• Heather Madland | Scaling Founder-Owned Businesses
    POSTED 11.28.22 M&A Masters Podcast

    There’s enormous opportunity in professionalizing and scaling founder-owned businesses.
    But what does it take to become a leader in this area?
    In this episode, I’m joined by Heather Madland of Huron Capital for an inside look at the firm.

    Read More >

  • Richard Parker | An Inside Look at Sell-Side M&A
    POSTED 11.17.22 M&A, M&A Masters Podcast

    The sell-side of M&A brings unique challenges and opportunities. In this episode, I’m joined by Richard Parker of Roy Street Advisors for an inside look at a sell-side firm.
    Read More >

  • Rep and Warranty Insurance Is a “Mature” Product
    POSTED 11.9.22 M&A

    In the world of M&A, Representations and Warranty (R&W) coverage has become a go-to transaction insurance product. Many PE firms, for example, have made it an almost standard part of any deal that is able to be covered.

    Simply put, R&W is a mature insurance product and despite its growth in popularity, it has not fallen off in terms of quality.
    Read More >

  • Two Ways TLPE Insurance Might Cover Your Next Deal
    POSTED 11.2.22 M&A

    Two Ways TLPE Insurance Might Cover Your Next Deal

    When it comes to acquisitions by PE firms, having Representations and Warranty insurance to cover the deal has become almost S.O.P. – it’s that common.

    But not every transaction qualifies, such as those under $30M in EV, or deals where the target’s financial records weren’t complete, and the Underwriters declined to cover the deal or at least included many exclusions.

    There is an alternative to traditional R&W insurance. A specialized new product that can also act as a solid alternative to “tail” policies for Directors & Officers liability coverage, also known as “naked tail” policies.

    First, here’s what to do if R&W coverage is not an option.
    Read More >

  • Justin Smith | Scaling Family Businesses
    POSTED 10.28.22 M&A, M&A Masters Podcast, Podcast

    Why do M&A Masters love the lower middle market?
    You get the opportunity to aggressively scale family businesses…

    In this episode, I’m joined by Justin Smith of LongWater Opportunities, a private equity firm based in the Midwest.
    Justin’s firm has firsthand experience growing family businesses, and he’s here to share his expertise.

    Read More >

  • Case Studies: TLPE and Multiple Sellers
    POSTED 10.19.22 M&A

    In this series on the protection offered by Transaction Liability Private Enterprise (TLPE) insurance to small- and medium-sized business owners who are selling their companies, I’ve written about how it is especially useful in M&A transactions involving tech companies, as well as so-called “indifferent buyers.”  
    Read More >

  • Case Studies: TLPE and Indifferent Buyers
    POSTED 10.12.22 M&A

    You’re a small to medium-sized business about to be acquired by a much larger Strategic Buyer. You want some measure of protection during the transaction, and you’d prefer not to let a large portion of the sale proceeds sit in escrow for years in case some or all of it could potentially be clawed back if there is breach of a rep in the purchase agreement.
    Read More >

  • Case Studies: TLPE Insurance and Tech Companies
    POSTED 10.5.22 M&A

    There is a new R&W product taking the lower middle market M&A world by storm: Transaction Liability Private Enterprise (TLPE).

    TLPE insurance is designed to fit a blind spot in deals that Buy-Side R&W policies won’t cover, specifically deals ranging from $1M to now $30M in enterprise value. Historically, these deals have been ineligible for traditional (R&W) coverage. Enter TLPE, which was innovated by London-based CFC Underwriting just one year ago, to offer protection for deals that are either too small or too expensive to justify a Buy-Side R&W policy.
    Read More >

  • Jamar Freeman | Build a Market-Leading Company
    POSTED 9.28.22 M&A Masters Podcast

    What does it take to be an M&A Master for the IT and cybersecurity industries? 

    Jamar Freeman of Moonshot Equity Partners is here to share his firm’s holistic approach to acquiring and building market-leading companies.    
    Read More >

  • Jeffrey Brooker | An Inside Look at the Independent Sponsor Conference 
    POSTED 9.21.22 M&A Masters Podcast

    If you’re an independent sponsor or a capital provider, you won’t want to miss the upcoming Independent Sponsor Conference…   

    Featuring one-on-one networking meetings with people hand-selected to match you…   

    This is an unbeatable opportunity to connect with someone and lay the groundwork for deals… 

    In this episode, Jeffrey Brooker, an organizer of the conference, is here to give you all the details on what to expect. 

    Jeffrey also gives insight into the role of an independent sponsor and how it differs from private equity. 
    Read More >

  • Think of Insurance as a War Chest
    POSTED 9.14.22 M&A

    You know about the drama with Elon Musk and Twitter. Lawsuits are flying back and forth, with both sides alleging breach of contract after Musk declined to buy the social media giant.

    For super-billionaires like Musk and multi-billion-dollar companies like Twitter, they have the millions needed for such drama. Money is no object.

    But most of us don’t have that kind of cash. That means when something goes south during a liquidity event, you need to have the proper insurance coverage in place – and proper level.

    But I propose that you should think about this insurance as more than just protection. Think of it as a war chest.

    Here’s what I mean…
    Read More >

  • The Next Evolution in Representations and Warranty Insurance
    POSTED 9.7.22 M&A

    An exciting innovation is coming to Representations and Warranty insurance world, and if you’re a Buyer or Seller in the lower middle market, you need to know about it. This new product is especially useful to serial acquirers.

    In short: insurtech is coming to M&A… sort of.
    Read More >

  • M&A Trends for the Rest of 2022 and into 2023
    POSTED 8.31.22 M&A

    Inflation, a rise in interest rates, and global unrest and uncertainty represent some serious headwinds for the economy right now. But the consensus, from my sources in the M&A world is that dealmaking for the lower middle market has not faltered and will not falter going into the next year.

    Granted there has been a decrease in the pace of M&A activity when you compare 2022 to 2021, but that’s not a far comparison, as last year we saw record-breaking deal-making thanks to pent-up demand for deals as we emerged from the pandemic.

    As PricewaterhouseCoopers put it in their Deals 2022 midyear outlook report:

    “Just like a car that slows from 100 mph to 60 mph is still moving fast, so was the first half of 2022. The 2021 deal volume was not a sustainable annual average, and that context is important.” 

    There are several factors contributing to this continued run of impressive M&A activity.

    There is a massive amount of capital out there, with $800B to $900B in dry powder available to be exercised by PE firms and Strategic Buyers.

    Prices are leveling off. Unlike in 2021, with its frenzied rush of acquisitions, there are not as many Buyers pursuing a given target. That means more reasonable pricing for Buyers. Fewer bidding wars.

    There has been extra scrutiny focused on publicly-held companies, with the federal and some state governments taking closer looks at so-called megadeals in terms of antitrust issues. But this is not an issue for privately held like the majority of lower middle market firms.

    Rising interest rates, inflationary pressure, and consumer spending variability are impacting transactions – but not stopping them.

    Supply chain issues have actually caused many companies to react by acquiring suppliers, cutting out the middle-man to source materials directly. For example, in consumer goods, companies are acquiring distribution centers so they have control over that part of their supply chain at least.

    While volatility does inhibit IPO volume, PricewaterCoopers maintains in their report that “alternative sources of capital or transactions may be more likely, including PE suitors.”

    You also have to look to owners and founders of lower middle market companies. Many feel cornered by these ongoing macroeconomic trends. They feel like we’re headed to a similar fate as 2008/09, and they don’t want to be caught up in that cycle as a protracted recession could prevent them exiting for three to five years. So they have an incentive to get a deal done in the next 12 months.

    This is particularly the case in places like California and New York locations. These folks want sell, retire (or move on to other ventures), and they’re ready to escape to places with lower taxes and lower cost of living.

    These Sellers willing to take a discount if they can get out sooner rather than letter.

    It’s also worth noting that conditions that you would think would slow down deal-making…are actually doing the opposite. As the Deals 2022 midyear outlook report notes:

    “Some of the same forces creating market uncertainty – the lingering pandemic and geopolitical turmoil – also are driving dealmaking imperatives. Whether a company needs to transform its capabilities, supply chains or go-to-market approach, the market is impatient and one of the fastest ways to accelerate transformation is through M&A.”

    Certain market sectors are doing particularly well in these times.

    Technology companies are sitting pretty, buoyed by very favorable market fundamentals. Businesses need to keep pace with innovation and the ongoing worldwide digital transformation. There is always some new tech needed to stay competitive.

    And that means M&A deals for companies offering software, cloud solutions, analytics, and cybersecurity will continue at full steam.

    In the consumer goods market, they are faced with the fact that some people are not buying as much due to inflation. However, we have a strong market, which means plenty of people spending money out there.

    And industrial and manufacturing companies are also streamlining in the face of supply chain issues. With recent experience, they are getting better at making contingency plans for future supply chain interference, which means commodity shortages are less of an issue. Plus, they are increasingly turning to onshore manufacturing.

    All this said, deal-makers must be cautious. There are a lot of unknowns out there. The situation is volatile and changing constantly. But I contend that it will be more expensive – in terms of lost opportunity – to hunker down instead of continuing to move forward on deals. But deal-makers do have to work smarter in this climate.

    As Cascadia Capital put it in Summer 2022 Quarterly Newsletter:

    “Though the astronomic prices are gone, buyer scrutiny is more intense than ever. We have entered a ‘show me’ world where buyers are demanding concrete proof. They need to see it before believing it; once they do see it, they are willing to value and pay for it.”

    One way to eliminate Buyer and Seller risk in an M&A deal – especially now but in any market conditions – is with Representations and Warranty (R&W) insurance. This product is tailormade to facilitate fast acquisitions too.

