some type of transition.

    So either a generational shift, or, where a company’s stifled to grow and they have objectives to grow, but really don’t know how to do it. And then some of the tenants that we really look for are a strong management team or leader within the management team that we can partner with. And really I would say, and we do our due diligence with culture quite a bit, so that they’re the right cultural fit with our team.

    Patrick: Based on your recent successes this year, with the recognition of PEWIN and your status as one of the top women in private equity for the middle market. I did have one other question for you, as a father of two young teenage daughters, I am now more and more aware of opportunities for women in and around not just private equity, but mergers and acquisitions in general.

    And I assess now, again, as a father of two daughters, women are seriously underrepresented in M&A. And there are leaders like you that are coming through that are, I wouldn’t say paving the way, but you’re just showing excellence in this area. And I think nothing is more appealing than excellence and something that people can appreciate. And so, I’d like to get your perspective of the trends that you see for the future for women in, either in finance in general or M&A or private equity in particular.

    Suzanne: So I’m very bullish about women and more women having more leadership roles because I think part of what we really need to do is make sure that women and people of color are represented in leadership roles so that the next generation see that and know that it’s possible for them. And that we talk about it, because there are differences, right? I mean, I’m a mother of three and that has challenges too, being a mother of three. And just like it is to be a father of three. And I know you have daughters, I have sons, so I’m learning a lot about them.

    I’ve learned a lot about men through having three boys. And I appreciate that very much. And so I’m really bullish. I think girls today are more confident. They know they have a voice and a lot of it has to do with their fathers and men who make sure that they know that, right? That they want to be more independent. And I’m very fortunate. I had a dad who never made me feel like I couldn’t do anything that boys could do. And so it’s important not just for women to support each other, but men to support women. And I certainly will say, my whole career, as you mentioned, there were not very many women.

    I did not have a lot of good experiences with other women cause I didn’t have them. They were mostly with men. And I’m really fortunate that I had mentors, advisors, bosses, both men and women who were incredible champions for me. And so I think we have to continue to do that, right? For underrepresented people in general, but especially in industries where it’s very clear they’re underrepresented.

    Patrick: Well, I also believe that women just, people coming from different perspectives, but particularly women, there’s a different skill set that you bring to the table. And that diversity and different diversity and approach and everything avoids groupthink and gets other perspectives as you look at opportunities. And there are opportunities that could have been missed had it not been for different viewpoints.

    Why Diversity in the Workplace is More Than Just Filling Quotas

    Suzanne: I think diversity is, we talked a little bit earlier about trends, right? In the market. And diversity is a trend, but it’s not a trend to be trendy. It’s a trend because the statistics, right? That show that if you have a diverse board, companies outperform when they have diversity in their leadership ranks and when they have diversity on a board. So that’s both gender and ethnic and experience. You can’t have everybody thinking the same way. So I actually attribute some, a lot, of our success at Kinzie to that and not because I’m a woman and I have an ethnic background, but more when you look at our entire team and you see the different experiences we’ve had.

    So me having grown up within the financial sector professionally, my partner who grew up in technology consulting and fixing companies, my colleague who came from a corporate finance background and really worked inside a large company as an operator. And then in just the various backgrounds we have, we all bring very different perspectives that help us think through issues at any of our portfolio companies. And I’ve never operated a company before, except for Kinzie. And I was always a deal person.

    And so having those different perspectives, we have like accounting, we have to deal with honors or we have an accounting issue or we have to figure out how to make a project management software work properly so that it’s communicating across this lower middle market company because the larger the companies are, a lot of those things are fixed and they’re set because there’s a lot of professionalism. So we’re professionalizing an organization. And it’s very difficult to do that if you don’t have different perspectives and experiences. So we really take diversity, we think it’s very important. We know that it’s important for results.

    Patrick: Well, I think the other element of diversity is you need to be flexible, you need to be able to be nimble and not reactive, but proactive, in every phase of operating a business. If you’re set in your ways and you’re monolithic, you’re doomed to failure. Well, diversity is just one of those other elements there that’s being brought to the table. And it’s also, I mean, the thing about mergers and acquisitions to me is it is not one company buying another company. It is one group of people choosing to partner and join another group of people. And the expectation is one plus one equals six.

    So, or whatever the Kinzie Formula is for that, but one plus one Kinzie formula is going to go, a multiple. That’s what it’s about. And so this is just another part of the human element that comes in. So Suzanne, been very, very informative. Thank you so much for joining us today and sharing your thoughts and congratulations with you and Kinzie and hopefully, the successes of 2020 come follow you into 2021 and COVID stays behind. How can our audience members reach you? How can we find you?

    Suzanne: So we’re on LinkedIn. And we actually are pretty active, or we try to stay as active as possible on LinkedIn. And also go to our website, And you can contact us through there. And then our whole team is accessible again on LinkedIn. We have a Facebook account and a Twitter account. We try to do it, we try to stay relevant. So we’d love to hear from you.

    Patrick: Suzanne, it’s absolute pleasure. You have a good afternoon. Thanks again.

    Suzanne: Yeah, thank you very much, Patrick. Appreciate everything.


  • Emerging Trends in R&W Claims 
    POSTED 12.8.20 Insurance

    As the major player in the industry, AIG has been the long-standing, nearly sole source of claims information for the Representations and Warranty (R&W) insurance market. In 2020, Liberty Mutual, which has been actively writing M&A-oriented policies for about 10 years, issued its first such report based on their own experiences in this space.

    An important factor to note is that overall, the number of claim notifications is going up, with 19% of policies bound in 2017 with notifications, up from the 14% from 2012 to 2015, and 15% in 2016. Liberty Mutual expects to hit or exceed 19% for policies written in 2018 and 2019; as notifications are still coming in steadily for those years.

    Why the jump? Simple. As R&W insurance, which transfers indemnity risk to a third party (the insurer), has been…

    • Recognized as advantageous for both Buyers and Sellers
    • Opened up to smaller deal sizes, especially to the lower middle market transactions
    • Reduced in price

    … more policies than ever are being written. It’s only natural that the more policies there are out there, the more claims there will be. It does not point to a problem with this specialized type of insurance in the M&A world at all.

    I’m not worried that this rising trend in notifications and claims will impact the viability of R&W insurance. Neither will this cause coverage to shrink or prices to rise. This trend is not foreshadowing a rate increase or lack of capacity.

    Quite the contrary, because there are good reasons for this increase in notifications and claims: not only are more R&W policies being placed than at any point in history, including many deals in the sub-$250M transaction value, but policyholders are more aware that they can use their R&W policy for reporting.

    The increased reporting of breaches in recent years will not trigger higher prices because properly underwritten deals have not suddenly become riskier to insure despite the increase in notification frequency. As the report points out, no more than a quarter of notifications actually result in a request for payment from the policyholder. And only a fraction of reported breaches actually exceeds the retention and lead to payment by the Insurer.

    It’s also worth noting that tax-related notifications (in the form of audits) are among the most common breaches reported, usually within three years. Tax authorities aim or are required to commence an audit within one to two years of receiving returns due to the statute of limitations.

    There may be nothing wrong, but because the IRS is launching an audit, policyholders will report it to the insurance company to put them on notice so they can bring their resources to bear to defend them if necessary. However, these audits usually do not result in a claim. Most agreements require a six-year survival period for tax Reps, which may not be necessary.

    Overall, R&W insurance has established itself as credible, reliable, and sustainable. This is a respected, solid product. It’s on everybody’s checklist right now.

    The simple fact that Liberty Mutual has issued this report is reassuring. AIG was the only insurance company to put out any information about claims before now. This new report shows this is a maturing market.

    More competition brings better products and services and lower prices. It’s innovation in action.

    It’s also important to note that insurers like Liberty Mutual and AIG do pay these claims. As Gareth Rees, Liberty GTS Chief Underwriting Officer, put it:

    “In the past, R&W insurance was essentially something that helped solve a deal problem and get a deal over the line, but then often forgotten about post- closing. Now it is also seen as an asset from which an insured can recover value in the future, and much greater thought is given from the outset as to whether a policy claim exists.”

    The Liberty Mutual report, 2020 Claims Study: Exclusive Insight Driven by 10 Years of Data, is worth a close look, especially the section on emerging trends in the claims R&W insurance policyholders make. Here are the issues they expect to be leading claims generators in the next 12 months.

    Stock and Inventory Issues

    There are a few elements at play in these types of claims, which, as you might expect, are most common in retail and manufacturing businesses and mostly involve slow moving, obsolete, or damaged stock. The COVID-19 pandemic has only intensified this trend.

    There is more risk if the business is seasonal, or if the products in question are frequently updated or subject to price volatility or physical damage. There is even more risk, says the report, in so-called locked-box deals with no stock-take at, or following, closing.

    Why are these claims relatively common?

    Gareth Rees says: “The reality is that stock can be a difficult area to diligence, particularly on a deal that is moving very quickly. A lockdown situation obviously makes it difficult to carry out any physical checks.”

    “Also, there will be many companies that have built up large quantities of stock as a result of the lockdowns, but which may not have updated their policies around obsolete and slow-moving stock to reflect this. This is an issue of heightened underwriting focus for our team at the moment.”

    Accounts Receivables

    As with the previous trend, we are likely to see a pandemic-related impact here as well, which is why underwriters are taking a closer look at “the size of the accounts receivable figure in the accounts relative to the size of the balance sheet and asking more questions around this issue.”

    Common allegations with regards to accounts receivable claims include the setting of inadequate bad debt reserves and errors in quantifying the acquisition’s total accounts receivables. In some cases, it’s unclear in these times whether a customer on the books is “real” or will disappear or even shut down due to COVID.

    Software Licensing

    Essentially, this is when you have onsite audits from software providers to check how many people at a company are using software that has been licensed. According to Liberty Mutual’s report, these types of audits are on the rise.

    An acquired company could state that they have 100 licenses, but it turns out that 300 employees are actually using the software. That’s a big no-no. Punishments range from penalties, to a requirement by the vendor that the company buy new software at list price and pay support costs.

    This issue could be very impactful for SaaS companies and other tech businesses.

    Insurers are taking a closer look at software licensing in the underwriting phase too, says the report, which states: “[We] expect it will also become an area of focus for buyers and their advisors during the due diligence process as target businesses become more digitally enabled and more reliant on licensed software.”

    Revenue Recognition

    When you sell a company, you can’t have zero cash in the bank on closing day. The incoming Buyer needs money for payroll, leases, etc. for, say, 90 days post-closing. The Buyer will make an amount, say it’s $9M, part of the deal. But they will ask the Seller what amount is needed for operating expenses for that 90 days.

    This can be trickier than you might think when you consider the different ways revenue is recognized and then booked for accounting purposes. When there is a disconnect, a claim results.

    According to the report, this is an issue particularly with project-based work. In these cases, revenue is recognized over time and compared to incurred costs, instead of in line with actual income received. The fact that the projects involved are long-term and have multiple elements makes this even more complicated. This means tougher due diligence in this area.

    States the report: “We are increasingly looking for signs that management have been challenged appropriately in key areas of judgement associated with the entity’s revenue recognition practices and sufficient evidence has been obtained to support those judgements.”

    This has become such as issue that SRS Acquiom is adding side-escrows for revenue recognized and net operating revenue in the deals they oversee.

    Minimum Wage Legislation

    Minimum wage provisions are excluded by most R&W policies. So, although this can be a serious issue to those companies impacted by employees’ claims for backpay, increased tax liabilities, and fines from governmental authorities, it’s not something that insurers have to worry about in most cases.

    Reclassification of Contractors as Employees

    State governments, facing reduced tax receipts and pressure from advocacy groups, are increasingly seeking to classify independent contractors as employees. California is the perfect example.

    This could, says the report, “result in a large number of notifications with the potential for significant consequences for a business, both in terms of increased tax liabilities and payroll costs.”

    Health and Safety

    With increased regulation, especially in the real estate sector, and more stringent compliance measures, we are seeing more claims related to breaches of health and safety laws. The result, as the report states, are significant business disruption and remedial costs to get into compliance.

    As the report states: “We anticipate that this will lead to buyers and their advisors focusing more on this area as part of their due diligence, with technical reports addressing this specific issue becoming more common.”

    Climate Change

    The Liberty Mutual report does see climate change as an area of concern and increasing risk, but it’s mostly an issue for companies operating in the European Union.

    The Key Takeaway

    As I stated earlier, more R&W insurance policies are being written, so more notifications are being made. More notifications that don’t result in claims being paid out means that R&W isn’t any riskier than before.

    This trend of rising notifications actually points to sustainability and maturity in the R&W insurance market. As a result, we should have stable pricing for the foreseeable future.

    One thing to keep an eye on are new trends related to COVID-19, with Underwriters scrutinizing new potential areas of exposure, such as:

    1. Labor-related third-party claims from contracts terminated on the basis of force majeure.
    2. Claims related to key customer insolvency where the warrantors knew that the customer was facing financial difficulty.
    3. Claims related to incorrect use of government-enacted job retention plans.

    For guidance on the use of Representations and Warranty insurance in the time of COVID-19 and beyond, contact me, Patrick Stroth, at for all the details.

  • Peter Lyall | The Role of Marketing Communications Within M&A
    POSTED 12.1.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we’re joined by special guest, Peter Lyall, Group Director of Strategy at Fifth Ring, a marketing-communications company with locations in the Americas, Europe, and Asia. They promote the ultra-simple message of helping B2B companies sell more stuff and build better brands. Peter’s goal during this episode is to shed some light on the role of MarComm during M&A transactions and to explain why this is often a blind spot during the acquisition process.

    “There are quite a few skeptics about the role of MarComm within an M&A transaction, even to the point of saying that the brand isn’t important,” says Peter. “So, I did a little experiment: In a room of 50-60 people, I asked everybody to put up their hands if they had chosen their wristwatch because of the brand. They all had. Then I asked them if they’d chosen their car because of the brand. They all had. These people were very brand savvy, but couldn’t quite transition this thought, this appeal, this attraction of a brand, from the consumer environment to the B2B environment, which is where they’re living on a day to day basis.”

    We chat in detail about:

    • Legacy issues and the challenge they pose to marcomms post-acquisition
    • Implementing cultural values and brand messaging
    • Utilizing employees as brand ambassadors in messaging
    • Why cultural integration is a blind spot in M&A
    • Structuring multi-brand portfolios
    • The power of 3— Where 3 words can change everything
    • The future of energy
    • New tools to measure the intangible
    • 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 Lyall, Group Director of Strategy of Fifth Ring. Fifth Ring is a Marketing Communications Company, which today we call the lingo is MarComm. So Fifth Ring is a MarComm company with locations in the Americas, Europe, and Asia. They’re ultra simple messages. We help B2B companies sell more stuff and build better brands. And at essence, I can’t think of a clearer message to be out there for B2B companies. I’m pleased to have Peter join me today to discuss what I believe is a true blind spot in M&A, which is marketing, brands, and cultural integration challenges pre and post-acquisition. Peter, welcome to the program. Thanks for joining me today.

    Peter Lyall: Patrick, thank you very much for your kind invitation. It’s a pleasure to join you.

    Patrick: Oh, Peter, before we get into Fifth Ring and talking about this blind spot for M&A integration, why don’t we set the table for our audience, tell us about you. What got you to this point in your career?

    Peter: Well, it’s quite a long story. I have been in marketing services since about 1980. When I graduated from university, I started life wanting to be a journalist, but couldn’t find a job. So as a writer worked my way through advertising agencies in London, and eventually, with a few people, we set up our own agency. And actually, an early theme that came through for me was at a certain level, agencies are not considered on a par with professional services, companies. They’re nice people to be around. But when you’ve got really big important decisions to make that they can wait. So slightly tempered by that I went off to Henley Business School to do an MBA, which I did in the 90s. And then I came back to Aberdeen, where I’m from Aberdeen and northeast of Scotland, and eventually joined an agency here, which, as you say, has representation around the world. And that was really one of the attractions for me, was the international. In fact, when I worked in London, I kind of walked to clients. But now, well, not now, of course, because of COVID. But traditionally, I would be flying all over the place to service client needs. Armed with an MBA and an advertising agency background, I did a stint in management consultancy as well, in a firm just outside Oxford. And I’ve been at Fifth Ring for about 15 years, shareholder and director. And I think particularly interesting from the perspective of this audience. Our business was acquired in 2016 by a private family business media company in the northeast of Scotland. So I know what it’s like to be as an observer and a participant. And I think that gives an extra insight into the topic.

    Patrick: Well, that’s that’s something Peter, the helpful thing is, is you’ve been on both sides of the negotiating table. So I know you’ve walked in everyone’s shoes. So it’s great to have your perspective on this. Fifth Ring, tell me about that. What is it? What does it do? And I think the best way to kind of describe your firm is, and I asked this to a lot of my guests. How did you come up with the name? I mean, unlike other firms and insurance firms, most of them, just named them as the founder’s last names, which is really boring. There’s no creativity there. So go ahead and give us the story about Fifth Ring.

    Peter: Well, we certainly ought to have some creativity about that since that’s what we sell. I wasn’t there at the time. The business was set up in 1991. I joined in 2005. But the two individuals one of whom is CEO today, Ian Ord, and the previous owner, Cliff Kohler there. They came up with the name or classic agency founded in a kitchen table scenario. Ian was very experienced in the highly competitive individual and martial arts, martial arts, sorry. And in that sphere, there is a book by a gentleman called Miyamoto Musashi. It’s called the book of five rings. It is worth a read in its own right. Yes, it’s about martial arts, but there are lessons in there for general living discipline as part of that, but also Indeed, for management as well. And there are five books, ground wind, fire and water and you might say that they are acquainted maybe to the left brain side of one psyche, which is that the organized things that you have to do, you have to have a sharp knife, you have to know your competition, you have to be prepared, you have to be properly fed and watered. These are the things that any martial arts exponent, any businessman, any human being has mastered the basics in place.

    But then there’s the fifth book, which is called the void. And this is about intuition and flair and imagination and perhaps going against the trend and, and perhaps putting that to one side, all the sensible things to do, and taking a flyer. So he and Cliff decided, it’s the fifth book that matters. It’s the void, hence Fifth Ring. And so that gives you an insight about where the name came from, in terms of what we do. And we’ll come back to your comment on building brands and selling stuff later. But so we were Scotland’s first integrated marketing communications agency, which means that instead of just being a creative agency, or a media buying agency, or strategy, or planning or digital, we actually have all the services in house, which was a first, so I run the consultancy bit, but the front end piece in terms of establishing at a high level what businesses want to do.

    And then in house, we have designers, we have writers, we have digital experts, we have PR people who can take an idea and then distribute it through all the various channels. And that service, of having the integrated offering doesn’t appeal to everybody, we do sell bits of it, for those that just want bits of it. But not only can we deliver it locally, but we can deliver it regionally and internationally. And that’s what gives us our edge.

    And the second thing and the significant thing is, knowing what you do is doing it selectively, and we set out our stole very early on to focus on the energy sector, Aberdeen being an oil and gas center, but also our bases in Houston in Texas, Singapore, in Southeast Asia, we were in Dubai, we moved out of Dubai, we just find it too difficult a place to do business. But we have a discreet offering for a select marketplace. A marketplace, it has to be said that goes through peaks and troughs. And we’ve followed that ourselves as well. But when it’s up, it’s up when it’s done, then a diversified portfolio is essential. And so we do move outside the energy space at times as well.

    Patrick: Let’s talk about marketing communications and consultancy services. Because this is where we can touch on the blind spot that I saw, because of direct your services toward mergers and acquisitions, that activity where you’re engaged by companies that are looking to buy and what you provide, because there are all types of service providers out there providing tangible, measurable items, valuation, accounting services, compliance services, you know, legal services, all of those things out there. And on paper, all of those services added up could make a deal look really good on paper. And yet the best deal on paper with hundreds of millions of dollars at stake doesn’t work. And this is you know where you come in. So let’s talk about that those types of services that you do.

    Peter: Yes, it is fascinating. And, and to some extent, it’s by happenstance, but we are very experienced in the M&A field, primarily because of the energy industry, and by that, I’m fundamentally talking about upstream oil and gas is the sector that spends a lot of time buying and selling companies. And we have benefited from that.

    Because of course, as they buy and sell companies, so they buy and sell brands. And what is fascinating about this, and I have yet to get a great explanation from the financiers is they will pay a premium price for a brand. And yet when you quiz them and say so how are we going to manage that brand? Or how are we going to look after? How are we going to care for it? How are we going to nurture it? How are we going to look after the people that created it, it’s almost dismissed as “Hang on a sec, don’t worry about that we’ve got the numbers to worry about.” So there is this fascinating dichotomy between paying a premium for something I’ll give you a little insight into this we rebranded an organization, a global organization based out of Southeast Asia many years ago. And there are quite a few skeptics in the audience about the whole role of marketing communications within this M&A this within this transaction. And they even to the point of saying the brand isn’t important. Let’s not worry about that right now. And I did a little experiment I asked everybody to put up their hands if they had chosen that wristwatch because of the brand, no, about 50 or 60 people in the room, and they all had, and I asked them if they chose their car because of the brand. And they all had. And this is a mix of financiers and engineers. And then I asked them about their clothing, what kind of suits were being worn. And they were all branded suits.

    And so actually, as human beings, these people were very seriously brand savvy, they wouldn’t be seen dead in a Skoda when they could actually have an Audi. They had to have a Gucci suit, most of them are wearing Omega watches. But they couldn’t quite transition this thought, this appeal, this attraction of a brand, from the consumer environment to the B2B environment, which is where they earn their living on a day to day basis.

    And once we were able to convince them that that’s where it actually matters as much, then we got some real advocates and supporters to the process. So there is the environment in which we operate, the services that we provide there for our and usually, it’s after the event, and we’ll come on to that, why it should be before the event later. But after the event, people say, “Well, we’ve now got an extra half a dozen brands in our portfolio, how should we manage them? Do some actually compete with brands we’ve already got? Don’t quite know how that happened. What should we do about that?” We have several stories to tell the old story, the new story, a story for our staff, our story for our customers, our story for our suppliers, how should we evolve that story? How should we tell it? So this idea of coming to the event afterward, is always fascinating for us? Because we will then start asking questions such as so when you started thinking about this deal? What sort of story did you have in mind? And quite often it is? Well, we weren’t really thinking about that. We were just thinking about doing the deal.

    Patrick: Buying spasm?

    Peter: Yeah. And it’s like, well, Wasn’t there a strategy which said, We need market expansion, or we need to kill a competitor? Or we need market penetration? Or we need new technology? Or we need that hotspot of technological or innovation? Wasn’t there something? Yeah, yeah, yeah, Yes, there was. Okay, can you articulate it simply? No, but we’ve got a 200 page due to diligence document as to why we’re going to increase market share in Kazakhstan or wherever happens to be.

    So that this is the fascinating bit we then have to pick up the pieces that they are there, the pieces, we have to pick them up and say so you did this because, because, because you saw an opportunity here, there’s a new audience, an expanded audience, perhaps you can bring more products to your existing customers, whatever it happens to be, we get it now. Okay, there is a rationale there. Right, we will help you articulate that story into something meaningful.

    So that’s a good case scenario. For us, it’s not the perfect one. Because the perfect one we’d like to be in before the deal is made advising people saying, “Well, if you’re going to buy that brand, you realize you’re going to complicate your existing story, you’re going to actually have complications within your brand portfolio.” Again, I’m sure we’ll come on to that later. But that gives you an insight into the role that we play.

    And of course, just to supplement that we have to be perceived as peers at this point. Because we might be giving some pretty strong, no admonishments, but pretty strong advice to clients, which is, you know, you’ve created a problem for yourself here, don’t you? And we do it with a smile. And we, you know, we’re advisors at the end of the day, and they can choose to ignore our advice, of course, but it’s this idea of taking the role of bits, which you might have expected to be better thought through, and then turning them into an articulate, compelling, interesting story, and then disseminating that story.

    And just to add to that, Patrick, an interesting bit is quite often you get a sense, they want to tell the world first, but actually, they forget to tell their own people that sometimes, and it is and seems like the obvious thing, but we stress in B2B marketing communications activity has to be from the inside out. And we learned this from one particular major international oilfield services company that was represented in 46. companies. It had 26,000 people working for it when we did this project. And the client said You know what, we have about 170 clients around the world that we’re interested in, and we have 26,000 people. So we’re here to make sure that we use our army of people to tell our customers our new story. Rather than going straight to the market, putting out press releases whatever it happens to be. So that’s, that, that gives you a bit of an insight into the role we play and the timing of that in the process,

    Patrick: From our prior conversation, you had a great analogy where you were talking about how most of the parties you deal with were 90% engineers, or very objective, tangible decision-makers, and so forth. And however, most of their decisions they don’t make on an objective basis. They make it from instinct. Let’s talk about that real quick.

    Peter: Yes, it is nice. And it used to irritate me, but no, I actually find it quite entertaining. But yeah, as you say, in the oil and gas space, the concept of having a marketing department is relatively new. And so and even if it’s well established, it’s probably populated with engineers by training. And certainly the C suite individuals, always the CEO, probably got a strong engineering background. And they take a meticulous and analytical and, you know, very thorough view of everything that comes across their desk.

    But if we put a creative piece of work, an advertising campaign or design of a new website, or whatever, and say, This is what you should do, because and we will base it on the data and the Allison, the discovery work that we’ve done, we may get feedback, which is why I don’t like it by Well, I don’t like red. Okay, well, that’s fascinating, but it’s irrelevant. So we’ve had to find a way of getting around this and, and it’s okay. And we and we do it with a smile and the clients do. But you’re right, that there is this sense that somehow when it gets into that creative space, the typical persona evaporates. And this somewhat more flighty and individual with personality and emotion. So it comes to the fore, and that’s fine. But it is, it did take a bit of getting used to that for sure.

    Patrick: I think you’re familiar with that you realize and appreciate that people are going to act, particularly when they’re stepping out of their comfort zone, they’re going to be acting on instinct, and dissipate that and you bring that through, which I think is always helpful. And that’s what you know, professionals do now is they realize the limitations of what they know and don’t know, and they’ll, they’ll reach out to other places. And that just helps them, you know, lower the learning curve. And flatten that out so they can get to, you know, proper execution.

    I again, I think this is, it sounds a little simplistic, but when you consider there are hundreds of millions of dollars at stake, that you want to get it right, and we’re on the insurance side, and we want to make sure that things, you know, go well, otherwise, we’re gonna have to pay a big, big claim check. If some of these issues are thought about and anticipated, then you’re gonna have a much more successful outcome down the road, that’s good for all parties. Peter, can you give us an example, you would mention one where you know the very large energy company, but give us a quick little case study on what you did with a particular client?

    Peter: Yeah, I think dealing with legacy issues brought about by mergers and acquisitions is very typical,

    Patrick: It’s universal.

    Peter: Yeah. And it’s often stimulated by leadership change, I would say or ownership, you investors, whatever it is, and they will look at a company which has grown up probably quite successfully by buying competitors by buying by expanding its portfolio, and it wakes up one morning and goes, this is a bag of nails. We can’t explain this to anybody. We’ve got this business, we’ve got that business, we’ve got the same service being offered in different territories, but with different names. We need to sort this out so that anybody can understand it quickly. Whether that’s a potential future investor, whether that is a potential new recruit new member of staff, whether it is a new customer, multiple stakeholders, of course.

    So we did a major exercise for a global exercise again, for an oil and gas contracting business, who had got themselves into this exact state. They’d been involved in many joint ventures over the years, they had allowed their local marketeers to be quite flexible with how the actual brand was presented when they started dipping their toes into renewables, and then they had a wind farm operation. The actual logo appeared in green in one place. So this is a major corporate and so it’s a mess. So our job is to tidy it up. And of course, with the mess, often comes internal territorial battles, you know, I exist, I have power because I have a logo, you know what I’m going to say, you are a member of this organization, you may be a head of a division, but it’s, it’s the corporate brand that matters.

    So you have to deal with that sense of taking away from people. So you’ve got a number of sides on it, you’ve got to do this quite subtly. You’ve got to engage people, we do a lot of interviews, a lot of focus groups, how did the situation get to be as it is? What was the rationale? What was the justification? How would you envisage change, because what we’re going to have, ultimately, is probably what we call a monolithic brand, which is just the brand, and no subsidiary names, no house of brands? And so it’s involving it’s collaborative. In this particular case of this company, they were very good at that. I think we did 70 interviews around the world, we did two quantitative surveys of all 26,000 individuals. So you really get a sense of how something happened, why it happened, what people would think about in terms of options for change, then it is our job as creative people to say to the client, this is what good looks like, in order to meet your corporate vision and your corporate strategy, you now have to present your brand in this way, in our belief, as experts in the field, that is always subject to some debate, you know, whether it’s logo style, whether it’s colorwise, whether it’s a visual presentation, whatever it is, people will have a view. And that’s fine. And we accept that.

    That’s a fairly standard process. Enjoys, you know, good success doing that. And then you get to a point of decision, which is yes, we are going to structure our brand portfolio in this way, we’re not going to have a mess anymore. It’s going to be clean, neat, tidy, structured, you can see at a glance, this company is endorsed by the holding company, for example, or you can see at a glance, because of the way the colors, look that we’re all part of the same family, there is a semblance that there is a unity. And it could be in all sorts of different ways. That’s all relatively straightforward. The next bit comes to the implementation. And this is, again, hard. Because and this particular instance, remember when we completed the implementation, the big boss said, but what about the ships? Weren’t we going to repaint them? And we said, boss, we decided, as you had 26 ships in your fleet, it might be too big a deal to repaint them. And his response was, Oh, no, maybe it would have been nice to repaint them.

    So, you never quite know. But anyway, getting back to the point of implementation, and there’s the hard side of it, which is uniforms, signage, anything that represents the organization can be rebranded physically, relatively straightforward. You can choose to do overnight and spend a lot of time and money on it. Or you can take a more of a replacement point of view. And behind that, is, of course, the culture of it. Those people that were in an acquired business that grew up being Company X, and know their company, why they have loyalties to what, where does their corporate story come from? Where does their understanding of what matters, what gets them out of bed in the morning, they’re suddenly being asked to package that away, forget about it, and think about this, and be really focused on something new and different? And of course, that’s hard.

    We talk about change quite glibly, I think as everybody hates change, which we actually fundamentally disagree with that a lot of people are crying out for change. But what they don’t like is a bad change. So are loosely implemented or half-done changes. So you have to have a really thorough way of internally managing the messaging. Going back to the focus groups, going back to the people you spoke to say, this is how it’s going to be this is why we need your help. To share the story. We need your help as brand ambassadors as advocates, as powerful, influential people to take the story and that cultural bit.

    It’s the bit that never gets discussed in the deal-making. At least they may do but not in my experience. It’s the bit where the people from different organizations are brought close together and expected to work together, they don’t even know each other. And they’re expected to represent an organization and work together. And so it’s fundamentally, it’s hard. And it takes time. And it has to be done in a very clear and concise way of people speaking to people and explaining and explaining and making no assumptions. And the best example that we’ve seen, of the clients that we’ve had over the years, is a business that acquired businesses regularly. And they had it so slick, they actually had an implementation team, it was made up usually about 8 or 10 workstreams, from the basics of integrating ERP systems, to you know, that the softer skills, a bit of cultural integration. And if, if there was a lesson that we’ve learned, and which I would share it is, that’s the way to do it. And be absolutely clear that if you want someone on the front line, to represent your brand, you better tell them what you want them to do, rather than just sending them an email and hope they pick it up. And just to conclude on this piece, the message that we’ve sent to clients over the years is, if you want someone in the frontline, to know your news story, to understand your brand, you got to tell them seven times, in seven different ways.

    Patrick: So the cultural integration is one of those blind spots. And a lot of people keep thinking about that as an HR issue. And where you have clashes of cultures, where you may have a formally dressed office versus somebody that affirms that as everybody’s in casual clothes, and so forth. And that’s not just the dress, it’s just the people who have had a mission to accomplish. And they believe in their firm now that our mission is changed from an acquisition. And so always, you know, getting them to buy in because the most I think the most important thing with business is, it’s not the shareholders of a company. Now for the publicly traded companies. It’s not that is first of all your people. And then secondly is taking care of the customers, the people that are buying your goods and services. And if they’re not taking care of that, that’s going to kill you.

    And the best way, fastest way to do that is taken, you know, get your people on a mission, take very good care of them. So they have no fear, and then they move forward and take care of your customers. And then your customers end up buying more. It’s simple, but it’s not easy. You know, it’s one of those things for coming together. But one of the things you mentioned that I definitely want to touch on is, is giving a message a simple message to the people, you have to tell them seven times. Okay, and seven different messaging, I think what you guys do is essential, and I think is a great value add that you have where you make it ultra simple. And I’ll read back again what yours is. For Fifth Ring B2B companies sell more stuff and build better brands. No wasted words. They’re a very simple concept direct everything. Okay. Talk about not only just being creative, but why is so essential to have not just a message but a simple message?

    Peter: Well, it’s a great question, Patrick, and I’ll give you two sides of this, one from the front line. You know, I come from an MBA background, I read all the books, read Harvard Business Review, I speak the highfalutin language of the consultant. And I can tell you the difference between a vision and a mission and a strategy and a value proposition. And I can actually provide words for all these different things. And so can all my colleagues.