    This coverage:

    Transfers risk of breaches of any Seller Reps and Warranties to the insurance company.

    It protects Buyers if a post-closing breach occurs. They won’t be subject to covering that loss entirely themselves or having to pursue the Seller for a clawback.

    When this coverage is made part of the deal early on, there is no need for the intense negotiations over reps and warranties because, if there is a breach, the insurer pays the damages.

    This speeds up the process – not to mention saves on legal fees, about 20% savings on the negotiations part of the deal.

    The target company keeps more money in their pocket rather than in escrow. This is especially compelling for owners and founders seeking a quick exit.

    Buyers savvy enough to offer the idea of R&W at the opening of negotiations, routinely finds the target company will gladly pay for the coverage.

    As a boutique broker with long-time experience with R&W insurance, I’m happy to chat with you about how this unique coverage could be part of your next deal.

    Please contact me, Patrick Stroth, for more information on TLPE and other M&A insurance options.

  • Chris Parisi | Why M&A Isn’t About the Numbers
    POSTED 8.24.22 M&A, M&A Masters Podcast

    M&A is never just about chasing numbers….
    It’s about the people who trust you with their business…
    A business that represents generations of hard work—and a family’s legacy.
    My guest Chris Parisi knows this well. At Carl Marks Advisors, which has been around since 1925, Chris secures clean exits for lower middle market business owners.
    In this episode, Chris shares some of Carl Marks Advisors’ storied history and reveals how he fights for the best outcomes for his clients.
    Read More >

  • TLPE Insurance and Non-Disclosure Policies
    POSTED 8.17.22 M&A

    Transaction Liability Private Enterprise insurance (TLPE) is taking the lower middle market M&A world by storm. 

    Unlike traditional R&W insurance, TLPE is a Sell-Side policy where the Seller, rather than the Buyer, is the policyholder. The policy is triggered when the Buyer makes a claim against the Seller. Instead of going after the Seller directly, the Buyer simply collects from the insurer. 

    Sellers benefit from this insurance as well, with TLPE effectively reducing escrow levels in deals from 10% to 1% of the purchase price. (The cost of TLPE is only $10,000 to $20,000 per $1M in Limits.) You can check out a great case study of TLPE coverage being used by a Strategic Buyer here.

    But there is a downside to TLPE…

    TLPE, like all Sell-Side transaction liability policies, has an inherent weakness.

    If the Seller does not disclose something to the Buyer intentionally, that known item is excluded and not covered by the TLPE policy.

    This is the polar opposite of Buy-Side policies, where if the Seller commits fraud or intentionally doesn’t disclose an issue, the Buyer is still covered because they are the policyholder.

    This key difference has made some Buyers suspicious, and reluctant to go with Sell-Side policies that might exclude Seller breaches. Let’s say, TLPE insurance isn’t the first choice of many to cover their transactions. They’d prefer to keep a chunk of the Seller’s proceeds in escrow.

    But understandably, Sellers have been all over TLPE coverage because it offers protection, reduces the amount held in escrow, is easy to qualify for, and has a low cost.

    Enter a new insurance product to save the day…

    The Nondisclosure Policy, as its creator, CFC Underwriting, puts it “covers the Buyer for loss as a result of a breach of Seller’s representation caused by the Seller’s nondisclosure of known matters.”

    As you can see, this new coverage fills the whole left by TLPE quite nicely.

    The cost is a $10,000 premium per $1M limit, plus a $500 policy fee. And if the Seller gets a TLPE, the Buyer can then seek a Buy-Side Nondisclosure Policy.

    Then, in the event that the Seller does not disclose a bad thing in their history intentionally, the policy pays. There is no deductible.

    To be clear, unlike other Representations and Warranty-type policies, the Nondisclosure coverage states that if the Buyer suffers a breach and the TLPE coverage excludes it because it was prior knowledge of the Seller… the insurer will pay. However, the Buyer must give subrogation rights to the insurer, so they can then go after the Seller.

    A breach could be something as simple as out of date license or permit. Or a past indiscretion that seemed minor at the time and was felt to be a nothing issue not worth bringing up… and then it blows up big time. Of course, an innocent Seller has nothing to worry about and there’s no risk to them.

    The Nondisclosure Policy helps both parties with these claims.

    Please understand that this specialized coverage does not insure intentional fraud, simply issues not disclosed intentionally by the Seller. 

    No insurance company will willingly insure against fraud. It’s a moral hazard. However, the Buyer isn’t committing fraud, they are suffering from fraud. Buyers get protection from fraud with a traditional R&W policy. Insurers are willing to do this because diligence is so thorough it’s hard for Seller to hide something. 

    However, in a Sell-Side TLPE policy, much less diligence is done. If a Seller chooses to withhold key information, the Underwriters might not catch it. That’s why they don’t pay these claims. And then the Buyer is out of luck.

    Again, that’s where the Nondisclosure Policy kicks in. And it’s important to note that the Seller must have TLPE insurance in place before the Buyer can seek this other coverage to protect themselves.

    It’s cheap and the Policy Limit can go to $20M, with a six-year policy period.

    When you have TLPE coverage in the deal, it’s a good idea to throw in a Nondisclosure Policy as well. Policies can be issued within 24 hours of submission…in conjunction with the TLPE Policy.

    As far as who pays, this is negotiable. But for many Sellers, it’s worth footing the bill to dissuade the Buyer from holding back a portion of their proceeds in escrow. The Buyers have the leverage here.

    I understand TLPE inside and out. As this new insurance product has rolled out, it is becoming a go-to for many of the smaller deals out there and something I’ve been specializing in.

    Please contact me, Patrick Stroth, for more information on TLPE and other M&A insurance options.


  • Sean Frank | An Expert Investor on Cloud-Based Infrastructure
    POSTED 8.10.22 M&A Masters Podcast

    Cloud-based infrastructure is one of the most rapidly expanding industries today…
    And this episode’s guest, Sean Frank, is an expert on it.

    As the founder of Cloud Equity Group, Sean invests in lower middle market companies in the web hosting and cloud-based infrastructure sectors.

    Read More >

  • Current Trends in M&A Add-Ons
    POSTED 8.3.22 M&A

    Globally, M&A activity so far has declined 23% in 2022 compared to 2021. Yes, that is a significant drop. But, as I wrote in a previous article, you must consider that 2021 was a historic record-breaking year of deal-making. So, in a sense, 2022 has been somewhat of a return to normal.

    That said, while worldwide M&A activity has declined, what we’ve seen in the U.S. is little or no decline in deal-making. It’s essentially “flat.”

    This is largely because of the increasingly common practice of purchasing “add-ons” instead of platform companies.
    Read More >

  • Sly Buford | Strategies for the Lower Middle Market
    POSTED 7.27.22 M&A Masters Podcast

    How do you get owners to stop thinking like operators…
    And start thinking like investors?
    For the lower middle market, this mindset shift is crucial for a clean exit.
    In this episode, I talk to Sly Buford, founder, and CEO of Tenth Street Group, which specializes in helping lower middle market businesses grow, scale, and exit. Sly had an unconventional path to becoming an investor, and he’s here to share how he found M&A success.
    Read More >

  • Marty Fahncke | Finding Success in the Lower Middle Market
    POSTED 7.20.22 M&A Masters Podcast

    In this week’s episode of M&A Masters, we sit down with Marty Fahncke to talk about M&A for the lower middle market. Marty is a partner at Westbound Road, LLC and has over 30 years of experience in building and growing businesses.
    Read More >

  • Legal Diligence Reports and R&W Insurance
    POSTED 7.13.22 Representations and Warranty

    I’m helping a first-time client place Representations and Warranty (R&W) insurance, and it’s taking a bit of hand-holding on this first go-around as we get quotes from insurers and review other elements of the process.

    We should all keep in mind that the primary thing Underwriters want to see is thorough due diligence. Otherwise, they are going to be a lot of exclusions in the policy.
    Read More >

  • Alistair McBride | How to win your deal-by building trust
    POSTED 7.6.22 M&A Masters Podcast

    You might think of M&A as a zero-sum game…

    But that’s where many business owners go wrong.

    It might surprise you to hear that building trust with the opposing side is the key to securing your clean exit.

    This episode’s guest, Alistair McBride, coaches business owners in the fine art of negotiating M&A deals. 

    Alistair has seen deals succeed when business owners treat their opponents like their ally.

    He calls this “the psychological edge of negotiation.”

    In today’s episode, we discuss how you can use this idea to win over the other side and sell them your vision—so you can both close with maximum value.
    Read More >

  • It’s Never Too Late for TLPE
    POSTED 6.29.22 M&A

    It’s Never Too Late for TLPE
    I was at a conference recently talking with an M&A advisor. One of his clients sold his RV park for about $10M a few months prior. But, he was getting nervous that he has money withheld from the purchase price, in escrow, in case of a breach of the purchase and sale agreement.
    Read More >

  • Deborah Smith | Trends in Real Estate NOW
    POSTED 6.22.22 M&A Masters Podcast

    On this week’s episode of M&A Masters, we’re sitting down with Deborah Smith to talk about real estate, a first on this show!

    Deborah is the Co-Founder and CEO of The CenterCap Group. The CenterCap Group, LLC, is a boutique investment bank providing strategic advisory, capital-raising, and consulting-related services to public and private corporations, owners, operators, and investment managers. They are exclusively focused on the real estate sector, with a deep understanding of what drives the industry and the relationships to back that up.

    Deborah says, “We are all things real estate and we haven’t strayed from that. Our whole goal is to be in the middle… if you think about real estate and you need an advisor, you should call us.”