    And I think what was a real eye-opener for me is we’ve taken a logistics firm, which specializes in oil and gas, needless to say, through a rebrand, given them a new story, we’ve done the cultural integration, we actually used actors to do roleplay and scenarios, which was a great way of getting that cultural piece aligned. And as it happens, we ran an event where there are prizes given and as a supplier to them, we were encouraged to give a prize. And we were given a prize for playing golf. And I took three guys from the company to play golf. And these are pretty frontline individuals. They worked on the docks, shipping, you know, crane operators, loading ships, moving stuff offshore. And I asked them as we’re playing golf, so what do you make of the new vision? I don’t know about that. But what about the mission? Yeah, I saw I saw a video about that there was a book that wasn’t there. You don’t know anything about that. So what do you think of the three words strategic principle that we came up with? What was that? So it was called “Trust well placed”. “Oh, I like that.” Well, yeah. Why’d you like it? “It’s what I do. My job is to people trust me, and I make sure that things are placed in the right place, and then they go on the boat. And then they get to the rig. And that’s, you know, yeah, I can go with that.” And, and so we were able to succinctly, in three words articulate the entire strategy for this organization “Trust well placed”. It’s not, it’s not an easy thing to do.

    And that’s kind of one of the benchmarks out there. And you think, “Well, okay, it takes a hell of a lot of creativity and imagination to come up with these things.” But it has to be linked back to the strategy. So that’s why we think simple messages really resonate with staff. But the other area, which is pertinent to what we’re talking about today, of course, is M&A. And the investor community, God bless them, doesn’t have much time. So it, it believes it has to understand instantly, what a business is all about to make some kind of rapid decision as to whether or not this is an interesting opportunity. I actually think that’s a little bit unfair. And of course, they do have to do the due diligence and look under the hood and test it and poke it and all the rest of it. But if you can articulate quickly, and simply what your business is about, you’ve got a far better chance of resonating with the different stakeholder audiences that you have. And so the history behind building brands and selling stuff from a differing point of view was that we were just using this internally. You know, guys, what do we do on a Monday morning, we get up, we go build some brands, and we said, go sell some stuff on behalf of our clients. And we started using it in a quite lacs way in front of clients. And they quite liked it. They said, Well, yeah, yeah. Could you do that for us? And we said, well, yeah. But that’s it’s a bit casual, isn’t it? casual? Yes. But we understand what it means. So then we started using it externally, then it finds its way onto his website. And now we’re even thinking about what does that means for job titles and roles? and other things fundamentals within the organization? Could we have ahead of selling stuff? You know, would that be the right thing to do. So it is permeated right into our business because as you rightly say, it matters to customers, they get it. And of course, from a marketing communications point of view, we’ve never been in a better place to help people sell stuff because we have the strategies, we have the tools. But above all, we now have the technology to micro-target, to demonstrate return on investment, to show through all sorts of new modern, sophisticated marketing automation ways that if you identify the right people, if you approach them in the right way, you can actually turn them into a qualified lead. And that’s why selling stuff is so significant in B2B.

    I would say as a footnote to that, there is still a huge place for personal relationship-oriented selling. And, you know, some of the contracts that our customers are selling are massive, you know, 10s of millions of dollars, hundreds of millions of dollars. So they’re not going to do that online. But they can find new audiences new opportunities online.

    Patrick: Then, of course, they bring in the experts, the technical experts, the strategic experts to convince that particular prospect of why it’s a good idea. But we would like to take this even further and link our remuneration to our performance. So getting away from fees, and into well, we produce that amount of reward for that business, we want to share of that reward. And that we think is the way our industry will go. Right.

    It removes the risk. At least mitigate that mitigates the risk, because that’s always the concern when you’re making a spend on something as particularly creative marketing type expenditures, because there are too many stories out there of decisions made spend a lot of dollars and didn’t get the return that they had hoped. And I think if you link in a successful model there then you’re both working together. So I think that’s a great trend. Peter, what do you see in the M&A trends wise, from your perspective, how do you think things are going? Or what do you see from where you are?

    Peter: I think the interesting arena for us. And this week has been christened and “BP Week,” because of the amount of news coverage that they’re getting. But we’re in what we call the energy transition. Now, the reliance on hydrocarbons is changing the growth of renewables is obviously here. And now. Have we reached the tipping point, no? Will we start using oil and gas tomorrow? No. But from an M&A point of view, and what we’re interested in is, what will happen to those smaller businesses that are currently in the renewable space? How will the big oil companies, the big oil operators, manage to bring them into their portfolios? And we’ve already seen a deal done with BP buying some of Ecuador’s renewables assets in the last few weeks? So so things are happening? So the under-recognized brands in the renewable space at the moment, because it’s still a relatively new arena. What role will they play as they add value to the portfolio of established oil and gas companies going forward? Will they add anything? Will their brands have value as they transition over? Or will they fundamentally just disappear? That’s going to be really interesting to see for us.

    Patrick: One thing about Fifth Ring, you develop your reputation and your experiences in that sector, that oil and gas sector and I think it’s helpful that you were very, very focused on industry but you’re not locked into that certainly, you can get into other industries as well, I think was significant for credibility wise for filtering is you’re working with deals that were in the billions of dollars, and you had organizations with billion-dollar checks being written, they trusted you. So if they can trust you, a lot of other industries should have no problem with your credibility in delivering on on a promise. Talk about who your ideal client is, and what Fifth Ring is looking for?

    Peter: Well, that’s a great question. And we discuss it a lot ourselves of course, in terms of who that actual ideal individual would be. And I say individual quite deliberately because we like to deal with the CEO. So that means it’s not going to be a massive, massive organization, it’ll be big, this individual will be quite enlightened, they will have an open mind to marketing, marketing communications and branding, they probably have some experience of it already. They won’t consider themselves an expert in the field, but they will know that it’s important. It’s probably an international organization, it’s probably going through a bit of flux and a bit of change. And probably got some new investment, maybe even a new leadership team. It’s ambitious, it’s in a hurry. It’s not afraid to be challenged, it’s quite demanding. It realizes the value of people, it doesn’t look at our staff in any particular way, just because they happen to be young, or ethnic, or female, or whatever it is, they’ve got a very open, transparent view of diversity. You know, I thought, that’s really I know, it’s quite topical. And I’m, could be accused of just saying this, but actually, I’m not, you know, it’s quite normal for us to employ young people. And so we want senior people in the client-side, to take these young people seriously. So that so that’s important to us. That’s another thing in the ideal client, I think they also have to be willing to take a little bit of risk. And when we come to them with an idea, and we say, you know, you might want to think twice about this, but it really could work. And they all go on, you know, what’s the downside? What’s the worst that could happen? So we quite like that. And also, ultimately, and I don’t want this to be taken the wrong way. But there should be an element of fun about this. You know, the last eight months have not been particularly fun, worldwide for the obvious reason. But actually, if we collaboratively can have a bit of fun, creating a new position for a brand creating a new story, seeing it engage people seeing it drive new business, and you can look back on it later, you know, that we enjoy doing that. What why wouldn’t that be something that you would actually look for in the perfect client?

    Patrick: You know, I just think that you know, as a father of two, you never get your kids working harder or expending more energy other than when they’re having fun. They’re having fun. It’s Unlimited, that type of stuff. So I think that’s a great element out there. That that can be there. And while you’re based in Scotland, Fifth Ring has a US presence to multiple offices with headquarters in Houston. And you’re eligible for companies and firms worldwide. So across the United States, correct?

    Peter: It is. And I personally have done a lot of work in Houston. I know it’s a cliche, but cliches usually have a bit of truth. In fact, that’s why they become cliches. But there is an entrepreneurialism that we notice amongst the techs and clientele that we work with. There is a willingness to give things a try. They like process, of course. But there is a sense. “Yeah, okay, come on. Let’s see what we can do.” And I’m not saying that it’s not the case with our European business or Southeast Asian business either. But that there is a sense, it’s, there’s an informality as well, which we like, it’s often quite difficult at the first meeting to work out who the big boss is, you know, the dress code, couldn’t sell them be a giveaway, you know, that there is a sense of not necessarily equality, but collaboration and entrepreneurialism. But funnily enough in the M&A space, we have seen plenty of successes and failures in Houston. But that doesn’t stop people from trying. And being part of that. The business environment is stimulating to say the least.

    Patrick: Well, Peter, how can our audience members, many are in Houston, but they’re also across the country. How can our audience members and our listeners find you?

    Peter: We have, of course, a website, which is constantly evolving and changing, very simple address is And you will find a lot of good stories and information and background about us there. If you want to speak to me, and I have a very simple email address, which is We have a simple recruitment policy, which is only one Peter. So that’s me. I think we have lots We had lots of Stephanies for a while. So we do actually use surnames as well in our email addresses. But there’s only one, Peter.

    I think that that this is a fascinating topic is it really has meaning that you’re absolutely spot on of you Patrick to realize that it’s a talking point, I know deep down that the investor community, the financiers, the bankers, the lawyers, they know this, they just occasionally need to be reminded that the cultural aspect, the branding aspect, the communications aspect, really is significant.

    And if there was one thing that people did want to get in touch to talk about, because we know that this tangible, intangible dichotomy is something that matters, we actually created a dashboard to try and put some of these softer, intangible things into the mix in the pre-deal phase. And so we’ve got some insight and ideas on that, that could be helpful to try and say to people, there is a metric by which you can test culture, see how it changes, and turn it the way that you want it to be over time. So that might be a topic for further conversation.

    Patrick: I appreciate you being here today. Because when you think about the M&A community, and it’s not shrinking, you’ve got thousands of private equity firms, you have thousands of family offices, you have thousands of strategic acquirers out there. And now we have the emergence of SPACs, special purpose acquisition companies, and they are doing IPOs, at least 20 to 30 new SPACs are coming the last four months consecutively. So we have all these buyers out here.

    How is the target to distinguish other than price? How are they going to distinguish one buyer from another? And I think that if you really wanted to separate your organization from the rest of the pack, you come in with something that’s different and I think this is why if you can address blind spots and culture I think is really big, but this puts the dollars and the motivation with the culture there with the integration, the brand that the target is always going to want their legacy to move forward or to be elevated. And that’s something you deliver.

    And I think that you know, particularly for the SPAC market which we can embrace immediately. This is a great way to differentiate yourself from a lot of the other others out there. And so I really appreciate what you have. And I recommend anybody to reach out to Peter and his team, they’ve got a fabulous story. And what’s more importantly, they’re going to help you create your story, which will close deals that will save you 10s, if not hundreds of millions of dollars. So it’s a pleasure for me to be able to provide that kind of thing to the community. So Peter, thank you very much for that.

    Peter: Right. Well, that’s kind of you, Patrick, I would just conclude to add to that point that you made, we saw this opportunity quite vividly about a year ago. So we are now working with a management consultancy firm in Houston a company called Carnrite, jointly. So they help businesses through the hard bit of the M&A the advice, the transition, the transformation, the implementation, and then we support in parallel on the communication and brand matters that go with it. And so we’re working under the joint title of walk the talk, they, help you do the walking, we Fifth Ring help you do the talking. It’s resonating pretty well, but it does go into the heart of what you just said about finding a point of differentiation.

    Patrick: Well, thank you very much, Peter. You got to find a three-word slogan for the Rubicon next.

    Peter: Thank you so much. We’ll do our very best. Thank you, Patrick.


  • Heather Hubbard | Representation for Women in M&A
    POSTED 11.17.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we’re joined by special guest Heather Hubbard, Managing Partner of Valesco Industries, a lower-middle market firm based in Dallas, Texas. This past May, Heather was named D CEO’s Private Equity Investment Professional of the Year, and in a market like Texas, that’s no small achievement.

    “I think, coming in, we represent what we’re oftentimes looking at in portfolio companies and potential prospects. There’s a very diverse group of people working at the majority of these companies, so when we can reflect that back to them and relate to them each in their own way, I think that it gives us an advantage,” says Heather about the unique perspective of women in M&A.

    We chat about Heather’s journey from running a company to private equity, as well as:

    • What women bring to the table in M&A, specifically in private equity
    • Team dynamics with women in M&A
    • Why women are underrepresented in private equity
    • The future of Women in M&A
    • 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. There’s a saying out there, the bigger the challenge, the bigger the opportunity for growth. It’s hard not to see the obstacles we’re all facing these days.

    But I’d like to focus our attention in today’s show on an entirely different challenge and the real opportunities out there were business owners and private equity both stand to benefit tremendously. I’m not talking about the pandemic. I’m talking about how women are seriously underrepresented in M&A today and how this situation presents an unbelievable opportunity for those who want to take on this situation. I’m thrilled to be joined by Heather Hubbard, managing partner of Valesco Industries.

    Valesco Industries is a lower middle market president pretty firm based in Dallas, Texas. Now, for my regular listeners, earlier this year I profiled Valesco’s Bud Moore. I’m returning to Velasco because this past May, Heather was named D CEOs Private Equity Investment Professional of the Year. And in a market like Texas, that’s not a small market. So this is a real big get for Heather. So who better to talk about women in M&A? Heather, welcome to the program. Thanks for joining me.

    Heather Hubbard: Thanks for having me.

    Patrick: Now, before we get into macro issues, women, M&A and all that, let’s start with you. How did you get to this point in your career?

    How Heather Got to This Point in Her Career

    Heather: You know, I definitely didn’t sit out and say I want to be a female partner of a private equity fund or an SBIC fund when I was a little girl because I obviously didn’t know what that quite meant. But what I did do when I was a little girl was take all the groceries out of the pantry of my parent’s house, set them up on the kitchen island and take one of the two cash registers that I begged my parents to buy me when I was growing up and sell all their groceries back to them.

    So from that small business that I started, which had a great gross profit margin, I started a pool cleaning business, a gift wrapping business. And I knew I always wanted to be in business. So I didn’t know what I wanted to major in, in college but I did attend a meeting of the Collegiate Entrepreneurs Society, and they were interviewing.

    At the time, there were 12 kids in the basement of Business College and interviewing a local business owner in Oklahoma City who wasn’t doing anything bright or brilliant, just had a really cool business that he was operating. I think it was a data center or something like that. But learning about how he started his business, how he signed a lease, how he hired his employees, how he managed his accounting system, how he on and on and on.

    The questions that we would ask in diligence today, we got to ask in that setting. And I realized that I was hooked. I just wanted to know everything about what he was doing and how he was making that happen and all the little details and the fact that he could control his own destiny and he could chart his own path. That set entrepreneurship and really this idea of investing in entrepreneurs into a whole different plane for me because I didn’t want to just be another employee in corporate America doing corporate finance or accounting or anything like that.

    Not that there’s anything wrong with that. I just really love the entrepreneurial spirit. And so we get to, now fast forward all those years, back those really cool entrepreneurs who have a great idea and a great vision, and we get to support their vision and we get to learn about their vision. And it’s pretty much the coolest job that I could ever imagine.

    Patrick: Yeah, one of the things that can separate us in age and perspectives is, you know, some of us that are a little bit older, we were just at the dawn of going from the big corporate America structures out there where you had one job, you stayed with that firm for your entire career to now it’s a free for all where there are all these smaller, nimble companies where you get a whole wide variety of different tasks you can do and things you can focus on.

    So you get in there, you’re in this great positive pool and you’ve got the mindset for an entrepreneur. It is a particular mindset you have to have. What brought you from, you know, running a company to going into private equity?

    What Led Heather Specifically to Private Equity?

    Heather: Well, you know, I kind of stumbled into it in a way. I had an internship with the folks at Valesco in college. And they gave me an opportunity to learn what they were doing. And at the time, we were independent sponsors. So we were doing investments on a deal by deal basis. We didn’t know what this whole fund thing was all about. And when I started, we said let’s raise a formal fund. Let’s make a legacy out of what we’re doing. And so I got to be in on the ground floor sort of starting with everything from all of our diligence lists and making sure those were right to our models to how do you raise a fund.

    How do you portray a sort of track record? How do you do anything and everything? How do you hire an intern? How do you train that intern? Obviously, people have methods on those things. But we didn’t have a Valesco method until we started to do it. And so everything that we are today, I had a finger in developing which is also really cool because I feel like an entrepreneur amongst all these entrepreneurs we get to invest in. We created our own destiny at Valesco as well.

    Patrick: Well, it’s nice because it was just growing and so you were in the ideal position coming in at the ground floor, literally. And there were all these opportunities within there and you can try a bunch of stuff and probably stub your toe but you can at least get in and get exposure to that.

    Heather: I was told many times that all the things roll downhill and I was the only one at the bottom of the hill, so,

    Patrick: That’s how it goes. Now. I’m not going to take credit for the idea of talking about the topic of women in M&A. Actually, I was inspired by one of the law firms out here in Silicon Valley, which is very active in trying to attract more female attorneys to get into the M&A practice. And so we were looking, you know, when you look at a profile of private equity firms out there, it doesn’t take a lot of time to notice that there are fewer ladies in the pictures of the team members than men.

    Now, there are studies coming out that are listing all of these benefits and value that women bring to the table when they come in. They have a whole separate skill set and perspective. And that perspective can be harnessed to do a lot of great stuff that just, for nobody’s fault, just isn’t happening right now. Now, from your perspective, what do you see the women actually bring to the table here for M&A, specifically, M&A in private equity.