    Listen to learn: 
    Read More >

  • Patrick Turner | Leveraging Financial and Industry Expertise to Drive Growth
    POSTED 6.17.22 M&A Masters Podcast

    In this week’s episode of M&A Masters, we sit down with Patrick Turner to talk about how his company is transforming good companies into great companies through their partnerships. 
    Read More >

  • A Look Back at 2022 Q1 M&A Activity
    POSTED 6.9.22 M&A

    As we exit the first quarter of 2022, all the buzz is around the slowdown in M&A activity.

    It’s true that deal activity in the beginning of 2022 is a drop from Q4 2021, as well as a drop compared with Q3, Q2, and Q1 of 2021 because there was so much pent-up activity as pandemic closures waned.
    Read More >

  • Case Study: A Strategic Buyer and TLPE Insurance
    POSTED 6.1.22 Insurance

    Case Study: A Strategic Buyer and TLPE Insurance

    It took years for Representations & Warranty insurance (R&W) to gain the trust of the M&A community.

    For years, lawyers argued that nothing was more sure than cold- hard cash sitting in an escrow account.

    But PE firms, seeing the value of R&W’s ability to successfully transfer risk at a reasonable cost propelled the use of R&W to where it’s present in far more deals than not.
    Read More >

  • D&O Liability Coverage Versus TLPE Insurance
    POSTED 5.25.22 M&A

    D&O Liability Coverage Versus TLPE Insurance

    As I’ve written in the past, there are many founders of small- and medium-sized, privately held companies that simply don’t see the need for Directors & Officers (D&O) liability coverage.

    I won’t argue the merits of D&O insurance here.

    But, the reality is that when those owners try to sell their companies, that lack of coverage will come back to bite them.
    Read More >

  • The Biggest Impact of TLPE Insurance
    POSTED 5.19.22 M&A

    The Biggest Impact of TLPE Insurance
    Transactions—the major decisions in the life of a business—impact both Sellers and Buyers.

    In a standard transaction, a Buyer will request that money from the purchase price be held in escrow. While I’ll admit there is a strong argument justifying these requests, there are viable alternatives.
    Read More >

  • Four Reasons to Use TLPE in SME M&A Deals
    POSTED 5.11.22 M&A

    Four Reasons to Use TLPE in SME M&A Deals

    If you’re a sell-side advisor… investment banker, business broker, or an insurance agent… I have some news for you:

    If you aren’t at least discussing Transaction Liability Private Enterprise(TLPE) as an option to cover an M&A transaction, you are doing your SME clients a serious disservice.
    Read More >

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

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

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

  • A New Trend in M&A Insurance You Should Know About
    POSTED 4.26.22 M&A

    In this era of sky-high valuations, PE firms seeking inorganic growth are increasingly looking at an alternative to acquiring fully built out platform companies.

    The strategy is to buy a platform that is not fully built out yet and available for a lower price and then “add on” other small companies. Not only are these acquisitions cheaper, but they are also easier to transition into the platform, which helps accelerate growth.

    This trend has also led to increasing adoption of two unique M&A insurance products that have been available for a couple of years but were not widely used until now.

    More on that in a moment. But first, why are valuations so high?

    Well, 2021 was a banner year in M&A, with 8,624 deals with a combined value of $1.2 trillion. That’s 50% above the previous record for deal value in a single year.

    What brought about all those deals? As Pitchbook in the 2021 US PE Breakdown:

    “GPs were motivated by the availability of debt, the wave of sellers coming to market to avoid anticipated tax hikes, and the urge to deploy capital quickly in order to return to the fundraising market. Many industries, if not most, experienced intense competition for deals as a result, and multiples elevated to 2019 levels or higher in 2021.”

    On other words, it’s a seller’s market, with intense competition for target companies pushing prices higher.

    A compelling trend has emerged out of all, says the Pitchbook report:

    “The current deal climate has been particularly conducive for buy-and-build strategies, and add-ons as a proportion of the number of total US buyouts reached an all-time high of 72.8%. During the market dislocation in 2020, firms had turned to add-on dealmaking to continue deploying capital with diminished risk, because add-ons are typically smaller deals and the GP has a firm grasp on its platform.”

    As I’ve written before, PE firms these days use Representations and Warranty (R&W) coverage to protect their deals as a matter of course. It’s become standard. So, it’s no surprise that they’ve sought out similar insurance products when doing add-on acquisitions.

    Add-On Insurance

    For transactions under $20M in deal value, PE firms use Transaction Liability Private Enterprise (TLPE) insurance. For example, I recently brokered TLPE coverage for a deal in which a sports apparel manufacturer bought a high-performance glove wholesaler for under $2M. The process took two days and cost just $20,000.

    By having this TLPE coverage in place, the Seller was able to reduce their holdback from $140,000 to $14,000— matching the policy retention.  The standard retention level for TLPE is  1% of enterprise value or $10,000, whichever is higher. Compared to the usual escrow or holdback of 10% of purchase price, no wonder TLPE is so popular.

    As this manufacturer looks at other add-ons, they will again look to be covered by TLPE insurance, which offers six-year policy periods with a limit that is 100% of enterprise value. TLPE isn’t just for Sellers. Now Buyers can be named as Loss Payee in a TLPE policy which ensures faster collection from covered losses.

    What about strategies where the planned add-ons are expected to be above the $20M TLPE threshold? CFC Underwriting has created an innovative coverage called a Portfolio Policy where an initial portfolio platform is underwritten and insured by CFC consistent with a standard R&W policy.  The Portfolio Policy can grow as companies are added to the platform at a discount.

    Under the Portfolio Policy, R&W coverage is arranged for the PE’s platform investment.   As add-ons are brought in, the Portfolio Policy is amended to add new limits for each new entity brought on board. Each new Limit is independent of the other acquired entity Limits, so there’s no dilution as companies scale.

    The thinking is that the Underwriters who underwrote the original platform acquisition will be familiar enough that it will save time and money on the underwriting process (lower UW fees and discounted premium rates.)

    They can see how the new add-ons fit on the platform and will understand the investment theory of the PE firm making the decision to acquire the add-on. In other words, they are already familiar with the key players and aren’t coming at this fresh.

    With familiarity comes comfort and Underwriters can add new companies to a platform for a fraction of the underwriting fee because they’ve already done most of the legwork. Considering the increasing costs for R&W, a scalable product should be a welcome alternative. Another perk: processing time will be cut down as well, with the underwriting call cut in half at least.

    If a PE firm is going into an acquisition and knows upfront that add-ons will be bought, the Portfolio Policy is the correct route.

    Otherwise, they should go with traditional R&W insurance for the platform. For add-ons they could go with another R&W policy if the enterprise value of the add-on is above $20M. If it is lower than $20M, TLPE is the way to go.

    When seeking out this specialized and relatively new M&A insurance, it’s best to reach out to an insurance broker experienced in this type of coverage

    I’m happy to help. You can contact me here at

  • New Targets for Ransomware Attacks – and How to Protect Yourself
    POSTED 3.29.22 M&A

    The dream of every startup is to one day be acquired by a PE or VC firm or a Strategic Buyer.

    All the hard work and dedication finally pays off. And it’s only natural that these firms will announce the happy news to the world with a press release whether it’s a merger or announcement of a successful round of fundraising.

    Unfortunately, these days such announcements have put a target squarely on the backs of soon-to-be or newly acquired companies in all sorts of industries, from manufacturing to tech to healthcare to consumer-oriented businesses. These days, of course, every company has a database full of sensitive data about its customers, clients, and/or own operations and systems. Just as importantly, most companies today rely on their IT systems for day to day operations.  Being locked out can cause operations to grind to a halt. Who can go for a day without access to their system?

    As noted in a recent article in the Wall Street Journal, hackers involved in ransomware attacks are shifting their focus away from big corporations to smaller targets, including midmarket acquisition targets. Government authorities and law enforcement have noted this trend has been heating up in the last year or so, even as bigger targets like the Colonial Pipeline grabbed the headlines last year.

    These cyber criminals know that:

    • The PE firms and other deal-makers have deep pockets or the newly acquired company has quick access to cash thanks to their recent payday.
    • These startups, which have been focused on growth, may not have very robust cybersecurity measures in place, which makes them easier to hack.
    • This lack of cybersecurity could allow the hackers to also sneak into the Acquirer’s systems, as well as other firms in its portfolio, through an unsecured backdoor.
    • By attacking smaller, midsize companies they won’t get as much attention from authorities and law enforcement. Even if they ransoms are smaller, they bring that “income” in steadily

    In one such case cited in the Journal article, a midsize manufacturer was bought the 4th quarter of 2021 by a PE firm. Two months later, a Russian ransomware group locked up its hardware systems and demanded $1.2 million to release them. The company paid.

    This is typical of these attacks. And deal-makers have taken note and are seeking measures to protect themselves and their acquisitions from financial losses and loss of reputation.

    Fortunately, there are some best practices that can help prevent such attacks, as well as protections that can provide financial compensation if a ransom is paid.

    As noted in my previous article on cyber liability insurance, this specialized type of coverage is fast becoming a must-have in deals. Buyers are basically requiring Sellers to have a policy that will respond to any cyber claims. And Buyers are taking out their own policies as well to cover what the Seller’s policy does not.

    When writing these policies, Underwriters have a common set of questions they ask to verify the cyber security and privacy measures in place. If they’re not satisfied, no policy. Or, at the very least, they will load down the policy with broad exclusions and narrow limits.

    On the plus side, this has forced companies to bolster their security measures and given them clear direction on how to do so.