    A Woman’s Touch in M&A/Private Equity

    Heather: So I think they’re, it’s interesting to ask this question because we’ve been working from home for coming on six months now. I almost forgot what the answer to this question was because when you’re in your own little world working with your own team and the situations that you’re familiar with, you stop getting that perspective of what it is to be female and what it is to be different. But we recently had the opportunity to start looking at deals again and get on the road a little bit and spend some time with folks.

    And I think there’s two things that women bring to the table. It’s perspective, which you’ve used that word over and over again, but we’re looking at things from a completely different lens. And it’s everything from we’re not really not interested in, generally speaking, talking about a football game or the baseball game or what happened in March Madness. We’re interested in other things. So we bring a different perspective on business models and product lines and what’s attractive to certain audiences and maybe how to approach diligence assignment in a slightly different way.

    Or maybe we’re interested in slightly different things and because we ask a certain line of questions, it gives us a different look or perspective on a potential target. And I also think we bring a lot of balance. We look at the world differently. It’s not universal, obviously, we’re all different human beings and we all are along a spectrum, right? But there, it’s not better, it’s not worse. It’s just different. And if we have a balance in different perspective that we’re bringing to the table, we’re investing in female entrepreneurs, minorities, different people that may not have had a fair shake. And it’s not because my male colleagues wouldn’t give them a fair shake.

    It’s just that they may not have seen a perspective that that type of investment would bring to the table or an opportunity that we may have seen. And we’ve certainly stopped a lot of bad cosmetics investments that have come across our desk. The guy said, Oh, that’s a pretty cool deal. And we’ve shot those down. So it gives good perspective because we are 50% of the population and we buy more than 50% of the products out there in the world. And so we have a unique take on that.

    Patrick: No, I mean that’s fundamental, particularly if you’re doing consumer products or whatever. You need the perspective from the target buyer, and you know who your customer is. And if you’re selling hockey equipment and the only people that are involved with that business have never played hockey before, you’re not going to be able to connect with the target audience there.

    Heather: That’s a great example, right? Because one of the things I said is so true. We represent way more than 50% of the consumer purchases, right? And yeah, one of the members of my team might have never played hockey before. But I’m a mom and a lot of the women I work with are moms. And you know what I do is I buy all the soccer equipment, I buy all, I sign up for all the gymnastics lessons. I buy a lot of the things that our family consumes and so I have a different look on that world.

    Patrick: Yeah, so he needs sporting equipment. Well, wait a minute, who’s buying it? So absolutely. Well, talk about real quick the team dynamics, because you would mention that where, we’ll get into later on reasons why there hasn’t been as much representation and we could be turning the corner. But let’s just talk about the team dynamics with women, but either in the company itself or in a deal team.

    Heather: And when you say team dynamics, you mean with females in the room?

    Patrick: Yes. Yeah.

    Heather: You know, I think that’s an interesting question because I think, again, it’s about perspective. A lot of times, it’s cultural too, right? When we get into a diligence assignment. I’m the kind of person, I want to know about the person that I’m engaging with.

    And I may not dive into, you know, tell me about sales by product line by gross profit margin by, you know, geographic mix right away, but I may ask about your family and your background and your history, and I might have different questions than the rest of my teammates and that might give me more insight or a line of questioning that might be helpful for us to understand and appreciate where that entrepreneur is coming from. And so I think I bring that to the table. My other colleagues bring, you know, maybe a different spin on the analytics to the table.

    And so I think us coming in, we represent what we’re oftentimes looking at, at portfolio companies and potential prospects. Because there’s a very diverse group of people that’s working at the majority of these companies. And so when we can reflect that back to them and relate to them each in their own way, I think that it gives us an advantage.

    Patrick: Well, on that softer approach, I’m just using that term, but that kind of human skills approach is one that is consistent with one of my absolute core beliefs about M&A. It’s not, mergers and acquisitions is not company A buying company B. It is a group of people agreeing and trusting to work with another group of people who when they come together, the ideal is that the whole is going to be much greater than the sum of its parts.

    And that’s people. And I think a perspective when people are talking about well, we’ve got great synergies and on paper, this all looks good. If you get under, you know, a couple layers down, you’re going to find out that well, maybe they have other priorities or other fears that we need to deal with. And that gives you an edge.

    Heather: Well, Patrick, Bud’s not gonna want me to tell you this, but our money is just as green as everybody else’s money. And our differentiator is 100%, related to emotional intelligence and being able to meet people where they are and to build that bond. And I can sit here and tell you all about my investment criteria, you’re probably going to ask about that. And it’s going to sound just as boring as next person’s investment criteria and exactly the same.

    And so it’s all about how we meet people where they’re at, and how we engage with them on a number of levels because we’re going to be tied at the hip. These teams, we’re three to five, seven years, at least. They’re going to be texting us on the weekends and wishing our kids happy birthday and also diving into some really hard topics. So we’ve got to meet them in a common place.

    Patrick: Let me circle around just on some stats here when you talk about your money’s as green as everybody else’s, and so forth. But let’s talk about just specifically with women. And this is from Venture Capital Magazine just recently, startups with one female founder hired two and a half times as many women as compared with male-founded startups. And exclusively female-founded startups hire six times as many women.

    So you’re going to have diversity right there if you’ve got female-founded companies. Now, companies with female founders generate, get this, 35% larger ROI compared with male-founded startups. Okay, this is a meritocracy, okay? and it is all about the bottom line and performance and execution. And when I hear that, that catches your attention real fast. And this is what’s real contrarian into that. And again, same survey from Venture Capital.

    Despite their success, a study shows that 40% of female-founded companies will not meet their fundraising goals this year. Okay, there’s the disconnect. There is great opportunity, if you’re getting a higher ROI, you’ve got more built-in diversity with a firm already this organic. Why not take another look at it? And so the thing that is just, it’s almost hiding in plain sight, which is why I think it’s a tremendous opportunity out there. Now, when you and I talked, Heather, you know, there was this lack of women in M&A. And I just want to get into the reasons because it’s not that they’re being held out.

    I think quite frankly, they just may not be aware of the opportunities that are there. And unfortunately, you could have some situations where maybe they’re not being encouraged or they may be actively being discouraged by people, you know, in authority, in education or whatever. You know, let’s talk about that real fast. And, you know, what do you see, what steps can be taken, what confirms do to say, you know, to people that weren’t even thinking about private equity or finance that, hey, door’s wide open and here’s some great stuff?

    Educating People About Existing Opportunities

    Heather: I think it’s a great question and it absolutely starts with kids that are my daughter’s age at six years old, teaching her about budgeting and business and getting her interested in those types of worlds. It goes to high school. Don’t let a girl think that she can’t be anything. We were talking about that the other day. I never thought I couldn’t do anything that I wanted to do. So I just kept going. So in high school, you know, getting that opportunity in college, educating about what the opportunities are that are out there.

    I was one of probably three females in my entrepreneurship major at all. Even in the finance classes, there weren’t very many females represented. When we go to hire, unfortunately, the pool of candidates is very low on women. My team knows that I’m going to ask how many female applicants we get for that job. And they go out and they hunt for those female applicants because they know that I’m going to want them to interview and just at least give that woman a fair shake at the opportunity.

    But they struggle to get the candidates that they need. And it’s not because those women don’t want those jobs it’s because they never were told they could. They were never told that they could major in finance or entrepreneurship or accounting. They were never told that this was an option. So it’s about education of the opportunity in the world and what we do, but it’s also about encouraging women to get into business because I think we can, we can knock it out of the park.

    Patrick: And when we talked before, it wasn’t just women working with other women, you’re enhancing teams that are mixed, men and women. And all of a sudden, and we can see this where suddenly if you’ve got a different person in your group, everybody seems to up their game a little bit. There’s less complacency.

    Heather: Absolutely. And you’re having to figure out how you relate to different people because you’re just inherently different, right? So if that starts internally with us, then how much better are we going to be if one of my male associates has to relate to me every day, he’s going to be way better at relating to that female CFO at our portfolio companies. We see a lot more, you know, CFOs and accountants that are females than we do in the finance profession.

    So, you know, there’s, we’re everywhere. We’re out there. We’re doing jobs at portfolio companies. You know, we’re heads to purchasing and heads of inventory management and heads of marketing. And so to think that a diverse team at bar level wouldn’t be the goal or the gold standard is just misguided because we’ve got to pair with those diverse teams that are popping up everywhere else.

    Patrick: Let’s look in the crystal ball real quick. And again, from your perspective, because you’re actively doing recruiting out there. I know the law firms are actively recruiting. If you want to look for a model or an analogy, look in the healthcare industry. Virtually everybody in management and upper management in larger institutions are all women.

    Now, presidents, vice presidents all the way through. The old days, 50 years ago, it was all-male because all the men were doctors. And you’re seeing now women are now outnumbering men in medical care, not only on treatment but in management. So it is there. But what do you see for the future for women in M&A?

    Heather: I think it starts with people like me. And we have a great responsibility to encourage that education and encourage the hiring of a diverse pool of candidates. And it’s not just women. It’s, you know, ethnic minorities, it’s people from different backgrounds, right?

    We benefit greatly from having people who grew up in rural communities on our team, and urban communities. And I think that difference right there is huge. So just keeping an eye out for those differentiators and people’s backgrounds and really getting to know their backgrounds so that you, you know, we’re investing in America. We’re a small business investment company. So our team has to be a reflection of that and it starts at the top.

    Patrick: I’m personally looking forward to just once the whole pandemic issue passes, and I will really appreciate this more as that human contact again. And I cannot wait to be out there. This has been nice technologically for me being able to reach out and meet people like you remotely like this. So we’re not forced to travel.

    But I think we’re all really going to appreciate being around other people. And I think that the more you can bring to the table, it’s only going to be a net benefit for everybody. Well, let’s not leave our audience hanging out there, okay Heather? Why don’t you tell us, give us your profile of what your ideal client is looking like right now. What are you looking for?

    Valesco’s Ideal Client Profile

    Heather: Well, I told you I wouldn’t bore you with our investment criteria. And I can leave that to the end. But we’re actually looking for entrepreneurs. I think that’s the first and foremost. we’re looking for people who have great ideas, great vision, and they started an awesome company based on a really cool product line or idea. And they’re looking to take their business. That, I don’t know, you’d rate it on a scale from one to 10, you’d rate it a seven, right? Great idea, great product line. Great start on marketing and sales and business development. You know, a solid accounting team, but they need that something to push them to the next level.

    They need somebody to invest in their growth. They need somebody to partner with them to understand them to really relate to them. So we’re looking for those really interesting and unique entrepreneurs, first and foremost. We’re looking for businesses in the three to $15 million EBITDA range in the ten to $100 million revenue range. We hope they’re not distressed when we make our investment in them. We want them to be kind of growth-oriented, really all over the US because we are a small business investment company. And we’re investing in minority and control equity positions.

    So that means that we can pair with entrepreneurs in a variety of different circumstances, whether they want to retain control and they want to really grow this thing and knock the socks off of it, great. We can be a solution for that. If they’re looking to exit and pass the business down to their management team or their family members, we can facilitate that. We can come in and a traditional sense as well and facilitate a buyout if that’s really what’s of interest, but we’re looking to be a good solid solution and partner for that entrepreneur to do whatever he or she is looking to do in the next phase of their life.

    Patrick: Bud’s comments about your investments have been real community-oriented, where you’re looking not just to enhance a portfolio company, you want to enhance the community that that company serves. And I think that’s broader and that really resonated particularly when we first talked was pre-pandemic. What do you see trend-wise in terms of business now for you guys? Is the activity picking up?

    Heather: It is. Thank goodness. We’re so excited. We’ve been really busy through this time just trying to make sure that we set our businesses that we are invested in right now up for success on the backside of all of the things that are happening in the world. But we are seeing the activity pick up. Our business development team, I have to give them a shout out because they are doing excellent work and the fruits of their labor definitely showing up in the activity. We’re interested in making investments this year. We’re engaged in that process. And we will be making investments next year as well. And we’re not slowing down.

    Patrick: Great. Well, Heather, how can our listeners find you?

    Heather: Sure. Well, we are launching a new website, which I’m pretty excited about. So that should be online soon. We have a lot of cool interactive videos to show people who we are. We like to highlight our team, which is really great kind of bringing this whole conversation full circle. We have a video out there that talks about our team and our culture and how we partner with people and how we partner with each other as well as all the things you’d want to know about why you should choose us, but our website is, and you can find us there and maybe check back a couple of times because we’ll have new updates.

    Patrick: Heather, thank you very much for joining us today and I encourage anybody that wants to learn more about just this whole subject, heather is truly an inspirational person to speak with. And it’s been a great time talking to you. Heather, thanks again.

    Heather: Great chatting with you.

  • How Business Development Has Changed in Private Equity 
    POSTED 11.10.20 M&A

    As with so many areas of our lives, COVID-19 has had a huge impact on business development among Private Equity firms. The “old ways” of finding and connecting with potential acquisitions and deals are disappearing, a trend that was already happening but was sped up by the travel and other restrictions brought about by coronavirus.

    As Mark Gartner, head of investment development at lower middle market-focused Private Equity firm ClearLight Partners LLC, put it in a recent article, “Creative Destruction: How Private Equity BD May Change Forever”:

    “The pandemic is stress testing everything, and COVID-19 may finally kill several BD strategies already in decline.”

    “I believe that the best originators in the lower middle market will start to approach the private equity game through the lens of a lead generator with the content and lead capture techniques to match.”

    Gone are the days of constantly traveling for in-person meetings with investment bankers, M&A advisors, and other reps for target companies. To be honest, all the information you glean from these meetings could be handled in a phone call.

    An inability to travel, says Gartner, has hastened the decline of what he calls “high volume, low value city visits.” But that doesn’t mean all travel is out, says Gartner, who still sees a need for visits that emphasize quality over quantity and activities that produce real relationship development.

    Also, out the window: BD pros collecting as many CIMs (confidential information memorandums) as possible to fill their PE firm’s funnel. The idea is that the more “books” they have, the more winning deals will come out of it.

    Gartner recommends PE firms instead have their BD team analyze potential deals based on what he calls an “angle matrix” and concentrate on deals that they have a higher probability of closing because they have the right angle, which could be “process dynamics, executive resources to bring to the table, prior experience/investments in a related space, a previously developed investment thesis, and geographic proximity.”

    What other changes are on the horizon? A PE firm has a great story… the trick is now to get the word out through different channels.

    There are several more strategies that have been building for some time that are now experiencing faster adoption due to the pandemic, says Gartner.


    Generalist PE firms may think that casting a wider net will result in catching more deals. A better strategy is to pick a small group of sectors to get really good at. Soon, you’ll build a brand – and reputation – associated with those industries and, as Gartner says, “relevant deal flow will start to find you.”

    If you’re worried that concentrating on a limited number of industries could backfire if those sectors go into decline, Gartner recommends this strategy:

    “Pick sectors that are specific enough to be memorable, but that are broad enough to offer room for pivots if need be.”

    Thesis Development

    An investment thesis is, of course, a PE firm’s plan to make an acquired business more valuable within a few years. It essentially lays out the reasons to do a deal.

    Gartner maintains that today this tool is more important than ever. As he puts it:

    “Investors that put in the work to get off of their heels and proactively call their shots by developing investment theses have advantages over more reactive investors. I’m always amazed by how much incremental deal flow arrives when I market very specific sectors of interest to intermediaries and other deal referral sources.”

    This strategy goes along with the move from being generalist to specialist.

    Digital Marketing for Lead Generation

    It’s amazing how difficult some PE firms make it for business owners and dealmakers to contact them. And how little they take advantage of the online tools that are available for reaching out to potential targets and their reps… and turning them into leads.

    Creating valuable content written for business owners is key to creating engagement. This could be articles and blog posts… even a podcast… to get the word out about a PE firm and what makes it different than others out there.

    Also, says Gartner, make sure the firm’s website is clear and easy to navigate, with contact information clearly visible. For website design, he recommends looking at management consulting websites.

    Own Your Local Market

    In the time of COVID, Gartner says there’s never been a better time to leverage the geographic proximity of a PE firm to potential acquisitions. Staying local means no travel and, whether or not it is true, feels safer.

    To market locally does require a different approach. These are some avenues Gartner recommends:

    “Membership in YPO or Vistage, providing regular content / interviews for the local business journal, sending personalized invitations to business owners to luncheons / events, and partnering with law / accounting firms to deliver value-added in-person content.”

    Where We Go From Here

    Business development for PE firms is changing forever. But by being nimble and quick to adapt to the new reality, savvy firms can differentiate themselves from competitors and nab the better deals.

    For more on this and other topics from Mark Gartner of ClearLight Partners LLC, be sure to listen to my interview with him from my podcast, M&A Masters.

  • Adam Cook | How M&A Can Create Value for Shareholders as Well as Customers
    POSTED 11.3.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Adam Cook, managing partner and Chief Investment Officer of Culper Capital Partners. Based in Norwood, New Jersey, Culper Capital Partners invests debt and equity in middle-market companies that seek true partnership solutions that go well beyond the capital deployed. Culper Capital Partners is also a newly minted private equity firm, which is indicative of the growing body of private equity out there.

    “At Culper, we’re investing in middle-market businesses. We focus on things that we can see and touch. We will make debt investments where we’re riding along with a BDC or a traditional lending company, but we really focus in on the platform equity side where we’re putting our own money to work, along with our business partners, to find bespoke opportunities where it’s well beyond the capital deployed,” says Adam.

    We chat about what led Adam to a career in private equity, as well as:

    • Why private equity is often viewed cynically
    • Incentivizing those involved in an M&A deal from a cultural and a value perspective
    • Culper’s ideal profile for an investment target
    • How COVID could affect M&A moving into 2021
    • And more

    Listen now…

    Mentioned in this episode:


    Patrick Stroth: Hello there. I’m Patrick Stroth. 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 Adam Cook, managing partner and Chief Investment Officer of Culper Capital Partners.

    Based in Norwood, New Jersey, Culper Capital Partners invests debt and equity in middle-market companies that seek true partnership solutions that go well beyond the capital deployed. So I don’t want to steal Adam’s thunder here. I’m very glad to have him because Culper Capital Partners is a newly-minted private equity firm which is illustrative of the growing body of private equity out there. There is a real healthy market when new firms are emerging. And that’s good. So, Adam, it’s a pleasure to have you. Thank you for joining me today.

    Adam Cook: Thank you so much, Patrick. It’s a pleasure to be with you this afternoon.

    Patrick: Now, before we get into your firm, let’s set the table. Tell us what led you to this part, this point in your career.

    What Led Adam to a Career in Private Equity

    Adam: So, you know, in 1997 or 1998, I remember myself licking customer confirmation envelopes while I was working at an audit firm. And a few folks kind of scurried into the room and went into one of the manager’s offices and then came out about 25 minutes later and grabbed a few of us and said, hey, we’ve got kind of a new assignment for you. And while I can’t talk about the details of the deal, back then it was a very large transaction.

    And they had me working on a part of a team that was basically analyzing what is the present value of an underfunded pension plan would have to be funded at closing as fall day, a rabbis trust, that would have to be created. So I was automatic. I was kind of thrown in out of nowhere into this new universe of M&A, albeit a very specific portion. And I’m not sure how long that transaction went on but I was hooked ever since that time. So stayed in audit for a very short period of my career and then went into M&A and really never looked back.

    Patrick: And so you caught the bug.

    Adam: I call it the bug. Not that there’s anything wrong with audit, but it sure beats licking customer envelopes.

    Patrick: I would consider mergers and acquisitions is probably the most exciting business event out there. I’m sure there are people that really love the IPO world but I think for the larger business community because it happens to so many more people is such a milestone that that’s the big event out there.

    Adam: Yeah, and I’ve been very lucky throughout my career not only to, you know, kind of witness the value that M&A can create, not only for shareholders but also for customers, you know, bringing kind of a smaller target, you know, up to speed from a professional perspective and, you know, different revenue channels and products.

    Giving employees new opportunities, you know, with more opportunities as part of a, you know, larger-scale organizations, but also spent a bunch of time early in my career and throughout the latter part of my M&A career before we’ll get into what we’re going to talk about today in terms of how M&A, you know, shaped a lot of, you know, part of what I’m doing. But also on protecting the downside when a company is in trouble or there is an issue with a business, but it’s got true value.

    There might have been, you know, nothing that management did while the company is in trouble. It could be, you know, a, you know, a catastrophic event, it could be that their products were tied to some commodity that was spiking for a longer period of time and, you know, their product costs were out of control, you know, for macro issues, or it could be management.

    But M&A often serves as a function as well, not only to preserve the true value of a company, but to preserve, you know, jobs that would otherwise go away if consolidation didn’t take place. So, you know, and that portion of my career was certainly rewarding to see what the process could do for, you know, not only the creation of value, but at the employee level. I think sometimes there’s a misnomer that with M&A jobs go away. I saw quite the opposite in terms of kind of the aggregate amount of employment, M&A, allowing, you know, that employment to continue in distressed situations.

    Patrick: Yeah, I can’t agree with you more. I think there’s a cynical view of private equity. It’s summed up in four words, buy low and sell high. The way you bring things down is, the traditional view is well, you’re letting people go, so you’re cutting costs, you’re bringing cost synergies together. That’s not necessarily it. I mean, there are a lot of companies that are well-run, well-managed, but they get to a point, one author called it no man’s land where the management in place can only get so big.

    And then they need another skill set to go to the next level. And you’re not too small to run unnoticed. You get to a size where you got to take another level, another step up, otherwise you’re gonna have a problem. And who better than somebody that’s done that time and time and time again successfully, you know, to hold your hand and bring you there?

    Adam: Yeah. We’ll talk, it’s a good point. We’ll talk about the Glebar story later in the podcast. But when I bought Glebar, and I was also, I was kind of owner-operator in that situation, it wasn’t slash costs. It was quite the opposite, right? Move to a world-class facility, spend millions on capital equipment and building out, you know, that world-class base not only to have a place where our customers could come in and kind of fit the bill for that, but, you know, a nice safe place where our employees could work and feel proud. You know, doubled headcount, right?

    So I think we are certainly very growth-orientated at Culpers. Sure, if there’s waste, you know, I think that you’re robbing the entire company and all the employees that are there, regardless of what that waste is. But, you know, our mantra is to redeploy that waste into, you know, turn that scrap into gold, if you will.

    Patrick: Yeah. Well, you can’t save your way to prosperity is the way I always look at that. Tell us about Culper Capital Partners. And I always like asking people like you just where did you come up with the name? To give us an insight on just the angle you came and tell us a little bit about this organization.

    About Culper Capital Partners

    Adam: So for Culper, we’re investing in, you know, middle-market businesses. We’ll focus on things that we can see and touch. We will make, you know, debt investments where we’re riding along with, you know, whether it’s a BDC or, you know, traditional lending companies where we’ll take, you know, more passive, you know, pieces of debt.

    But really focused in on the platform equity side where we’re putting our own money to work along with our business partners to find bespoke opportunities where, you know, it’s well beyond the capital deployed. If someone’s just looking for capital at a platform investment, we’re probably not the right partner. We are going to be more of, we’re not going to work at the company. So not be management, but we’re going to be more owner-operator than, you know, just strategic advisor. So what does that, you know, what does that mean?

    That means, you know, our team, you know, focused really on industrials. solutions, medical device, health care services, where we could put our M&A experience to work like traditional private equity to find add-on opportunities that will bring arbitrage and create additional revenue channels to sell through our market channel. You know, arbitrage, if you will, product synergies. We are going to evaluate whether the ERP systems are up to date.

    Often in lower middle-market companies, there’s so much low hanging fruit, you know, in that investment and albeit it takes a lot of time. We’re going to build a sales organization to create sales organizations that are measured, tracked, held accountable, are not just looking to maintain existing customer relationships, but to go out and get new ones, to foster new opportunities within your existing customer base as well, to consultative sell so that your customer is getting everything, maximum value out of what you’re providing, right?

    That ROI. So eventually, you know, their products are bought and not sold, right? So I think, you know, kind of our mantra is really, I would say, on average, we’re going to spend about, you know, 40 hours a week collectively as a group where we can add that expertise into an environment where we found a great company with great people and really good leaders, but that we can help professionalize it.

    You know, from a sales perspective, from an infrastructure perspective, you know, to, you know, really have, you know, employees kind of feel like they can grow as enterprise value grows and truly partner with them. Not that there’s anything wrong with the traditional private equity model. But just for us, I think we’re gonna look at two to three portfolio companies at any given point in time.

    I would extremely doubt if it would be more than that from a, if we’re the lead, and really focus on putting those resources in place. We just brought on a medical device expert that’s been in the industry for, you know, 25 to 30 years in leadership positions. He was actually a customer of mine when I was the CEO of Glebar, you know, because we’re, you know, kind of heavily involved in looking at opportunities in the medical device space, right? So we really want to be able to bring much more than that, you know, that check to the table.

    Patrick: It’s got to be real attractive for prospective targets out there, the management where you’re going to make them best of breed. You’re going to get them out there and have them excellent. I think they saying I heard, I’m stealing from somebody else, but nobody wants to buy or subscribe to the second-best software security system out there.

    They want the best. And that’s what you’re specifically offering out there is bringing them to the level, they probably are at a high level already, otherwise, you wouldn’t have an appetite for them. But to get to be that best of breed and stay there comfortably and move at that higher platform, it’s very, very exciting. There’s a great value opportunity that you guys are offering. You mentioned Glebar before. Why don’t you share that experience if that’s a case study that you could share with me?

    Adam’s Experience as Owner/Operator at Glebar

    Adam: Sure. So Glebar, not just because I owned it and ran it, but is truly a gem of a company. When I learned about the company. I said, Wow, what amazing technology. I’m not sure if these folks realize what they really have here. But to be respectful of the old owner, because he made a lot of money. It was run, you know, a bit like a small delegate, you know, versus a world-class organization. While they had such talented people, including the old owner, he’s one of the smartest engineers I’ve ever met to date and he’s 85 years old. And that’s an understatement. They didn’t know the definition of sales.

    It was, you know, if you build it, they will come, if you will. It was, well, this is the way we do things. And it was a whole lot of talking and not a whole lot of listening to the customer. And it was an engineering company. And that’s great. It still remains that intimate engineering company today. But what we really did was kind of turn that into a sales organization where go out and see your customers and consult with them. Become their partner, to where, you know, again, I use the term a lot, where your products are bought, not sold.

    That’s really the value proposition that your customers should demand of you. And we really turned that into a sales organization over time. We also really focused in on the customer and employee experience, right? We moved from, you know, two and a half, if you will, old facilities that were kind of, you know, beaten down, we had to walk parts across the street in the winter storm to, what we considered, you know, it was more indicative of the products that Glebar sold.

    The world-class facility, you know, where employees would feel good about going to, you know, it had world-class filtration, you know, everything was always kept up to from, you know, from a safety perspective, and they were really given the opportunity to thrive. So on day one, you know, we kind of decided, hey, we’re moving, and we did that. We also needed to, you know, play the part, if you will, in terms of, hey, if we’re going to have a fortune 500 customer base and then that level below that, not that we didn’t have smaller customers, but we need to practice what we preach here.

    So instead of telling the customer Hey, you can’t go back there. We’ve got some top-secret thing going on. You know, I think that, you know, we spent a ton of money on, you know, not only new capital equipment of our own, but really mapping out the facility logistically and having it be lean and safe and something where you could be efficient. But where our customers should say, yeah, we should really, you know, not just do business with someone. I don’t even like the word customer. They have to become a trusted partner.

    And I think that’s a, you know, real part of what we did. I think the biggest thing that we did, and certainly, we’re gonna do this at our portfolio companies here at Culper, you have to incentivize people. Not that people aren’t going to work hard for their paycheck. They are, but you need to align them with what you’re trying to do, not only from a dollars and cents perspective, you know, but also from a cultural perspective, a safety perspective, a, you know, an overall value perspective.

    I always often use the phrase, you know, if you’re not adding value anymore and you’re still sitting at your desk, go for a run or whatever you like to do. If you still come back to your desk that day and you don’t have any value, go home. If you don’t have any value to add that day, right? And that’s not because I was trying to be negative, it was a positive thing, right? Meaning, you know, we celebrated failures at Glebar, right? Because if you can’t celebrate failures, you’re never going to be able to take those risks to win. And I think with aligning employee incentives, you know, with where you’re trying to go, is uber important.

    I think the most gratification I got when we sold Glebar to our client, and I still maintain a minority position, was seeing the faces of key employees that participated in that transaction with the look of shock on their face, you know, when you told them, you know, what they were going to see, you know, receive in proceeds. So I think alignment, and not only alignment with your employees, but everyone. Your suppliers and seeing value in everything that you, you know, that you do in that ecosystem of that company that you own.

    Patrick: I’m very pleased that we’re having this on recording. And I’m going to encourage everybody to have a real listen to this. Those steps that you took are absolutely fantastic and very, very thorough. And took a little bit of faith or quite a bit of faith, I can imagine, because these weren’t small capital outlays to get the physical plant put together and everything else lined up.

    But it was great because you can tell clearly that you had it in your heart at your core, that this is the direction we’re going to go. We’re not going to worry about short term outcomes. We’ve got, you know, a long term goal here and I just cannot vision anything not embracing that approach.

    Adam: And I, you know, it’s fun, it’s a different parallel but, you know, I coach jr football and what I tell all the kids all the time is we have a philosophy here and it’s no different in anything else you’re trying to achieve in life, whether it’s business or, you know, being a good partner to your spouse. We’re raising your children but it’s effort, attitude that, you know, that I can attitude, and then the toughness. That doesn’t mean being, you know, brash or abrasive but being able to fight through the, you know, tough times knowing that the sun will come out.

    Patrick: Resilient. Absolutely. Yeah, you’ve got to be there. I mean, absolute words to live by, Adam, tell us what’s your ideal profile for a target now? What are you guys looking for?

    Culper’s Profile for an Investment Target

    Adam: Yeah, I mean, I think it’s a founder-owned business or a second-generation business that truly has a differentiating product, whether it’s manufactured or distributed is that they’re in the second inning, right? So think 20 million bucks a revenue, 4 million of EBDA, but that founder slash owner is saying, Hey, I recognize I’m in the second inning. I’ve done an unbelievable job with this business.

    But not only do I need money, but I need more than that, right? I need someone, you know, and when I say someone, a group of folks who could kind of come in, you know, and build for the future. To say, Wow, I’m listening to these ideas and they make a whole lot of sense. And, you know, I’m gonna roll X percent of my business and you know what, the next time we sell it, if we do sell it, my minority position, it looks like it’s going to be worth more than the entire enterprise value next time. That’s the type of partner I want that is willing to listen.

    And we have to be willing to listen too. I remember at Glebar, I had a 30-day plan 60, 90, 180, 365, three-year five-year and I went in. You know, I sat there and interviewed every single employee. I actually went to my first customer visit in Ireland and after we landed after a nine-hour flight, went directly to a company and actually pointed to a poster and said, Hey, what’s that? I said, that’s what you do, sir. I had no idea what even the picture was. Talk about humbling.

    Alright, so you have to be willing to listen. So those plans that I had put together after I went on those customer visits, did a lot of listening not only to customers but our employees and suppliers alike. Three months later, pretty much 75% of those plans that I put together had materially changed, right? So I, you know, I think that there really needs to be, you know, that openness there. And hey, look, you know, I think Glebar, for example, I got it from the second inning to the bottom of the fourth.

    And I think the next fire and that bottom of the fourth from, and this is not being boastful, but I think was pretty impressive. It’s an unbelievable company today that our clients going to do phenomenal with. But, you know, my belief as well is that, you know, you should only own a business as long as you are going to continue to drive that value. And you know what, there probably comes another point where, you know, I removed myself as CEO, you know, last June because I said to myself, okay, now is the time to bring in that professional CEO, okay?

    Which I did from Stryker, a gentleman from Stryker, but then in addition to that, we really needed to start focusing in on M&A which was my background and we went out and did an add on. That is, you know, really impactful for the business. Had we not done that, had I not recognized that that was time, we probably wouldn’t have been able to go out and get that deal done.

    There’ll come a point, you know, because we were a change agent in Glebar when we came in where we said, hey, look, we need a new fresh set of eyes. This thing now is a potential for it to go from, we got it from, you know, C to F, well, somebody else needs to come in now with a whole new, you know, thought process and, you know, disciplines, if you will, to get it from F to S. And I really do believe that. So we’ll never stand in the way of a company’s growth or their potential.

    Patrick: Outstanding. If you could, share with me your experience with rep and warranty insurance. Good, bad or indifferent if applicable?

    Adam: You know, so as I was thinking about this podcast and thinking of rep and warranty insurance, I thought back to approximately about 15 years ago, I forgot where I was and what I was doing, but I was talking about a rather large deal. And, you know, hearing more about rep, warranty insurance and back then, it was for really large transactions. And I remember I wrote a one-page article, I forgot where it was published, but M&A insurance with a big, you know, exclamation point. I probably still have it at home.

    It was probably very, very generic and, you know, probably didn’t get a lot of reads. But, you know, now it’s completely changed the landscape of transactions. I mean, we’re working on a deal now with enterprise value of, you know, 30 to 40 million and rep and warranty insurance is available. So, to me, why is it important to the seller? I think that, you know, it obviously limits the amount of, you know, escrow baskets that they have to, you know, put up for a year or more, so that’s great.

    They get to, you know, they get to extrapolate more cash upfront without having their money hung up in an escrow account, earning little to nothing, and get to go ahead and invest that. I think for the seller, certainly, you know, it provides risk mitigation. But I think more importantly than that, for the seller, I think it further illustrates, you know, that you’ve got to do your diligence, right. So the insurance provider is not going to underwrite the transaction unless you really dive deep in the areas that they’re going to give you protection for.