    One of my contacts, an Underwriting Manager for Toko Marine HCC – Cyber & Professional Lines Group, provided a list of security controls they look for when writing a policy (otherwise they will not write the policy or adjust terms accordingly):

    1.  Multi-factor authentication (MFA) is required for all remote access to the Insured’s network.

    2.  MFA is required for all local and remote access to privileged user accounts.

    3.  A preferred Endpoint Detection and Response tool is required.

    As the Underwriter noted:

    If the Insured is missing any of these three important controls the premium and deductible will increase and we will sublimit Breach Event Costs, System Failure, Dependent System Failure, and Cyber Extortion to $250k. Additionally, we will include an endorsement with a $250k ransomware sublimit/50% coinsurance for all losses/expenses related to a ransomware attack.

     “If the Insured does not use MFA for all access to emails through a web browser or non-corporate device, cyber crime will be reduced to $25k. If they use MFA for email access, the maximum cyber crime limit available is $100k.”

    The implementation of cyber liability insurance is more important than ever, as cyber security has become one of the most costly and largest exposures out there. As a result, Insurers are looking to exclude cyber claims from other M&A insurance products, such as Representations and Warranty coverage.

    You should also note for board members of a startup that suffers from cyber security issues, that Directors and Officers insurance may not protect you from investor lawsuits if you did not take proper cyber security measures to protect the company. Failure to Affect and Maintain proper insurance is a standard exclusion clause in D&O policies.

    Insurers want deal-makers to take out stand-alone cyber liability policies which are more appropriately underwritten and broader in scope to best handle these exposures. They don’t want D&O or R&W insurance to become “umbrella policies.”

    When seeking out help in securing cyber liability coverage, it’s best to reach out to an IT specialist or an insurance broker who is connected with such experts.

    I’m happy to help you secure cyber insurance. You can contact me here at

  • Cyber Security & Privacy Liability
    POSTED 3.8.22 M&A

    Cyber crime is a major problem in the United States and around the world.

    It seems every day there is another news story about hackers and other criminals who have been able to breach company networks and get their hands on confidential data…or take companies hostage by locking them out of their networks or even shutting down a business’s operations until a ransom is paid.

    Remember, the Colonial Pipeline ransomware attack in May 2021? Cyber criminals managed to access computerized equipment that operates the pipeline, which runs from Texas and New York and delivers about 36 billion gallons per year to the eastern seaboard.

    The incident cost the company $25 million. And all the hackers had to get in was use one compromised password that was leaked on the dark web.

    Also in May 2021, the data of more than 100 million Android users was compromised. Personal info from over 700 million LinkedIn users was found for sale online. Facebook users were hit too – 553 million of them.

    It’s clear this is a serious problem. And it extends to all industries.

    Every company these days, from retailers (online and brick-and-mortar) to restaurants to healthcare providers, collects confidential information, also known as personally identifiable information, or PII. This can include customer names, birth dates, Social Security numbers, driver’s license numbers, credit card numbers, bank information, medical records, and more. Everything a hacker would need to steal an identity.

    It can be collected by the company directly or through a third-party, like a payment processor like PayPal.

    But in any case, if there is a fault of security and that data goes out into the world, customers are going to blame the business they patronize. They’ve shared their information with the company, and the company breached their trust. That certainly doesn’t encourage repeat business. Plus, there are costs related to notifying all the people affected. There can be legal penalties and fines as well, particularly when healthcare information is involved.

    Not to mention, in some cases, the affected customers have a right to claim compensation if they suffered material or non-material damage.

    Enter cyber liability insurance to make these payouts on behalf of the company.

    But there is another wrinkle in this issue you may not have considered, where again cyber insurance comes to the rescue.

    Say you acquire a restaurant or hotel chain or a group of healthcare companies and, six months or a year post-closing, one of these breaches of confidential data is discovered. (It is very common these incidents are not discovered until six months or more after they occurred.)

    As the Buyer, you are on the hook. When the deal is done that exposure has been transferred to you from the target company. That’s even if the incident occurred before the sale.

    It doesn’t matter if, during the diligence process, you asked the Seller about any data breaches. To their knowledge, they had none.

    Again, enter Cyber Security & Privacy Liability insurance. And here’s the best way to protect yourself as a Buyer:

    1.   Make sure the Seller has a robust cyber liability policy in place that will respond to these claims. There should be at least a $5M limit. That will cover the expenses associated with notifying all the customers whose data was stolen. This should be the first batch of money that is used for any expenses from a data breach.

    2.  Make sure you, as the Buyer, also have a cyber liability policy. This may cover what the Seller’s policy does not.

    Keep in mind that a stolen personal information incident is also a breach of the Representation and Warranty policy covering the deal. So the R&W insurance will effectively sit right on top of the cyber policies.

    This will help not only cover expenses but also potential loss of value of the target company. And this kind of fallout can happen.

    Say there is major data breach of a hotel or retail chain. Those customers are probably going to have second thoughts about ever doing business there again.

    Cyber liability can also cover the impact from ransomware that cause outages and a loss of business. For example, the computer network and payment system for a chain of sports bars is held hostage during the Super Bowl…reducing the bars to only accepting cash! A big loss.

    Cyber liability insurance means extra diligence in the run up to the sale.

    I’ve put together some common diligence questions asked during that process. I would recommend viewing them and keeping them handy during your next acquisition.

    You can get this free download here: Sample Cyber Liability/Privacy Questions in Diligence

    You can also discuss this issue with me, Patrick Stroth. You can contact me here at

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

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

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

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

    Listen to discover:

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

    And much more



    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and president of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Broker Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Renny Sie, Vice President for Business Development for Boyne Capital. Boyne Capital was established in 2006 in Miami, Florida, with a focus on investing in lower middle market companies. Boyne has a unique approach to investing. It’s an approach to forges lasting and collaborative relationships with companies whose founders and families are still deeply involved with growing their business. It’s a term they call a value cultivator approach. Renny is a pleasure to have you. Thanks for joining me today.

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

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

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

    Patrick: Yes. 

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

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

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

    Patrick: Focus, yes.

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

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

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

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

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

    Patrick: Yeah, that second bite of the apple.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • Material Contracts and Representations and Warranty Insurance
    POSTED 2.15.22 M&A

    As Representations and Warranty insurance matures as a product and comes into wider use, Underwriters are taking lessons learned from past claims to equip future policyholders on ways to either identify pre-closing trouble-spots, or to mitigate their impact post-closing. They’re looking for patterns or “danger areas” where breaches are more likely to occur.

    Many such breaches result in losses far exceeding the R&W policy limit. So, it’s essential that Buyers take action so that they can catch any issues before a deal closes. That way they can address the issue with the Seller. (Read to the end of this article for key questions to ask in this regard during the due diligence process.)

    The cynical view is that insurance companies are taking such an interest in order to exclude parts of the deal from the policies they provide so they don’t have to pay claims.

    But I see it as an attempt to protect Buyers and give them the chance to go to the Seller for a remedy. That could be a lower price or having the Seller address the issue. This way the risk is transferred away and does not have an impact on the R&W policy for the deal.

    All industry types are impacted by material contract breaches. But the biggest “hot spots” are manufacturing, tech, and government contractors.

    Trouble Areas to Look Out For

    Currently, material contracts are now the third leading cause of R&W claims overall worldwide, preceded by financial misstatements and violation of laws, and tied with tax issues. Material contracts represent 14% of reported incidents, as reported in AIG’s M&A Insurance Comes of Age report.

    If a Buyer acquires a target company with bad contracts and it is not disclosed, the Buyer is left holding the bag. And that bag can be quite big. Damages in material contract claims can be sizeable.

    Think a $20M material contract claim with a $10M R&W policy.

    There are four leading types of material contract breaches.

    1.  Issues around profitability of a contract (e.g. improper accounting for expenses).

    2.  Target in breach of a material contract.

    3.  Change in a customer relationship (e.g. termination or curtailing of purchasing levels). This could involve contracts with key customers where a customer is allowed to go to another provider for lower costs, leaving the new owner without revenue they expected. This is a major issue.

    4.  Failure to disclose existence of a material contract or material term (e.g. undisclosed discounts)

    Due Diligence Questions You Can Use

    The below are questions regarding material contracts taken from actual due diligence calls with Underwriters. I would recommend you make this a standard part of due diligence in your deals.

    1.  Discuss the scope of your diligence of Company contracts. Was this reviewed in house by the Buyer? What diligence was memorialized in writing, if any? Have you reviewed all material customer and vendor contracts? Confirm you’ve reviewed all form agreements and material deviations therefrom.

    2.  Please confirm no issues were identified in the top 15 customer and service provider contracts.

    3.  Please confirm that you did not identify any material vendor or supplier that cannot be readily replaced.

    4.  Discuss any notable provisions (e.g. change in control, anti-assignment, most-favored nation, termination, preferential pricing, restrictive covenants, atypical indemnity, powers of attorney). How does Company ensure compliance?

    5.  Describe the indemnification provisions in the material contracts. Have there been any breaches (actual or alleged) of any contract? Any other material disputes or declines in business under any contract? Are you aware of any other planned terminations or other issues with respect to the Company’s material relationships?

    6.  Did you or any advisor conduct customer calls/surveys? If so, describe the results.

    7.  Confirm Company is not a party to any government contract. If so, describe.

    8.  Have any customers provided any notice of intent to terminate? Are there any concerns related to this?

    9.  Any other concerns related to material contracts?

    Material contract breaches can be a serious issue for any M&A Buyer. But armed with knowledge, it’s a problem easily avoided before a deal closes.

    I’m happy to discuss this issue with you further. You can contact me

    You can contact me Patrick Stroth, at

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

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

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

    Listen as she walks us through:

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



    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability, and President of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Broker Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Laurin Parthemos, Principal of Kotter. With offices on both coasts, Kotter helps organizations mobilize their people to achieve unimaginable results at unprecedented speeds. And I gotta tell you it for a marketing thing, that’s a lot to unpack in one sentence. So there’s a very efficient intro right there. Laurin, welcome to M&A Masters. Thanks for joining me today.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: Great.

  • Staging Your Deal for a Better Rep and Warranty Experience
    POSTED 2.1.22 M&A

    When you sell your house, one of the best ways to get noticed by potential buyers is to “stage” the home. This is interior design. Nice furniture and décor. No personal items or family photos. No family photos on the wall. No crazy paint schemes on the wall.

    Some sellers even hire professional decorators to arrange their homes in this way.

    Similarly, in the M&A world, if you want to use Representations and Warranty (R&W) insurance, you should be prepared to stage your deal to make it more appealing to Underwriters who would be approving and writing your policy.

    Doing so will get your deal noticed and your policy priced appropriately.

    Why should you have to jump through hoops for a policy you pay for? Wasn’t it just a few years ago that insurers were hawking R&W coverage to anyone who would listen…?

    Things have changed.

    As I mentioned in my article, “Bandwidth,” the problem is that Underwriters are overwhelmed right now.

    R&W coverage has become standard in many circles, including PE firms and Strategic Buyers. It’s more popular than ever as M&A players have come to understand its benefits, that claims are paid properly and on time, and that this specialized insurance can actually smooth negotiation and speed up deal-making.

    Combine that with an increase in M&A activity overall and, in particular, a rise in the number of so-called mega deals of $1B+ in transaction value (TV), which get priority from Underwriters…

    And the result is that the teams of Underwriters out there (who are also short-staffed as companies can’t hire enough people fast enough to meet demand) simply don’t have the capacity to research and understand all the deals and determine coverage and terms for all the Buyers and Sellers out there who want a policy.

    In fact, insurers are actually declining to cover otherwise great risks because their Underwriters lack bandwidth. They’re just stretched too thin. Actually, national insurance brokers are not covering deals under $400M in transaction value in most cases.

    Unfortunately, that means to secure R&W coverage for your deals, you have to be prepared to put in some legwork. And while there are some common themes, there is also industry-specific prep you must consider depending on what space your deal is in.

    First, the best way to stage your deal is preparing your due diligence. The goal: to make the Underwriters life easier and make less work for them. Ninety percent of R&W policies are buy-side, which means it’s up to the Buyer to do the prep work.

    In this case, that means:

    1. Having all the proper due diligence done before approaching the Underwriter. Loop in your experts now, including your lawyers and accountants. Identify potential areas of concern…and have answers or solutions ready.

    Have that work done upfront so the Underwriter can review quickly, have their most common concerns mollified, and write that policy. And the Buyer should also be prepared to address any new concerns or requests for new documentation that come up.

    2. You know the concept of supply and demand. Demand goes up, supply goes down…costs go up. That is what is happening with R&W policies. So, plan for increases in due diligence costs, insurance costs…and higher R&W premiums. Prepare any decision-makers for these increased costs to prevent delays.

    Something to note. If you have a deal under $400M TV, forget going to one of those nationwide brokers as they simply don’t have the time for you. You need to look for a boutique broker, somebody regional, somebody experienced. This goes the same for any law or accounting firms you want to work with on the due diligence process. Oh, and be sure to contact these firms ASAP and get on their calendar. They’re busy too.

    Also, healthcare, technology, service businesses, restaurant industry, entertainment…every industry has its own little processes you should follow to best stage your deal.

    More on that in a future article.

    For now, if you’re working on a deal and are worried that R&W coverage might not be available to you, as a boutique broker with long-time experience with this insurance product, I’m happy to chat with you.

    You can contact me Patrick Stroth, at

  • The Reluctant Strategic Acquirer
    POSTED 1.11.22 M&A

    Representations and Warranty insurance transfers all the risk in an M&A deal, including the indemnity obligation, to a third party – that’s the insurer.

    It’s hard to argue against a major benefit like that. Plus, R&W coverage makes negotiations smoother and faster (and cheaper when it comes to less attorney fees) because all the nitty-gritty of a deal doesn’t have to be picked over. If there’s a breach, a claim is filed, and the insurance company pays.

    Easy. It’s no wonder it is more widely available and widely used than ever before.

    The perception may be that R&W coverage has gone from an obscure insurance product to something that is ubiquitous in the M&A process. And if you’re Private Equity that may be the case. PE firms are the most common repeat buyers. They’ve embraced this coverage in a big way – so much, in fact, that demand has grown exponentially.

    But not everybody is totally convinced of the value of this coverage.

    In the case of one Strategic Buyer I interviewed recently, while he didn’t object to R&W insurance being part of the deal, there was definite reluctance on his part. Simply because it was the first time he had used it on a deal.

    This reluctance to take on R&W insurance – or at least their lack of exposure to it – on the part of Strategic Buyers is no surprise. In the past, they never really needed it. Until a few years ago, it was more of a Buyer’s market… the Buyer had more leverage, especially a Strategic Acquirer like a massive corporation buying a smaller company.

    So, the Buyer didn’t have to accommodate the Seller with R&W coverage. They could impose escrow requirements and essentially be unopposed. The Seller had no recourse. In many cases, Strategics have been convinced by their attorneys that there is nothing more secure than having cold hard cash sitting in an escrow account.

    Also a factor: Because Strategic Acquirers have not used this insurance before, there is a fear that it would slow the deal down or alter the process in a way that would cause a delay. They didn’t want to add this new, “foreign” element they weren’t familiar with to get in the way of what had been their smooth, well-oiled machine.

    Then, things changed…

    Why Strategic Buyers Are Changing Their Mind on Rep and Warranty Insurance

     Strategic Buyers seemingly had plenty of reason to push R&W insurance to the side. But they can’t ignore it any longer.

    It’s a Seller’s market out there right now. And Sellers, even smaller companies being acquired by vastly larger companies, now have leverage. And they’re using that power to make R&W coverage standard in M&A deals.

    So Strategics have been forced to make this accommodation in increasing numbers to make quality deals to buy solid companies they want.

    The good news is, the process to secure this specialized coverage, even if you’re totally new to it, is straightforward. Here are some things to keep in mind:

    1.  A professional Strategic Buyer, when making such a big investment as acquiring a company, is going to be doing thorough and appropriate due diligence. That’s a given.

    Well, that means they’ve probably done enough due diligence to qualify for R&W insurance. You simply send the diligence over to the Underwriters. It’ll probably have to be rearranged or organized in a different way, but the diligence is there.

    2.  Underwriters are ready to work with Strategic Buyers, so it never hurts to look at R&W coverage to see what the options are. Underwriters will provide applicants with a quote that outlines the major policy terms before committing funds for underwriting fees. Within those indications, the Underwriters will comment on what they’re concerned about with the deal, what they call “heightened areas of risk.”

    They’ll put in their quote that they’ll be looking closely at Topic A, Topic B, Topic C, etc. So, if a Strategic can respond to these topics and show their diligence in these specific areas, Underwriters will be satisfied.

    This eliminates a concern had by many Strategic Buyers: that they’ll pay an underwriting fee to get R&W insurance and then there will be a lot of exclusions on the policy. But it’s not true. You can go in with eyes wide open and get all the details before you spend a dollar.

    3.  Working with an experienced broker who knows M&A and Rep and Warranty coverage is key. A broker can convey information back and forth between the Buyer and the Underwriter. A broker knows what information is needed. They can manage expectations, provide reasonable timelines, be diligent in following up to make sure the proper due diligence and documentation – in the proper format – is flowing to the Underwriters.

    Not just any broker will do. Some less experienced brokers have a tendency to be reluctant to ask a client for more documentation when requested by the Underwriter. They don’t want to be a bother or have the client ask why they didn’t request the document at the beginning of the process.

    But the truth is, and an experienced broker knows this, that sometimes, in the course of the underwriting process, there are questions that come up that must be satisfied. An experienced broker can head that off somewhat because they’ll have identified those areas of heightened areas of concern and addressed those with the Buyer upfront.

    Where to Go From Here

    With the right help, the process to underwrite a R&W policy have this coverage in place in an M&A deal is actually quite easy. That’s even for a Strategic Buyer that has never used this insurance before.

    If you’re engaged with accounting firms and law firms experienced in this area, along with an experienced broker who can work with Buyer and Underwriters alike to shepherd the policy from application to closing day, it can be a frictionless process.

    And having that coverage means that between Buyer and Seller all the most sensitive issues of a deal – indemnity, escrow, etc. – are now non-issues.

    Soon enough, I expect more Strategic Buyers to happily embrace R&W coverage and become converts. All it takes is facing the unknown and going through the process once.

    My firm has extensive experience in Representations and Warranty insurance. If you’re looking at this coverage for the first time, or are already an enthusiastic user, you can contact me, Patrick Stroth to chat about your next deal. You can reach me at

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

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

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

    Listen as she walks us through:

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



    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and president of Rubicon M&A Insurance Services. Now a proud member of The Liberty Company Insurance Group of Brokers. Welcome to M&A Masters, where speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Samantha Ory, Founder and General Partner of Ouroboros Group. Ouroboros Group is a private investment firm specializing in middle market acquisitions and operations within the healthcare, consumer, manufacturing and distribution spaces. The firm has offices in Boston and New York. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: Continuity.

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

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

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

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

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

    Samantha: 5 million EBITDA and above.

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

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

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

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

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


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

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

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

    Samantha: I agree. And thank you.