    So I think it’s really focused buyers, if you will, I should say, to really dive deep because the insurance companies require it. Not that they didn’t dive deep before but I think it’s further risk mitigation as it relates and correlates to purchase price. So I think it’s changed, you know, discipline a bit, and I think it clearly, you know, helps the seller in terms of, you know, that cash, you know, that cash being available. But, you know, that offers a level of protection to the buyer that otherwise wouldn’t be available, especially the lower middle market, folks.

    Patrick: Now, since that first piece you wrote 15 years ago, there’s been a lot of change. It’s almost as much change as online businesses. I mean, night and day. I think it did not get a lot of traction because the cost was very big in the early days. And also the coverage was very, very narrow. For example, in Silicon Valley, you couldn’t get past first base on rep and warranty because it excluded intellectual property reps.

    So it accelerates the process. And I think it, particularly when you’re trying to attract management over from the target over, avoiding hammering them into the ground over terms because you have a lot more leverage is really a good long term strategy. And you were talking about all the great things that you do for quality of life and trying to get people all on board with you. It starts, it can start there with management, and it’s just one way that eases it through.

    And I think what I’m very happy about for us is that it was a product that was reserved for the larger middle-market deals north of 100 million dollars transaction value. And there are so many owners and founders that don’t get to 100 million but they get to 20 and 30 million and they could really benefit from this. And that’s the one thing has happened in the last about 16 months is that a number of insurance carriers come in and they’re targeting those sub $50 million transaction value deals.

    They’re coming in with really competitive rates, their broad coverage, just as broad as larger deals. And the eligibility standards are easier. Now, Adam, as we’re in this period of the year, COVID-19 is still around, we were stumbling in trying to get our legs under us to open up a little more full and we’re having some roadblocks here. How do you see from your perspective, either COVID or non-COVID on the future M&A for, let’s say, you know, through the end of 2020 into 2021.

    M&A Primes for a Big Comeback

    Adam: Look, I mean, I think in the intermediate term, M&A is going to come back in a big way. I think, you know, M&A is obviously been hot for so long. But, you know, let’s face it, there’s going to be businesses that are struggling to come out of COVID on the other side, particularly lower middle market businesses where I think consolidation is going to be more important than ever before to save a lot of these businesses.

    So the intermediate-term, I think, you know, we see a volume, you know, that, you know, that matches 19 or even higher, okay? I think that in the short term, I think it was Blackstone, I saw someone reference the other day about M&A is, you know, gonna continue to slow until people could shake hands again. I believe that.

    You know, we’re the lead investor. I’m not doing a deal unless I could look someone in the eye. And I think that’s extremely important. So I think in the short term, people gonna have to get creative. You’re gonna have to travel safely, to be able to go, you know, walk the floor, see how the culture is at the company. How do employees look when they’re working?

    You know, all of these things are really, really important that go well beyond just the dollars and cents that you can see in a spreadsheet doing diligence or on a Zoom call where you can’t, you know, read body language. So I think people are going to have to adapt. I think sellers are going to have to understand that warp speed closings, you know, in 30 to 60 days, they’re probably not going to happen. Maybe for add ons, but, you know, service providers are going to need more time.

    They’re going to have to be able to get there and coordinate travel safely. You know, so that kind of new normal is going to exist until, you know, COVID is under control, in my opinion. But in the intermediate and long term, I think it comes back. You know, it comes back in a very, very big way. And I think it’s going to be a necessary tool to save a lot of these companies that at no fault of their own or in, you know, are in, you know, painful positions.

    Patrick: I can’t tell you how much I appreciate all you’ve shared with us today because it’s been very, very helpful. I’m going to encourage our listeners, I think they’re going to do it because you’re, it was enjoyable enough listening to this the first time to repeat this. Adam, how can our listeners find you?

    Adam: Best way to find us is to go to I think there’s, you know, it tells our story there. It tells a little bit about who we are and what our approach is and, you know, Culper’s tied basically to the Revolutionary War. And that’s really the story is kind of, we want to, not that it has any tie the Revolutionary War, but we want to revolutionize the way that, you know, the meaning of private equity and why, you know, why deals get done, you know, beyond just, you know, multiple on invested capital or rate of return. Not that that’s not important, it is but there’s much more to it.

    Patrick: Well, focusing on the basics of business is surprising how it can be revolutionary, particularly when you’ve got an engineering-centric thought process now. So I really encourage folks to go and check out Culper Capital. Adam, thank you very much. And it was a pleasure speaking with you. Thanks again.

    Adam: Thank you, Patrick. Appreciate the opportunity, sir.

  • Moore’s Law Comes to R&W Insurance
    POSTED 10.27.20 Insurance

    While attending a recent M&A conference, I was surprised to hear so many of the participants – including PE firms, M&A attorneys, and bankers – still hold the mistaken belief that Representations and Warranty (R&W) insurance is too expensive.

    In fact, the floor for R&W coverage has actually come down drastically in the past year to the point that a $5M policy can easily be found and it will cost less than $200K, including underwriting fees and taxes. (This figure doesn’t include broker fees, which the big firms are adding to maintain income levels. More on that below.)

    Why the disconnect? These folks haven’t checked in on R&W insurance for a while, and people assume what was true a couple of years ago is still valid. They tend to get their information and updates from conferences. I was happy to spread the good news while I was there, and I got positive response. These folks did not see value in a policy if the cost was $225K, $350K. But if they could get a policy for under $200K, they were interested.

    This significant drop in costs reminds me of Moore’s law. Quite appropriate considering how many M&A deals are done in the tech space. This maxim holds that every 18 months we can expect the speed and capability of our computers to double, while we pay less.

    There are several reasons why the cost of R&W coverage has dropped:

    • The number of insurers offering R&W insurance has more than doubled.
    • Rates have fallen from the 2.5% to 4% range to the 2% to 2.9% range.
    • Eligibility thresholds have decreased from deals at $75M in transaction value to $10M in transaction value.
    • Falling costs have given rise to more policies being placed.

    I expect this trend to hold steady as the increase in R&W policies written has not yet translated into a corresponding increase in paid losses by Underwriters. Due to the simple fact that more policies are out there, reported losses are up. However, most of these cases fall within the policy retentions, so insurers are not having to write many R&W checks to cover damages. Plus, just because they’re writing smaller deals doesn’t mean Underwriters are getting sloppy and accepting just anything. They expect the same due diligence, making the smaller deals just as safe for them as bigger deals.

    It should be noted that unlike other discounted insurance products, these low-priced R&W policies provide coverage just as comprehensive as the higher priced alternatives (depending on the complexity of the deal and diligence completed, of course). You’re not getting lower quality coverage or added restrictions just because it’s cheaper.

    How Low-Priced R&W Insurance Changes the Game

    A sub-$200K priced R&W policy is good for M&A for the following reasons:

    1. Lower costs make the value proposition on smaller deals more “palatable” – especially for Sellers where $1M or $2M less in escrow makes a material difference. These folks can’t take a $1M to $2M hit if there is a breach. R&W coverage is a lifesaver for them.

    2. Lower priced policies more easily enable Buyers and Sellers to share the costs.

    Many Buyers are saying that Sellers want R&W coverage on the deal but don’t want to pay for it. And Buyers are chagrined by that. But if costs are split and it’s under $100K for each side, it’s more favorable, and both sides benefit from having the policy in place.

    As you know, this specialized insurance makes negotiations smoother, lets the Seller keep more cash at closing, and ensures that the Buyer doesn’t have to take legal action against the Seller if there is a breach, which is awkward if the Seller’s management team is on board with the new entity.

    3. The lower price point makes R&W an affordable tool for add-ons, which are expected to increase as PE firms and Strategics look to enhance the value of their portfolio companies.

    With PE firms in particular, thanks to lower cost policy and premium, they won’t just reserve R&W coverage for deals above $100M in transaction value. This lower price justifies using R&W on deals at $30M, which they are doing more of because it’s a lot easier to spend $30M to $50M than $100M. PE firms will transact two to three times more add-ons per year than one big acquisition.

    I saw this first-hand recently with a policy I provided here in Silicon Valley. The company brought in a $90M add-on to an existing portfolio company. The $5M limit R&W policy cost just $175K (including underwriting fees and taxes).

    Overall, with the lower price for an R&W policy, cost is no longer an objection for either party to consider a policy.

    What’s Ahead

    If R&W continues its stellar performance, expect to see even fewer exclusions and possibly lower retention levels.

    But how much lower can the price go? Not much further if R&W insurance is to be sustainable. If the product gets too cheap insurers will not be able to collect enough in premiums to pay claims.

    We’d caution prospective users to be wary of policies coming in under $100K.

    One observation from this drop in premium rates is that the major insurance brokers offering R&W coverage have reacted to this price drop (which they’ve had to go along with to stay competitive) by adding broker fees of as much as $25K. These big firms have big overheads and want to protect their profit margin.

    That’s where a boutique firm like Rubicon Insurance Services shines. In this segment of small market M&A deals, we take a back seat to nobody. We can broker policies more cost effectively and more efficiently because we don’t have the overhead. We won’t charge those broker fees.

    I’m happy to provide you with more information on R&W insurance and provide you with a quote. Please contact me, Patrick Stroth, at

  • Mark Addison | From a $30M Exit Offer to $100M
    POSTED 10.20.20 M&A Masters Podcast

    What motivates Mark Addison, CEO of X He’s seen too many entrepreneurs, especially first-timers leave money on the table when they exit.

    His firm helps optimize key valuation drivers during M&A negotiations to maximize the money owners and founders take home.

    In one case, he and his team were able to reengineer a $30 million offer… into a $100 million offer. We talk about the three things they did to make it happen and the audits they perform on clients, as well as…

    • The key metrics that predict higher valuations
    • Acquisition trends with PE firms you should be watching
    • Two insurance products you should have in place for any deal
    • The biggest misconception many founders hang on to
    • And more

    Listen now…

    Mentioned in this episode:



    Patrick Stroth: Hello there. I’m Patrick Stroth. 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 Mark Addison, CEO of X Rocket provides valuation engineering for M&A exits.

    They optimize the key valuation drivers used in M&A negotiations to prepare companies for larger exits. Now, while personally, my focus is providing a clean exit for owners and founders, Mark’s goal is to get larger exits, which makes even more people happy. So I’m pleased to have Mark join me today. Mark, welcome to the podcast.

    Mark Addison: Thank you, Patrick. Enjoy being here.

    Patrick:  Now before we get into X Rocket and value optimization and all that fun stuff, and again, this is targeted toward technology companies, both hardware, software, etc. Let’s set the table and tell us what got you to this point in your career.

    Mark: Well, depending on how far back you want to go, a couple decades ago, I started as a data quad for SRI, that’s out of Stanford. And I was doing multivariate statistical analyses. It was sort of a precursor to what we call data science today. And I got swept up in the technology. And so I had an early career win where I help the online chat community go to IPO. I’ve co-founded three companies.

    One, a wine importer and direct consumer retailer. Two, a tech marketing company, which is the core of my business. And then three, the M&A business, which we’re talking about today. You know, I’ve been motivated, because I’ve seen firsthand entrepreneurs pouring their sweat and equity and tears and passions and lives into building companies. And then I’ve also seen entrepreneurs exit those companies and sometimes leave a lot of money on the table.

    You know, helping people understand the difference between financial valuation, which is a multiple of EBITDA versus strategic valuation is, which is really where you get the extra value. You know, we recently helped a CEO reengineer a company, they had a $30 million exit offer. And we reengineered that into more than 100 million dollar exit offer. So that was really where we got, where I got to today, where we decided to double down and offer this kind of hands-on consulting to help companies and investors increase valuation. That’s where we are.

    Patrick: Every company in Silicon Valley is for sale. And if you’re in technology, you’re not limited to Silicon Valley. You’re around the world and you’re ideally, looking for an exit. So owners and founders have an eye on an eventual exit, that’s in addition to what they’re already doing. Let’s talk about the difference from what owners and founders expect in reality. Why should they engage specialists to best position them for a larger exit?

    You Want to Be the Worst-Kept Secret

    Mark: And I think early-stage investors will probably tell founders, hey, don’t worry about the exit, just focus on building the company. If you build it, it will come. And, you know, that’s certainly the ethos among a lot of more engineering-led companies, just build the technology and the rest will happen. I think as companies mature, they start to realize that there is more to it.

    And, you know, I think companies, most Silicon Valley companies go through some stages and so there’s usually a founder, CEO, who’s usually an engineer and he’s very product-driven and they’re just trying to find, you know, market fit and engineer the product. And then oftentimes, sometimes it’s the same CEO, but oftentimes, there’s a new CEO who’s going to be in charge of the growth and the scaling. And then as they get even more mature, and getting starting to approach exit, sometimes you’ll see a third tier of CEO come in.

    I call him the Exit CEO and that’s the CEO who’s got a big Rolodex of contacts and that’s the CEO who understands strategic valuation and that’s the CEO who starts to really look at the operations and ready the company for exit. I think this sort of this dichotomy that you are asking about, you know, what’s the founder’s expectations versus the reality. When you start a company, you know, at the seed round, you think you’re just gonna build a cool technology and the world is going to beat its way to your door.

    And, you know, seven to 10 years later when you’re on your C and D round, it’s just a different animal and you start to realize that wow, you know, I have to now be a sector leader and a thought leader. And it’s in, this sector that I started this technology in seven years ago, I invented the technology. but now it’s a noisy, crowded market sector because, you know, I proved that there was money to be made there, right?

    Think about AI, right? Think about early startups there. Now it’s a very noisy market. So now, the reality is, you have to distinguish yourself from all the other competition out there and you have to rise above that noise and you have to establish yourself as a sector leader so that you get the acquisition offer so that you don’t become, you know, the best-kept secret. You don’t want to be the best-kept secret. You want to be the worst-kept secret.

    Patrick: You mentioned when we talked before about there are some key valuation drivers or things that specifically can be done to drive value up. Let’s touch on a couple of those.

    Mark: Yeah, so one of the things that we did when we set up this M&A business, X Rocket, is we interviewed a whole bunch of M&A bankers and brokers and we asked them, What are the key metrics that predict best towards higher valuations? And what we were hoping to do was create this, literally an algorithm that we could just, you know, hammer down into a science, and, it’s unfortunately, not quite, it’s still a little more of an art than it is a science.

    But there are certain metrics, we call them levers that buyers pay attention to, and they’re things like, you know, operational levers and sales levers and marketing levers and customer levers. And we built a proprietary audit around those. So we walk companies through that valuation audit to highlight where the potential weak spots are and where the opportunities are to increase the valuation.

    Patrick: Well, you mentioned before, when you’re talking about one of your success stories there where you took a company that had an exit at 30 million, and you tripled that with the CEO with what you guys did. Let’s talk about that in little bit more detail. And, you know, give us a couple case studies on where X Rocket came in and literally changed the game for the client.

    Finding the Valuation

    Mark: I can give you one case study in healthcare because it’s like textbook, right? So small company, they built onboarding software for physical therapists. The company was 25 years old, founded by three doctors. They were ready to move on and sell. They actually originally came to us for marketing help and put that on hold because they got an acquisition offer. The acquisition offer failed in due diligence, right? Per the conversation that we had earlier and I’ll explain some of the reasons why.

    They came back to us and said, Hey, we get it now, right? We get it that there’s stuff you need to do to attract an offer and survive the due diligence and then attract a good offer. So we set and we looked at the business and this is where it’s easier for us as outside consultants to kind of see the business. They were trying to figure out how they were going to improve the valuation of their onboarding software which ran on a tablet and was sold to physical therapists.

    And that was all fine and dandy. But we discovered, like, literally in the first week, that they had this database with some 22 million healthcare records. In the healthcare world, it’s called morbidities and modalities and outcomes, right? And so morbidities is what’s wrong with the patient. Why’d they come in to visit the doctor? Modalities is what did the doctor do to make them better? Then outcomes is, you know, what metrics did you measure to say that the patient got better?

    And how many sessions did it take and things like that. And what we discovered was insurance companies were starting to come to this company asking to look at that data because they could better underwrite insurance deals. They could better figure out that, oh, you know, if the patient is a 24-year-old athlete, and they’ve got a torn Achilles, it’s this many sessions to get them better. If it’s an 80-year-old sedentary adult, with a torn Achilles, it’s a whole different, you know, sort of therapy, right? And a whole different cost structure to that.

    So the lightbulb went off in our head that, Hey, you guys aren’t a piece of onboarding software for physical therapists, you’re a data analytics company. right? That’s the nugget. That’s the valuation. That’s the big pot, right? And so then we started to do all the things to position the company as a data analytics company. Like we completely wipe the website, right? Because the website was selling to physical therapists. And so we just wiped it clean and stuffed it full of keywords around healthcare and data analytics and predictive data carrier analytics and things like that.