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

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

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

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

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

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

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

  • Trends to Look Out for in the M&A Insurance Market in 2022
    POSTED 12.28.21 M&A

    If you thought M&A activity would slow in 2022 after the record year in 2021…think again.

    Market watchers see current levels continuing through at least the first half of next year. As you know, an increase in M&A activity equals more demand for R&W insurance.

    And that means you should expect to see many of the same trends driving the use of Representations & Warranty (R&W) and other M&A-related coverage continue as well—if not become even more widespread.

    Here’s a breakdown of what you should be looking out for in the coming year:

    1. The “extra” frees being charged on smaller deals are creeping into all

    For a while now, many insurance brokers have been quietly adding fees onto what are considered small deals (under $50M TV). They typically add fees when they don’t charge commission. Now they are trying to do so on all the deals they cover.

    Premium ranges that used to be standard at 2.5% to 3% of the amount of the policy, so $250,000 to $300,000 for a $10M policy, are now at or above 5%.

    There could be some pushback on this from policyholders as premiums go up. However, many brokers will still be able to “sneak in” fees like this because the overall cost of an M&A transaction is expensive and those fees can get lost in the shuffle, so to speak.

    This is fair warning to keep an eye out.

    2. Increased scarcity for a home for sub-$50M TV deals.

    As I wrote in my article, “Limited Bandwidth for R&W Insurance in 2021”, there are fewer and fewer Underwriters who want to work on deals under $50M in Transaction Value. Simply because there are so many deals above $500M+ out there. With limited time and resources, insurers, of course, will focus on those deals generating higher revenues..

    As Woodruff Sawyer put it in their Private Equity and M&A Looking Ahead to 2022 report:

    “We expect RWI options for deals less than $50 million in enterprise value to be scarce leading into the end of the year. As bandwidth reaches capacity, underwriters will pick and choose only deals they deem highly profitable to pursue. We believe there will be limited to no capacity for small deals or deals with financial issues or a lack of underwriting.”

    But if you don’t hit that desirable threshold, all hope is not lost.

    What you need is a clean deal and solid due diligence. With a simple package like this that Underwriters could process quickly, there could be a receptive audience. You should also find a smaller, boutique firm that specializes in smaller deals and will give you their full attention.

    With an approach like this coverage is scarce but not impossible.

    Why would Underwriters turn away business from smaller deals?

    If the due diligence is lacking, that leads to unanswered questions. As a result, Underwriters have to put exclusions in the policy or limit the coverage. And they don’t like to do that because it makes them look like the “bad guys”—they get the blame when policyholders get upset.

    This type of situation often happens because the insurance broker did not adequately manage expectations.

    Sometimes, Underwriters just need clarification in these types of cases where they might otherwise decline to cover a deal.

    For example, in the case of one company that was buying a film and TV library. The Buyer had not done extensive diligence on who owned all that content, which made the Underwriters very nervous. They were expecting thorough legal diligence on the intellectual property.

    Then the Buyer made several good points. Since they were simply distributors, they were not subject to intellectual property infringement laws —those who produced and planned the use of the content would be on the hook. And not only were they not exposed in that way, but all their contracts had indemnification language, so they were further insulated from IP complaints. On top of that, they had insurance to respond to IP related issues.

    That was shared with the Underwriters and the rest of the underwriting process went smoothly, was completed ahead of schedule and with no limitation on IP.

    It’s the perfect illustration of how packaging makes all the difference.

    3. Rates will continue to be high well into Q1 2022…and beyond

    Premium rates went up from 2020 to 2021…and I see them continuing to rise into 2022, at least into the first half of the year. Demand for R&W insurance is just too high to compel a decrease. And, as I said at the beginning M&A activity is on a tear and will continue.

    4. Watch out for the impact of the shake-up at R&W insurers.

    R&W insurance companies have an Underwriter problem. First, new insurers are entering this lucrative market and poaching whole teams of Underwriters from established carriers. This interruption in talent and staff could slow down processing.

    Also, in some cases one of the larger national brokers is losing experienced brokers, and executives in the wake of a failed merger which would have made them redundant. They’ve seen the writing on the wall and decided to leave and start their own firms, including some Underwriters who want to get in on the brokerage side.

    They have the contacts. They have repeat clients they can bring over. It’s the perfect opportunity.

    5. Expect increased scrutiny from Underwriters with regard to insurance that the target is carrying and cybersecurity.

    R&W insurers and Underwriters are looking to pull other policies in to recover losses to be paid in the event of a breach. The thinking being those losses are actually insured by a company’s traditional commercial insurance policies.

    There is also a focus on cybersecurity. Underwriters want to see that companies have adequate IT and cybersecurity measure in place to protect data.

    As Woodruff Sawyer puts it on their report: “If a deal team does not perform diligence in these key areas, they should expect additional questions and/or exclusionary language related to things like Management Liability, Cyber Liability, and Professional/E&O Liability.”

    6. Claims are steady.

    More R&W insurance claims are being paid these days. But it stands to reason as more claims are being reported…because there are more policies out there. No big concern here. “Roughly 20% of policies result in claims, and about 25% of submitted claims result in a limit loss,” as they mention in the Woodruff Sawyer report, and that is a similar rate to 2020.

    The rate of claims being paid has not changed.

    7. Expect more deals with no indemnity.

    There is an interesting phenomenon that has been occurring.

    The accepted wisdom in M&A Insurance circles for a long time was that R&W policies with no Seller indemnity would be more risky and have more claims. As a result, Underwriters used to favor deals where the Seller indemnity clause was present, and deductible was shared by the parties. They wanted to see both sides have “skin in the game.”

    However, in practice this has not been the case. There is no discernible difference between the two types of deals. So, expect to see more deals be covered with no indemnity needed.

    Here’s how it used to be:

    In the Purchase and Sale Agreement there would be an indemnification clause that the Seller must pay the Buyer’s loss if there was a breach. If there was a R&W policy in place, the policy stepped into the Seller’s shoes to take care of that and pay the loss. Although the Seller would still be on the hook for at least a share of the deductible.

    Today, however, now Sellers want no indemnity and negotiate that the reps and warranties do not survive past closing. They want to sell “as is” – kind of like a used car. To be clear, in these types of “as is/non-indemnity agreement”, the Seller is liable to the Buyer for nothing…ever…nothing is held back. However, the risk is hedged for the Buyer because they have R&W insurance in place.

    8. Concern about COVID is waning.

    As the pandemic winds down, insurers are less concerned about pandemic-related claims.  Although they will continue to ask about COVID in their diligence process.

    9. Prices for targets are not going down.

    From attendees of a recent McGuire Woods Independent Sponsor Conference, the word is that prices for targets are not going down any time soon—despite any pandemic effects. Many vulnerable companies pulled themselves off the market. And they are strengthening. The multiples and competition for these targets is going up, not down. So, if you’re waiting for a dip in evaluations…it’s not happening.

    It’s clear that it’s going to be an interesting year in 2022. And I’m happy to help with your M&A insurance needs.

    You can contact me Patrick Stroth, at

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

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

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

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

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

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



    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability, and President of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Brokers Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today, I’m joined by Lorraine Wilson, Chief Impact Officer of Novata. Novata is an ESG platform built specifically for private markets. 

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

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

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

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

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

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

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

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

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

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

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

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

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

    Lorraine: Exactly.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Lorraine: Take care.

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

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

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

    Listen as he walks us through:

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



    Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and president of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Brokers Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Kresimir Peharda, partner and chair of the cannabis practice at YK Law. With offices in New York, Texas and California, YK Law describes itself as the gravity and prestige of big law with the flexibility and efficiency of a solo.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Kresimir: Oh, very much very much. 

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

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

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

    Kresimir: My pleasure, Patrick.

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

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

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

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

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



    Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority in executive and transactional liability, and president of Rubicon M&A Insurance Services, now a proud member of Liberty Company Insurance Brokers, a nationwide network of specialized insurance brokerages. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. 

    Today, I’m joined by Michael Kornman, managing partner of NCK Capital. Based in Dallas, NCK Capital acquires controlling interests and lower middle market companies and takes them to the next level, with right fit capital structures, inspiring management incentives, and nurturing support. Michael, I’m really looking forward to this conversation today. Thank you for joining me.

    Michael Kornman: Thanks for having me, Patrick.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Michael: Thank you so much.

  • What Is Insurance Diligence…and Why Should You Care About It?
    POSTED 10.26.21 M&A

    When evaluating a target company for acquisition, the Buyer conducts a thorough check of financials, IP, tax obligations, contracts, customer lists, and other key aspects of the business.

    That’s due diligence.

    But to make an informed decision on whether or not to move forward and close the deal, there’s another aspect of diligence that I recommend…that some don’t seriously many do not consider – insurance diligence.

    You get some insights on the mindset of management and the caliber of operations from the amount of insurance and the quality of that coverage they have in place.

    Also, digging deeper, if they have had a lot of insurance claims, that could provide a red flag or at least insight on a problem area in either operations, management, or even both. Every insurance policy can deliver an up-to-date report on any claims that have been reported and the amounts that were paid. That’s called the loss run report, which is available for each respective policy.

    Having that information in your back pocket can be helpful in deal-making when asking a target company about private litigation. They could dismiss a claim that was paid by their insurer and maintain the issue in question was not a big deal. They say they just gave it to the insurance company to take care of.

    But when you are looking at the loss history and that the insurance paid a multi-million-dollar settlement …it shows you it actually was a pretty big deal. It provides unique insight into the management of the company and how they handle issues.

    When first conducting insurance diligence, you’ll first discover how a target is insured and what specific policies are in place, whether it be Directors and Officers, IP Infringement Defense, General Liability, Product Liability, Property Insurance, Professional Liability, or some other type.

    When looking at what coverage lines are in place, you also have to check to make sure the coverage is adequate or appropriate for the risk out there. For example, is it a $100M revenue company with a $500,000 limit policy? Not good.

    You should also look for other potential gaps. You might be surprised that many technology companies do not carry Cyber Security & Privacy insurance. It’s counterintuitive, but it happens a lot. So don’t that for granted.

    Likewise, many management teams do not carry D&O insurance because they are privately held and it’s not required. But even small companies should have D&O coverage in place as it is so important to protect the personal assets of the directors and officers (not to mention their spouses and estates) if they are personally sued for actual or alleged wrongful acts they’ve committed in managing the company.

     Who Are They Insured With?

    After examining the types of insurance and coverage levels the target company has, you should consider the quality of the insurance companies they are doing business with. They are not all created equal, by any means.

    Are they financially solid, secure brand-name insurance companies with good reputations?

    Or did the target try to go the cheap route and pick whatever company quoted them the lowest premiums?

    It is very common that start-ups will get very small policies at the lowest cost possible in the beginning but then forget to scale up their protection as they grow over time. Also, insurance companies used by start-ups are entry-level carriers, which is why they are so cheap.

    While appropriate at the start-up phase, these insurers aren’t equipped or qualified to handle larger policyholders.

    Again, this is all too common. In their rush to grow, these start-up companies don’t make sure that insurance keeps up with where they are at the moment. Insurance needs can change quickly and can’t be left out.

    Other Types of Insurance

    The insurance in the target company you should be examining is not only that which covers the company and its management team, or the property and casualty coverage for the assets of the business.

    If they have personnel, there is the health plan, benefit plan… any of those types of lines need to be considered, particularly when planning the transition. The last thing you want to do is cancel the employees’ health insurance.

    Where to Go From Here

    A huge benefit to this process, besides gaining insight into management and operations, is that the insurance diligence report can also provide advice on how to transition the target company’s insurance exposures into the Buyer’s existing program…or, if it makes sense, to create a new standalone program for the new company.

    The bottom-line is in the overall world of due diligence don’t forget to do specific diligence on the potential acquisition’s insurance coverage.

    This insurance diligence process does take time. But it’s well worth it.

    A lot of attorneys look this information over. But you can fast-track the process if you work with a reputable commercial insurance broker who is familiar with all these lines of coverage, not just management liability and property casualty but also benefits plans.

    Brokers provide this service on a fee-basis. But many brokers can waive the fee if they have an opportunity to either place coverage on a go-forward basis or participate in M&A transactional coverage.

    My firm, Rubicon M&A Insurance Services, a member of the Liberty Company Insurance Brokers network of companies, can provide such services. Just get in touch with me, Patrick Stroth, for more details:

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

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

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

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

    Listen as we talk about:

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



    Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on executive and transactional liability, and president of Rubicon M&A Insurance Services. Now a proud member of Liberty Company Group of Insurance Brokers. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Gina Cocking CEO and managing director of Colonnade Advisors, LLC. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Gina: That’s right. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • Liberty Announces Key Acquisition to Expand M&A Insurance Services
    POSTED 10.12.21 M&A

    Liberty Company Insurance Brokers is pleased to announce the acquisition of Rubicon M&A Insurance Services, LLC to its national network of specialty insurance brokerages. Rubicon is led by its founder Patrick Q. Stroth, ARM, a trusted authority in executive liability for over 30 years.

    Given that there was unprecedented demand for M&A insurance in 2021, with all signs pointing to a continuation of this growth in 2022, this is a natural move that will allow Liberty direct access to this market.

    Not only that, but this acquisition makes Liberty the only national broker network with a specific focus on micromarket M&A transactions, those that are sub $10M in transaction value. This is the fastest-growing segment of M&A.

    Patrick, who written extensively on Transaction Liability and hosts the M&A Masters Podcast, brings his decades of experience and knowledge to lead Liberty’s new Transactional Liability practice.

    “I consider M&A to be the most exciting event in business,” says Patrick, “One that has the ability to create life changing, even generational impacts for owners, founders, and their families. I’m thrilled to have the opportunity to move Rubicon’s M&A practice onto a national platform which can scale to meet the ever-increasing demand for owners, founders, and their investors to secure a ‘clean exit.’”

    According to Liberty CEO, Jerry Pickett. “We recognized the emergence of Transaction Liability as an essential coverage need for any Commercial Insurance Broker.  With the addition of Patrick and Rubicon M&A Insurance Services, LLC, Liberty Company Insurance Brokers immediately becomes a leading source of M&A insurance expertise and solutions.”

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

    On this week’s episode of M&A Masters, we speak with Ron Edmonds founder and president of The Principium Group.

    The Principium Group is one of the most recognized names in lawn and landscape mergers & acquisitions, or as I say, the of landscaping, one of those niches hiding in plain sight in M&A.

    This is an exciting area in the industry, so listen in as Ron walks us through:

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



    Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on executive and transactional liability, and president of Rubicon M&A Insurance Services, a member of the Liberty Company Insurance Brokers Group. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today, I’m joined by Ron Edmonds, founder of the Principium Group. For the past 17 years, the Principium Group has been providing M&A advisory services to business owners and investors in lawn care, landscaping and other facility services. One could say the Principium Group is the of landscaping, and talk about niches that are hiding in plain sight. I’m very excited because I never would have thought about this as a specialty in M&A. Ron, it’s great to have here. Welcome to the podcast. 

    Ron Edmonds: It’s great to be here, Patrick. 

    Patrick: Ron, before we get into the Principium Group, let’s start with you. How did you get to this point in your career, and then we can talk about the focus, but let’s get right as some context for our audience members.

    Ron: But like a lot of other people, I’ve my career has taken some paths and turns. And yeah, I’m a CPA by background in college education. I’ve practiced as a CPA with a national firm for 14 years, I guess. And then I was a CFO, for about nine or 10. And that business was sold. And I was, you know, 40. And looking for a new career. Career number three, which is pretty common these days, not too many people like my dad who had one job after the military, around. And I was actually kind of frantic, which seems kind of stupid now. Because I actually thought I was old, and to be hired as in a new company or something like that. And but while I was trying to figure out what to do what I want to do next, I did a little consulting. And I ended up getting a consulting arrangement with a company called True Green Lawn Care. 

    Most people have heard that it’s by far the largest company in the fertilization business. And they’re based here in Memphis, where I am and, and they were looking for some skills to work with them on where and making their acquisition process, more effective, efficient, and safer, actually. And they had just greatly increased what they were doing, because historically, they’ve been getting most of their new customers from telemarketing. And that was about the time the no call list had come out. And they had to pivot pretty dramatically. And so I took on this assignment that I expected to last about 90 days, and they were my primary client for close to four years, I still occasionally do some work for them. This 20, 15 years later. But that got me a taste of lawn care and landscape saw a little bit about what dealmakers looked like, and in that industry, and I thought there was a place for somebody like me with my kind of background and personality, and I could make a fit, and it worked pretty well.

    Patrick: So it’s amazing how, you know, some adversity or obstacles can create new pathways. So the Do Not Call list comes out. And that’s just the door on a lot of marking and opens up something else. So that’s a great story there. Now, let’s go to the Principium Group and tell us about this. But I always like learning about the culture, you get some insight with companies because you didn’t call it Ronald Edmonds M&A Advisory, you picked Principium. So tell us about the name. And then how you, you know, are focusing here on the lower middle market.

    Ron: It’s really pretty funny because I have the opportunity to talk to people about choosing names quite frequently, and actually advise people about changing their name in advance of going through an M&A process sometimes, because in the landscape industry, there’s a real issue with having your name on the door. And people, you know, really focusing on you as the individual as opposed to the business. Now, I gotta tell you, I wasn’t thinking about anything like that. When I named this company. And what really happened was, I had a partnership going that went sour. And a lot of people can relate to that. And a lot of people have had that lesson. I get to see people that have had good experiences and bad experiences with partnerships. But I had a I had to split up and I needed a name and a brand and a website and all those things just as fast as I could get them. 

    And I was enamored at the time of Greek words. And, you know, actually went through the dictionary looking at different Greek words that might make sense. And, and this one means, first things or important things. And to be perfectly honest, that was a little bit of a dig at my former partner. Because I thought he had not focused on the important things. And hopefully he’s not listening to this. Anyway, so we picked that name, and we’re able to get get a URL and everything. And they’ve devoted, you know, especially in the early years, and enormous amount of energy into recognition, marketing, on the web, and trade journals and, and email newsletters and all this stuff. And at some point in time, I thought, gee, what a lousy name I picked. And I said, how could you possibly, you know, I don’t know, there’s probably three or four tests of a good name. 

    But the first two are, they must to be easy to spell, and easy to pronounce. And this one fails those miserably. And, you know, I’ve started to change the name twice, but was convinced by people in the industry, that that would be ridiculous. Because it has recognition in our niche. And, and, and so we stuck with it, and it and most people in the industry, I think, do do recognize it, both from the level marketing we’ve done. And we’ve also were, we were doing content marketing, when content marketing wasn’t cool. And we’ve got everything we ever wrote on the web. And it’s, we found that you don’t have to spend a lot of money on search engine optimization, if you have all that stuff that’s accessible. And so if you’re going to look for information about about mergers and acquisitions in the lawn and landscape space, the odds are you’re gonna find us.