    The sales pipeline, we need to keep that going. So we hired an on-demand sales team to just do a bunch of digital sales and stuff that sales pipelines for that look good. We went through all of the valuation metrics, the valuation levers, and sort of one by one said, How do we optimize this, right? And so our house was tidy and clean, squeaky clean, right? And they were going to survive due diligence this time, because, you know, they knew, they learned. But then the big nugget that unlocked the value was how you position the company. What’s the real valuation of the company?

    So that’s one example. And so within nine months, Carlyle Group came knocking on the door and they were looking to do a roll up and they needed a healthcare data analytics piece and this company fit the bill perfectly. And there we go. So it was a textbook example of going from a failed acquisition and failed due diligence and probably, lower than anticipated valuation to more a successful offer that kind of just, you know, game-changing, repositioning.

    But more often than not, there is a strategic nugget that’s sitting right underneath the founders’ noses. They just don’t recognize it for the value that it is because they’re running the company, they’re fighting the fires, the daily fires. And it’s so much easier for us as outside consultants to kind of hover it 30,000 feet and look in on the business and go, Okay, I see it. It’s plain as day. It’s right here.

    So the second example, it was an ecommerce company, the one that we took from 30 million to over 100 million. That was pretty interesting because it was a founder-led company where the founder actually had been pushed aside by the investors who had brought in a new CEO with a specific mission of getting the company sold. That CEO did bring in a bid. The board rejected the bid as being far too low. The board rejected both the bid and that CEO.

    Founder CEO comes back into the hot seat and now, how do we get the company sold? How do we increase the valuation? So I think we did three things really, really well. One, in the absence of any branding and marketing under that other CEO, things that really languished a bit and the competitor’s sales guys were taking advantage of it. So they were putting FUD in the marketplace that, hey, things aren’t going so so well.

    And do you really want to hitch your ride on to the ecommerce company? So that was either outright killing deals or slowing them. So that’s one where we had to go in and tell the market that no, we’re here to stay and we’re here for real. Two, was on the positioning. In the ecommerce space, there’s open-source software available that’s free and then there’s some very large competitors that focus on the mega-market. And this company is focused on the mid-market but really wasn’t comfortable there.

    The sales guys were trying to go after deals both higher and lower. And we decided no, we’re gonna own the med market there. It’s a very respectable market sector to own. We double down on that, we really built the reputation around we serve mid-market retailers. And that served us really well. And then the third was around this CEO, he’s very charismatic. He was an underutilized asset. To the first point about rebuilding the brand reputation, what we did was we trotted the CEO out and we got him a lot of visibility.

    And we made him a spokesperson for that sector, for the ecommerce sector. He was a natural for it and he had really good content to share. And we got him, you know, guest columns in media and speaking opportunities and things like that. And we really built him up so he was a thought leader and so that the company by association, became a leader in the sector and therefore attractive to M&A buyers.

    Patrick: See now I’ll show off my age, but what you do with the CEO is you almost, you turn them into Lee Iacocca from Chrysler, where people weren’t buying Chryslers, they were buying Lee Iacocca. And that, you know, that’s one of those value propositions that you can bring in where you’re not necessarily changing the culture and making people within a company forget everything they did. You’re just enhancing them and opening them up to new opportunities.

    Mark: Yeah, I mean, our case, our CEO was a little more charismatic. But yeah, people sometimes will buy into that, you know, that credibility and that story,

    Patrick: Well, now the reason why I wanted to talk to you is not only because of what X Rocket can do for owners and founders of companies but also you’ve got a whole swath of mid-market private equity firms that have been buying these companies. They’ve been cleaning them up. They’ve been doing what they can.

    But their challenge now is they need to find a bigger buyer. And now it’s not just EBITDA that you can bring to the table, you can bring some other things that can really enhance the value because that’s the purpose of private equity, you know, find bigger buyers. And the market for bigger buyers is actually expanding because, you know, the traditional issue was while you would try to take your company IPO.

    If you don’t do the IPO, then find a bigger private equity company or find a strategic. And there’s a whole new class of strategic acquirers out there’s facts, and they have nine and 10 figures to spend. So there’s definitely a market for mid-market, lower middle-market private equity firms to stage up their babies to get them for bigger exits. So let’s talk about what you could do for those types of candidates.

    Bigger Exits for Mid Market and Lower Mid Market

    Mark: Yeah, well, as you said, the PE model is buy low, sell high, right? And do something in between to make the price justify the higher price. So I think among the mid-market, PE’s, what’s interesting is they’re buying inherently smaller companies to begin with. So those smaller companies, they don’t have 5000 employees and a bunch of fat, right?

    And so the classic PE model of buying three companies, consolidating operations, getting rid of all the HR directors and all the redundant positions to cut costs and add value, that’s just not quite as effective. I think at the mid-market, we have to find ways to actually add value, not just subtract costs. And that’s really where the X Rocket methodology comes in. We look at how to add value and create value beyond just the EBITDA and find strategic value that the M&A buyer is going to recognize as strategic value.

    Patrick: Specifically, what some of the things you can do? You were talking about creating thought leadership and so forth. Let’s talk about either scalability marketing, what are some of those levers that you could bring in because the private equities, they are outside of the portfolio, but they’re not that far outside, and a lot of them are probably embedded with their portfolio company so they don’t have that outside view. So let’s talk about that.

    Mark: Yeah. Well, so part of it is being able to scale this. So I know that there are some PE firms that will put in house staff into the portfolio companies to help with certain key aspects. But that’s not a particularly scalable model because you can only put your in house people into so many companies. So one is just scalability, we can come in from the outside. Two is that perspective that you just talked about. Coming in, understanding the market dynamics and seeing the business, you know, sort of, for what it is and figuring out where the strategic valuation is the other one. And then the rest is basically just implementing, right?

    So pulling the levers. So you can have a wonderful idea for, you know, improving the strategic valuation, but then you got to go get it done. And so for example, the case study that we mentioned in the healthcare company, that was textbook, but it wasn’t just going, Oh, yeah, it’s just the database, stupid. Just do that, right?

    And we had to do all the other things to make sure that that was, in fact, the nugget that the company was identified as and that the company could be discovered around and pumping up the sales pipeline and redoing the website so that it was a discoverable company. And in that case, we also did trot out the co-founders because we found out that they were scientists and they were co-authors of some 100 or so of these peer-reviewed medical journal articles. I mean, the real deal, right? Not just a contributor article to Forbes but, you know, a peer-reviewed medical journal article.

    And they were co-authors. And nobody knew that, right? So we wanted to shine the spotlight that, hey, this company, and therefore the data in this database, is real science from real doctors, and therefore really meaningful information. So a lot of it is, you know,  not just having the idea, not just educating the portfolio companies on what strategic valuation is and then having the perspective to find where the strategic valuation is, but then also turning that into real valuation that an outside buyer can recognize.

    Patrick: Now I’ve failed to mention also, and I apologize for this, but also you just released an article connected to our podcast notes here, but there’s another source of strategic buyers out there. Unicorns. Let’s talk about the growth real quick just in terms of pure number. Our audience here already knows that a unicorn is a privately held company with a valuation of a billion dollars or greater. Mark, you just took a headcount on them. Where are we standing now with that?

    Mark: We are standing at 603 unicorns, which means they are not nearly as special as they used to be, right? You can find a unicorn in any forest now. Not just the magic forests.

    Patrick: There’s another bigger buyer for you out there. Mark, let’s talk about, give us a quick profile, who’s your ideal client?

    X Rocket’s Ideal Client Profile

    Mark: So the ideal client for us, as you might gather is a company that’s maybe one to two years away from considering M&A. And this is important because a lot of companies wait a little too long. And this is what was borne out when we did all those interviews with the M&A brokers and the M&A investors, bankers. They love our model, obviously, because higher valuation means, you know, bigger exits for them. But they also see the frustration.

    By the time you’re talking to that M&A broker, they are preparing the two-sheet, you know, the two-page executive overview and they’re shopping your company to potential buyers, right? And a lot of these valuation increases, it’s too late, right? It’s too late to implement these things. It’s too late to clean up your books if your due diligence isn’t all neat and tidy. It’s too late to rebrand the company, right? It’s too late to make your CEO a thought leader and a sector leader.

    You can’t just do that in, you know, a week, right? So our ideal buyer is one to two years away from thinking about bringing in the M&A broker because that way we can work on all of these, the valuation levers that we uncover in our valuation audit. The other ideal client working revenue model, science experiments, as we call them, are very hard to place. They tend to be one-off, right? A certain strategic buyer needs that specific technology, but there’s usually one buyer for that particular technology.

    And what we’re trying to do is create competition among potential buyers for companies. So a working revenue model and not a science-driven. And then an under-marketed company, right? Per the discussion that we had a lot of times or earlier, a lot of times startups these days are engineering lead companies where they really focus on the product and the product-market fit. And, you know, or on scaling the growth and they really haven’t put a lot of attention to the brand.

    And so those under-marketed companies have a huge potential to increase valuation. And what we try to educate founders on is that, you know, if you’re selling your company for some multiple over EBITDA, you can negotiate that multiple, but it’s going to be within a certain range that is borne out by competitors. So buyers go out there, and whether it’s the ecommerce sector or the healthcare sector or whatever, there is a range of multiples over EBITDA that buyers typically buy at.

    And you can be on the low end of that range of the high end of the range, but it’s a pretty narrow range for negotiation. You’re leaving money on the table if you’re not getting strategic valuation layered on top of your financial evaluation. If you’re looking at selling your company, if you’re looking at increasing your revenue because you think you’re going to get seven times EBITDA as your multiple on sale and you’re going to be focused on that, that is good.

    But if that’s all you’re going to get the company sold far, you’re leaving money on the table. You need to get strategic valuation and that is by being a sector leader. That is by having competition among buyers. They want you and only you. There’s a great quote I have, we work with a lot of security companies and there’s a sales guy, I’ll never forget. He goes, Mark, nobody wants to buy the second-best security technology. There’s no market for that. There’s only a market for the most best.

    Patrick: Excellent, excellent. Well now you’re with the M&A and I’m not sure if you’ve had direct experience with us but have, tell me about any experience you or your clients have had with the M&A transaction insurance rep and warranty, or views with insurance at all.

    Directors and Officers Insurance 

    Mark: Yeah, rep and warranty, especially what you do, Patrick is I think underutilized. I don’t have any direct experience with it because I think it’s underutilized. My experience is with D&O insurance, directors and officers insurance, and that, I’m just in general, a big believer in have good insurance because I think it’s a sign of just a well-run company. But especially to D&O insurance, when you’re trying to recruit board members, you have to have D&O insurance in place because, you know, board members, they tend to be wealthy investors, which means they have assets that they need to protect.

    And they might really love your company and might really want to come onto the board and really want to help you out but it’s just not worth the risk to them if you haven’t bought a D&O insurance policy to protect their assets because now they’re basically signing their assets to your company. And if, and, you know, people who go to court usually look for the deep pockets. And if your potential director is one of those deep pockets, you better have insurance to protect them.

    Patrick: Yeah, I think it’s important to know that a lot of times the facilities that are providing insurance for these companies, they have commercial insurance and the benefits insurance and so forth. They overlook D&O or they don’t have the capacity or the bandwidth to provide D&O. They go elsewhere for that. I think it’s very, very important.

    It gets overlooked that, you know, not only if you want to attract good board members, but if you’re a seller and you’ve got a tight group of shareholders, you’ll still need a D&O policy because your buyer is going to require you to have it because the buyer doesn’t want past lawsuits against the former owners to be brought when they take over the company.

    Mark: Yep, yep. They don’t want a skeleton in the closet to come out and cost them a whole lot of money.

    Patrick: Oh, yeah. Then we were involved in a deal once and I can tell you where we had the widow of a founder that passed away and, you know, we processed the deal, they opted not to get insurance. But within about a week after the deal closed the news about the deal was in the LA Times and how the widow was due to get her half of the money, which is about $60 million. Out of the woodwork, wife number one showed up and widow number one, you know, we were looking around. We had never heard of this. So it does happen.

    Mark: Yeah. And the rep and warranty, from how I understand how you’ve described it to me, I mean, that’s a no brainer because that means that the seller will be able to take more money out of escrow rather than leaving it in escrow to effectively be a bond against, you know, unforeseen stuff that could come up later on.

    Patrick: Exactly. Within the purchase and sale agreement, the seller puts down a number of disclosures about the company, the financials and everything, the buyer performs due diligence on those to ensure they’re accurate and within the agreement, it’s, there’s an indemnification clause that says essentially, if the buyer suffers a financial loss as a result of those seller’s reps being inaccurate, the buyer contractually can claw back a certain amount of funds or all the proceeds from the seller.

    So the seller has the sort of Damocles hanging over them because there could be something out there unknown to the seller, the seller has no control over after closing, and saying the buyer will hold them accountable.

    Well, rep and warranty is an insurance policy that literally steps in between the buyer and the seller, steps in the seller’s shoes and says to the buyer, if you suffer financial loss, we the insurance company will pay you your loss. Show us the loss, we will pay you. And if you’ve got an insurance company stepping in, there’s little or no need for the buyer to withhold funds in an escrow. So seller not only gets more cash at closing because it’s not held up in escrow but they don’t have this huge indemnity obligation that’s going to be stalking them for years after closing.

    And so they get quality of life, free of fear and everything. And the buyer, they’re assured that if something does happen, they can collect. And the beautiful thing is, I will tell you as an insurance person, price is a non-issue with rep and warranty. I know people might not think that. But here’s the thing, if you’re the buyer and the policyholder is the buyer of the company, okay? The seller will gladly eagerly pay the premium so the buyer is protected. Because if the buyer is protected, there’s no escrow. So buyer, you’re getting this great protection and somebody else is paying the bill. I mean inside it.

    Mark: Well, I mentioned earlier that more companies than you think fail due diligence and it’s not because there was something inherently wrong with the company, it’s because the buyer got skittish. And when you’re in due diligence, you’ve got lawyers, right? And the lawyers don’t get all passionate and excited about technology. They’re paid to find, you know, they’re paid to figure out well, could there be a widow number two that could materialize on the seeing? What happens if so and so dies?

    They come up with all kinds, that’s what they’re paid to do. And so buyers tend to be really skittish, and I can imagine that when the policy is in place, they can just relax, those lawyers can sign off and the deal can get done. And, you know, as you know, from deals, time is your enemy, right? So the faster you can close the better off you are because the longer that deal lingers, the more opportunity there is for something to go sideways.

    Patrick: Mark, how can our listeners find you?

    Mark: Two ways. Our website is And my email address is m.addison with two D’s

    Patrick: Well is outstanding. And Mark, really appreciate this because that’s what we’re trying to do is find ways to add value that’s just not on the books. And here’s the nice thing, if you engage an organization like X Rocket, okay, not every firm out there is doing this. So you’re going to have a competitive advantage by engaging Mark. And I’ll tell you, it doesn’t hurt just having a conversation. So Mark, thank you very much for joining us today.

    Mark: Patrick, thank you so much for having me here. I enjoyed this conversation. Always good to talk to you.

  • Must-Have Insurance For Your Next Add-On Deal
    POSTED 10.13.20 Insurance

    If you’re involved in lower middle market M&A deals, you should know that Representations and Warranty (R&W) insurance is now available to cover transactions as low as $10M, offering tremendous benefits to both Buyers and Sellers.

    This isn’t common knowledge in M&A circles, even though it’s been 18 months since insurers started entertaining sub-$100M transactions.

    The pandemic has disrupted the normal route that this sort of news gets out: M&A conferences, where insurance companies share details on product development and product changes.

    If I wasn’t sharing this with you now, chances are, you wouldn’t know about it.

    That’s why I’m compelled to share that R&W policies created for lower middle market deals are available, and they are cheap – costing under $200K for a $5M Limit R&W policy.
    This makes R&W coverage perfect for add-ons, which have been an increasing focus of PE firms in order to add value to existing portfolio companies. Add-ons are often a smaller investment with potential for greater returns.

    The benefits to Sellers in an add-on deal are:

    • Greater value as part of a larger company
    • Cost synergies add to the bottom line
    • Access to larger customer base
    • Enhanced purchasing power and financial leverage

    Overall, this type of deal allows Sellers to strengthen a “weakness” keeping them from the next level.

    The greatest benefit is that it’s a “second bite at the apple.” Sellers retain a portion of the new entity, giving them potential for additional money when the new entity is eventually sold.

    For example, the owner of a $20M company agrees to sell for $15M cash and roll-over $5M (25%) in shares of the new firm. Later, when the new firm is sold for $100M, that 25% is now worth $25M, 5-times the original $5M roll-over figure and $5M more than the value of the original company.

    There’s a catch. Add-ons are smaller and less experienced in M&A than their counter parties. Once a LOI is signed, Buyers with huge leverage can exert great pressure in negotiations, which creates tremendous stress on the Seller.

    The acquired company might feel cornered and bullied into agreeing to take a lot of risk and liability away from the Buyer – like take on a sizable escrow. Traditionally, the Seller could be at risk of losing 10% to 30% of proceeds if there is a serious breach. And they have to swallow the fact that they’ll only get a portion of their money at closing.

    Sellers have to wait a year or more – and the money sitting in escrow can be exhausted in the event of a breach that the Seller had no control over.

    That’s where Rep and Warranty comes in.

    Removing Risk With R&W Insurance

    One way to remove some of the contentious issues in a deal is through R&W, which enables Sellers and Buyers to transfer their M&A risk to an insurance company.

    Until recently, this powerful tool was not available to smaller (sub-$50M deals) due to cost and target companies not having thorough financial documents or Buyers developing key diligence reports.

    As detailed in my previous piece “Moore’s Law Comes to R&W Insurance” greater competition among M&A insurance companies has driven down premium levels and simplified prior eligibility criteria. To read the Moore’s Law piece, go to:

    Insurers no longer require audited financials (a deal-breaker for lower middle market companies). And at costs under $200,000, R&W is the ideal fit for sub-$100M acquisitions – especially add-ons.

    Having this coverage in place makes for a much healthier environment post-closing, where you didn’t have to grind down the target company in negotiations. These are the folks joining your team, and if they come limping in, you can bet they won’t be as enthused to make the merger work.

    In the tech community, Buyers are especially reluctant to penalize their newest partners by using up escrow funds. So they have a dilemma. Do they eat the loss… or risk demoralizing their new partners? With a R&W insurance policy in place, that dilemma is gone.

    You want people to hit the ground running. How?

    Make sure they get as much money as they can with as little risk as possible. If you are the Buyer, the R&W policy is zero cost to you. And it can be applied directly to the purchase price which Sellers will eagerly accept.

    You want these transactions happening fast. You want to integrate the new group into your team in a positive way to ensure a successful transaction. What better way than this tool – Representations & Warranty insurance.

    It has withstood the test of time. It’s worked for the big deals, and now it also works for the lower middle market deals.

    What To Watch Out For

    As the R&W insurance market has matured, different insurance companies now favor different M&A profiles. Some prefer larger risks over $200M. Some prefer lower middle market – $50M or less. So when selecting a broker, make sure you work with one who is focused on your market segment.

    You could go to a “brand name” institutional broker for your lower middle market deal. They are not bad people, but they are focused on their bigger deals. They don’t have the bandwidth to handle the smaller transactions. If they have two or three billion-dollar deals going, they can’t handle a dozen $20M deals at the same time.

    Another wrinkle is that, due to lower priced R&W coverage, some brokers will add in extra fees to supplement revenue and maintain profitability per deal.

    I’m a broker with hands-on experience with the Representations and Warranty insurance product, specializing in insuring lower middle market deals.

    To learn more about the protection R&W coverage offers, I invite you to contact me, Patrick Stroth, at

  • Mark Gartner | Turning Targets Into Acquisitions
    POSTED 10.6.20 M&A Masters Podcast

    Mark Gartner is head of investment development at private equity firm ClearLight Partners LLC, which is dedicated to the lower middle market.

    Over his years in the industry, he’s seen a sea change in how PE firms go after potential targets, from “smiling and dialing” to using CRMs and data to guide their strategy.

    He talks about other elements of his approach to potential acquisitions, including how he always has a value proposition in mind when making contact.

    Part of that strategy derives from the fact that many of the ClearLight team have actually run companies and know the reality of operating a business – they’re not investors working in a vacuum.

    We talk about that, as well as…

    • Why 75% of companies utilize rep and warranty insurance
    • The reason they focus on lower middle market companies
    • The ideal target profile they’ve identified – and how it’s evolved over time
    • Where he and his partners see the greatest opportunity right now
    • And more

    Listen now…

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    Patrick Stroth: Hello there. I’m Patrick Stroth. 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 Mark Gartner, head of business development at ClearLight Partners.

    Based in Newport Beach, California, ClearLight Partners is a long-established private equity firm dedicated to the lower middle market. And at the expense of showing my bias, I would say there are fewer places on this planet that are more beautiful than Newport Beach, California to have your office situated. So, Mark, I envy where you are. Welcome to the podcast. Thanks for joining me today.

    Mark Gartner: Yeah, pleasure to be here. Thanks, Patrick.

    Patrick: Now, before we get into ClearLight, let’s set the table. Tell us what led you to this point in your career?

    How Mark Got to This Point in His Career

    Mark: Yeah, good question. As I look back, I would point to a series of decisions that all seemed like good ideas at the time. I would say in most cases they were. But I started off in investment banking, like a lot of folks who get into private equity, first with a boutique out of Memphis, Tennessee, and really valued that experience working for a firm called Morgan Keegan, which a while ago now got bought by Raymond James. So fewer people are familiar with the Morgan Keegan name, but had a wonderful experience there. And that was really my exposure to the m&a process.

    And then I joined a firm most people are not familiar with called Houlihan Lokey, their industrials group and focus on plastics and packaging transactions to kind of round out almost three years as an investment banking analyst. And then I was looking for a buy-side job and I interviewed with a lot of firms, mostly in Chicago, which was where I was at the time. And at one point, I think I’d cold emailed ClearLight, not knowing anything about the firm, not knowing anything about Newport Beach. I’m actually from Cincinnati, Ohio originally. And they responded, so every now and then a cold email works, or it did back in the day. This is back in 2007.

    Patrick: It was meant to be.

    Mark: It was meant to be, yeah. And they brought me in for an interview to be part of this proprietary deal sourcing program they wanted to develop. They were looking to recruit ex-investment banking analysts who could sort of eat what they killed and really be on the phones trying to source transactions by calling business owners directly and then work on those deals once you kind of brought them in house. And to me, that was very entrepreneurially exciting at that stage of my career to kind of live the full lifecycle of a private equity transaction.

    And, frankly, everything that they promised that program would be for the most part became true. And so I was at ClearLight for four and a half years, was kind of romanced away to another fund up in the Bay Area for two and a half years to focus on building them a deal sourcing program, and then was welcomed back to ClearLight in 2014 for my second tour of duty, so to speak. And, you know, I’ve been focused since that time on building, you know, what we think is a high-functioning, you know, institutional-grade deal sourcing engine to bring in as many deals that fit our criteria as possible.

    Patrick: Yeah, that’s part of the magic there is, you’ve got these great theories on what you can do with targets is identifying the targets, and then, you know, making a good enough case for that target to want to be acquired.

    Mark: Yeah, that’s a really good point. And I think what that kind of touches on a little bit, or maybe I’ll just touch on it, is the evolution of how the sourcing strategy has changed. You know, we started out looking for proprietary deals, you know, just kind of smiling and dialing. And at that point, this is probably 13,14 years ago, you could do that because not as many funds were doing it. Then business owners started getting bombarded with calls and they just kind of stopped returning phone calls. So the strategy had to pivot.

    And then we switched to kind of intermediary coverage, you know, getting to know all the relevant investment bankers that were producing deal flow that we found interesting, and there’s over 1000 of those entities out there. And so that was a very real process to get up to speed on the population of intermediaries out there, and, you know, adopting a CRM and using data to help, you know, guide our activities. So that was a very interesting exercise. And then, you know, other funds adopted that strategy as well. And so one of the things you alluded to is making the case for a company or an industry.

    And I think one of the really exciting strategies that’s working today is defining a thesis for a given industry, sort of calling your shot, if you will, and then going out and approaching companies in a more intelligent way, in a very purposeful way, given that you’ve already said I want to be in this space. You’re a company whose door I’m knocking on quite intentionally. Would you like to talk about a deal? And we’ve discovered that actually works pretty well.

    Patrick: At the risk of getting ahead of ourselves here, let’s back up a little bit and let’s talk about ClearLight. And then we can go into that. You know, with ClearLight, tell me how it was founded and then describe the focus that they have and you have because we’re both in the same area here. We’re looking at the lower middle market as opposed to middle market.

    ClearLight Partners’ Unique Origin Story

    Mark: Yeah, great. Yeah, so ClearLight’s origin story is pretty unique, I think. You know, we actually grew out of an operating company, there’s only so many funds that can lay claim to that. This is about 20 years ago, our founder, was running a residential security business on behalf of a Japanese publicly-traded company who had bought the security company in Orange County, as it turns out, and it was effectively a turnaround situation.

    Our founder had advised the parent company previously, as an attorney, incidentally, had learned to speak fluent Japanese in his spare time in between undergrad and law school and actually studied, I believe, in Tokyo and was able to nurture on that proficiency in the Japanese language.

    And so he earned the trust of this Japanese entity to run their US operation. And so I think at the ripe age of 31, despite a career in law, he was installed as CEO of this home security company called Westech, Westech Security Group, which, if I understand correctly, was around 35 million of revenue, was on the verge of losing money and it was his task to turn it around. And over a 15-year period through a combination of organic growth and acquisition, he got it up to maybe 250 million of revenue.

    And it’s sold to a strategic buyer for about $300 million. And rather than send the money, the proceeds money, back to Tokyo, he was entrusted with that capital to continue investing in other US-based businesses via a private equity structure. And so ClearLight was established in the year 2000, with that inaugural fund of 300 million, and we’ve subsequently raised a second and a third fund, each 300 million, with every dollar we’ve invested to date coming from that Japanese entity.

    And so having this sort of single LP structure, kind of, in a sense, makes us a hybrid between, say, a family office and a private equity fund in the sense that we can invest over a longer time horizon if need be because we’re not subjected to the fundraising cycle. Yet we are staffed, motivated, incentivized, structured, to deploy capital routinely, you know, not by hobby, which is, unfortunately, how family offices have developed a reputation. So it’s been really the best of both worlds. And they’ve been an amazing partner, you know, for now, over 20 years.

    Patrick: Well, and it speaks to the success because there’s just the trust and, you know, and that’s how these successful funds create lead to other funds is you’ve got very happy investors that are, you know, they trusted you with a little bit of money and now they can trust you with more money and they just keep rolling it over.

    Mark: Yep. That’s a great way to think about it.

    Patrick: Yeah. And so tell me about the targeting the lower middle market. The reason why I ask is that I personally believe that the lower middle market owners and founders there are the real entrepreneurs that are in a space where they’ve created value from nothing and just need to get to that next step. And the unfortunate thing is, I think a lot of lower middle market founders are underserved because they don’t know channels and access points that organizations like ClearLight Partners provides.

    Mark: Yeah, it’s a good question. I think, as an investor, what you’re really looking for is inefficiency, you know, in the market, and as funds get larger enough to chase larger and larger deals, that market, the competition for those deals creates a very high level of efficiency. And so you have to ask yourself, Is that where there is the most opportunity?

    Maybe I’m biased because I’ve spent most of my time in the lower middle market but I think about how a lot of private equity funds for instance, don’t have dedicated deal sourcing teams, are not using CRMs, are not comprehensively canvassing the universe of intermediaries who produce the deals are looking for, are still establishing kind of EBITDA thresholds of 5 million when you can find really great companies kind of in that three or $4 million EBITDA range. And to me, that just really presents a lot of opportunity.

    And to your point, business owners in that size range probably have been underserved by equity capital providers, or at least there hasn’t been a focus on them. And I really think that’s changing. And, you know, some of the best deals, or at least a couple of deals I could point to that we’ve done, that have produced really nice returns have started with a very small, very modest starting point.

    So yes, there’s more risk to starting at a smaller scale and the companies might need to be invested in and have management teams built out and have proper systems kind of put in place. But if that’s all done correctly, it can produce a lot of opportunity. So I’m a huge fan of the lower middle market. You just have to know kind of what you’re getting into and, you know, learn the playbook, if you will, to create value. So I’m a big fan of it.

    Patrick: Well, you started, ClearLight Partners started as an operating company. And so let’s talk about, and we referenced this earlier, where you have a value proposition to make to these target companies as you are actively going out there, talking to them. What’s the message that you deliver that’s different? What are you bringing this a little different?

    Mark: Yeah, I mean, as it relates to our operating heritage, I think sometimes between, you know, operators and investors, there can be kind of a communication disconnect. You know, let’s say you’ve got investors who’ve only been investors, or who were investment bankers and then became private equity investors.

    There’s a manner of speaking that might not be compatible, you know, with how operators kind of describe their world. And then there also can be a lack of empathy for what it takes to execute strategy. And so if you look at our firm, starting with the senior-most leadership, these are people that have had p&l expertise. And that story kind of ripples throughout several people on our team who have run companies before, in some cases, run companies for private equity funds, and in even some cases further started companies themselves.

    So it just lends itself to, I think, a more productive discussion and kind of bridging that communication gap and really understanding what it takes to execute strategies. That’s a huge part of what we offer. When you couple that with kind of the single source of capital and the longer investment horizon, we think, you know, in a fairly commoditized private equity world right now, we think it makes us different, but it’s just all a matter of getting in front of those owners so we can actually tell the story.

    Patrick: It’s important that you talk about the empathy that you have because there’s a danger if your investor only focused, you’re going to fall into that trap that cynical people describe private equity. And that cynical thing is for words, just buy low and sell high. And, you know, that’s not comforting for owner-founders out there. And so it’s great that you guys are stepping out, and that is different out there from a lot of other folks. Why don’t you give me an example, you know, one of the deals you’ve done, or one of the success stories you’ve had?

    Mark: Yeah, I think one of my favorite stories involves us getting into the fitness industry, which is important for a couple of reasons. One, we had never done a deal in fitness previously. And this was a franchisee. And this is before franchising was as hot of a space as it has become. And so, you know, one of our partners, you know, really deserves a tremendous amount of credit for having the vision to get into the industry to get into this deal. And so this franchisee in question was a Planet Fitness franchisee, they had 12 locations in two markets, they were generating healthy EBITDA, the unit economics were very compelling.

    And if you know anything about the Planet Fitness model, it’s all about value. So it’s the low-cost model. And this is also at a time, I think, before the world became so focused on recurring revenue, but fitness is yet another industry that is based upon recurring revenue that perhaps wasn’t appreciated for it in the way that say, a security company was, you know, back in the day or has been. And so, you know, we took a bet on this particular business and it just paid off so well.

    You know, we got into a couple of additional markets, so bought new territories, opened up clubs organically, basically didn’t acquire a single club in our journey from 12 locations to north of 60. And this is over a five-year period. And there are some really great things that happened during that time. Built out a management team. You know, the president of the company was given the opportunity to assume the CEO role. So that transition was done effectively.

    A former ClearLight employee was actually able to step in as the CFO of the company, which proved invaluable kind of given his understanding of kind of how we analyze businesses and just the strong rapport we had with him. And, you know, the business, the exit of that deal generated basically the best financial return in the firm’s history in a five-year period. It just exceeded all expectations. So it’s just one of those great success stories where everything lines up well and you make a huge difference in the lives of people at that company. And it was just a really rewarding journey to observe.

    Patrick: Well, that breaks the stereotype of fitness centers being not the greatest investment in the world. So that’s really telling. I’m just thinking from personal experience, just seeing things in the bay area where his centers are coming and going. With this thing, were you dealing in just one geographic region? Are you regional, are you cross country?

    Mark: In that case, we had pretty disparate locations. I believe we were in San Antonio initially and in Nashville, I want to say, and got into Sacramento and then Pittsburgh and then also Canada. And so literally all over the map. And I know there’s a strategy that people like to embrace of building kind of regional density and the view that that kind of enhances valuation or kind of positions you best to enhance valuation. But in this case, we benefited just fine from having disparate layers. And it was, again, it was a great run.

    Patrick: Well, and let’s transition into just a little bit broader on the profile. What’s the ideal target profile that you’re looking for?

    ClearLight’s Ideal Customer Profile

    Mark: Yeah, and this has evolved over time. I mean, if you can believe it, back when ClearLight was getting started, we were trying to figure out a strategy. We even did a few venture deals, some of which that actually panned out okay. But then we pivoted to kind of traditional middle market, you know, LBO investing back when LBO is still a term that people used.

    But I think, you know, we’ve done deals buying from other private equity funds, but our passion is to invest in founder family-owned companies. Has been for a while now. I think that presents a lot of opportunity for professionalization, for investment into the business that, you know, not to the fault of the business owner, it’s just many business owners, you know, get their business to a point where they’re generating three, four or five, 6 million of EBITDA, life is pretty good.

    You know, why do I need to take the risk of over-investing in the business or taking risks with the business? And so we think that presents a lot of opportunity. We like situations where the business is in an industry that’s healthy and growing. So it’s very clear and easy to understand macro story, supporting the growth of the business.

    We don’t really invest in story situations or turnarounds. It’s usually kind of up into the right, organic industry growth that’s beating GDP for some compelling and sustainable reason. And then from there, it’s underwriting the business and try to understand, you know, is this a company that we’re excited about where, you know, we can understand the risks and box those accordingly and, you know, proceed with the management team to hopefully, double, triple EBITDA.

    Patrick: And that’s where you guys really add the value to because the skill set for owners and founders where they’re killing themselves to get to a point where they’re three,