    Patrick: Yeah, I mean, we’ll put this in the show notes. But I did say I was very impressed. Because you’ve got that right there on your homepage. You have two ebooks, private equity investment in landscaping industry as of 2020. And then what you need to know, when selling a lawn care business. I mean, you’ve got your how to’s right there, that couldn’t be more straightforward than anything else. And I think that I imagine landscaping, the industry is unbelievably fragmented. And you’re in the lower middle market, largely because there aren’t that many, you know, 50, 100 million dollar landscaping, or building services organizations out there. 

    So there’s, you know, when you’re in that, that lower middle market sector, if people don’t know about you, and what you guys can offer, they’re gonna default to other parties, or competitors, or business brokers or try to get into institutions. And they’re either maybe not being misled, but I think they’re going to be overcharged and underserved. So it’s very important. I’m so happy that you’re here to talk about what Principium Group can do for this segment. But you know, in the early days, okay, you were with that large company. Okay. And then and then you moved on, why landscaping? What did you see that everybody else was missing as an industry.

    Ron: I like to say that I am, you know, clairvoyant and forward thinking person and saw that this would boom in a few years. But that’s not true. What I did see was an underserved market, which was clearly underserved, and big and had a lot of transactions going on. That hasn’t been as consistent as I may have hoped, at least back then it wasn’t. You know, it was just booming when I made the decision, and it slowed way down really quick. But we made some changes and broadened our scope, and have made it through pretty well, the, the downturns in M&A in the economy, which are usually in tandem, but not always. 

    It’s been so amazing to see the changes over the last 20 years, because 15 years ago, if you remember what was going on politically and in the economy, you know, if you talked about a government shutdown because of an impasse between the White House and Congress, no one would do anything. You couldn’t sell anything. You couldn’t. Yeah, they wouldn’t. They wouldn’t talk about it, they, they certainly wouldn’t sign any contracts. And that seems so trivial now, compared to the kind of tumult that we’ve experienced last few years. And it’s, and no one’s missed a beat. You know, I mean, it’s absolutely unbelievable that we could go through a pandemic that has been as hard and as long as this one and still have the M&A market moving aggressively forward. It is unbelievable.

    Patrick: And one other thing is just to clarify this because again, I wasn’t aware of this, but you’ve got residential landscaping, and you’ve got business and commercial landscaping. The larger focus for you is commercial landscaping. And in an earlier conversation, you and I were, were having, I said, well, with the impact of the pandemic, there are going to be fewer and fewer people going back to work. So a lot of these office, you know, commercial buildings are mostly empty. Okay, how’s that going to impact landscaping? What was your response to that?

    Ron: If they ever want to lease those buildings up again, they better look attractive and taken care of. And, yes, I think there could come a time when that’s an issue, but not now. You know, drive down the areas where there commercial office parks and office buildings, you’re not gonna see him a mess, or at least not on purpose. You know, they have their challenges right now. I mean, there are a lot of people in the industry that, you know, are really having a real struggle over labor and getting their work done. But it’s not because the clients don’t want it or aren’t willing to pay.

    Patrick: Yeah, I we’ve got a number of shopping malls here in Silicon Valley. And a lot of the stores are shut, but the flowers are getting planted. And as you said, we don’t see any weeds growing anywhere.

    Ron: Yeah, I’m not sure. I think retail is the best market to invest in. Yeah, I might add it will affect it in time, I imagine. But, but you’re correct.

    Patrick: So well talk about real quick on how private equity in this case hit their radar, because that’s kind of interesting on what’s happening there.

    Ron: Yeah, it’s, it’s really boomed in an amazing way. And we’ve been following this trend for, I guess, pretty closely for 10 years. And there will be a few deals that actually started publishing this annual survey of private equity activity. And it was a pretty thin report 10 years ago. And it’s, you know, so much, so involved now that it’s hard to keep up with it, it’s too much work to, to put out something like that. We still do it at least once a year. But I think part of it is the general private equity investment scenario in the lower middle market. And for service industries, they love recurring revenue models, and most of these businesses have a pretty big component of recurring revenue. But there’s just I’d like to say it’s really specific to lawn, lawn and landscape, but I’m not sure that’s really true. It’s caught the attention of private equity, but but they’re, you know, people crawling for, for deals everywhere you look, and everybody’s looking for a new idea. And then disappointed when they find somebody else has already figured it out. You have, for example, they are in some of the sub niches in landscape, one of the big ones right now is vegetation management. 

    You might not even know what that means, you know. And it’s not, and there’s there’s not trade magazines, promoting that. It’s a little bit easier, harder, to find them. But it’s a great big niche, with with a three, a three and a half billion dollar company and lots of you know, a good number of 100 million dollar companies and, and private equity loves that are looking for those deals. Those companies, by the way, what they do is work with utility companies, for the most part in making sure lines are clear. And so there’s both a routine service. And then when the hurricanes come, they make their real money. You can see the the big long lines of trucks running down the interstate headed in whatever direction that hurricanes caused havoc. And I’m sure I haven’t particularly noticed that with Hurricane Ida, but I’m sure it’s going on.

    Patrick: You know, those of us that live out in the suburbs in Silicon Valley where you said we got all the tree care services, would that be considered part of it for for your area? 

    Ron: Absolutely. 

    Patrick: Okay. Yeah, we’ve got lots of

    Ron: That’s another hot area right now. 

    Patrick: Okay. Yeah, because we’ve got lots of older trees out here. If the high winds ever kick up, we don’t have hurricanes. But if high winds kick up, but all of a sudden we get powerlines get taken down from a fallen tree. You got to move quickly. So okay, you know, again, this, the more we talk about this, the more I learn about this. Now, you’ve been involved. I mentioned this, you’ve been involved in this industry for 17 years, okay, and I referenced Principium Group as the of landscaping. Let’s talk about what you bring to the table as an advisor because you’ve got a nice Rolodex of not only, you know, potential sellers looking to get bought, and you’re representing them, but you’ve got a great list of buyers.

    Ron: We do and we’ve networked and met people for for a long time now. And we use a variety of tools and meet new people. One of the ones that has been the most valuable to us is that that book that we put out on private equity investment in the landscaping industry, because just about every private equity firm that’s been interested in learning about investing in this area has downloaded that book. And the majority of probably, business owners that think they might be a candidate, have downloaded it, too. And so that’s one have been one our huge lead generators, I might add. 

    But but we’ve been real active in the in the industry and are willing to talk to anybody. And that’s one of the things I like most about it. You know, sometimes we’re not the right people to help. But we can often aim people in the right direction. But we do understand and have been involved with plenty of transactions, most of them have done pretty well, some have done great, a few have been really challenging. And we’ve got some depth of experience to help business owners get ready for a more positive experience. And we understand what their numbers look like what their businesses are doing and can can explain that to buyers and, and an often, you know, mega deal happen. It’s still, you know, particularly with smaller businesses, identify the buyers are they’re finding where they are, can be a little bit difficult. For larger businesses, the demand is enormous. 

    And when I say larger, I mean businesses that are basically at the very end of the lower, lower middle market. Yeah, you know, five to $10 million companies. There’s a really strong demand driven by private equity investment, and looking for add on deals. But that has flown through to other businesses. Most of the larger ones are, you know, not that there’s a lot of ones that are owned by individuals, some are owned by esop’s, that’s fairly common in the industry. Different kinds of ownership formats are out there, all of them are participating in the M&A activity today.

    Patrick: One of the areas that the new tool. New relatively, it’s been around for several years, but it only really caught fire last four or five years has been an insurance product called reps and warranties insurance. And the purpose of reps and warranties is to take the indemnity obligation that’s in the purchase and sale agreement, and transfer it away from seller. So seller isn’t liable to buyer anymore and transfers it over to an insurance company. So that in the event of a breach of the seller reps, and that breach leads to a financial loss on the buy side, the buyer doesn’t have to go and try to claw back or pursue the seller. 

    They just go right to an insurance company. It simplifies the process, it lowers the temperature in the negotiation, particularly when we get to indemnification, which is near the end. And you don’t have this us versus them kind of conflict. They work together and go and do that is really been a boon for the M&A industry. And I’m just curious, you know, because you are in lower middle market, but you know, good, bad or indifferent without taking my advice on what, you know, rep and warranty. You know, Ron, what’s been your experience with reps and warranties?

    Ron: Well, to be honest, it’s been pretty minimal. Yeah, you know, our work is, you know, probably 80% sell side. And it just really hasn’t come up too much. You know, I have been following it, listening to people like you talk a bit for the last few years. And it’s, it’s interesting to me, and I would certainly think it would play a role in some deals, especially as, as if there were products that were available that were focused a little bit smaller deals and what seems to be the case right now.

    Patrick: Well, this is why this is an ideal time for us to be talking because as of July 2021, an insurance market called CFC came out with a sell side only product for the real lower middle market. These are companies with valuations of one to 10 million in enterprise value. And you don’t have to worry about a buyer. We’re not underwriting the buyer’s due diligence. The insurance company goes in sends an application to the seller, they fill out just like any other insurance application. There’s no underwriting fee, there’s no underwriting delays. And you the seller does not have to worry about the buyer approving the insurance or not, they just get the insurance and it protects them. 

    It’s one of the newer products out there that you know the purpose also for us talking is to make sure that the word about this available new product for this sector of the market that hasn’t been eligible for rep and warranty is now available. And so it’s one of the things that I’m very happy to have out there and I would say that given time, you’re going to see the success of this new CFC is called TLPE. Transaction liability for private enterprise, you’re going to see it grow. And then 10 million enterprise value won’t be its ceiling, it’ll probably start creeping up to 15 to $20 million, in a very short time. So it’s an opportune time to bring it up.

    Ron: Yeah, I think that’s gonna be fantastic. Because one of the biggest issues that we work with all the time is fear. And when when sellers look at a transaction, where they’re selling a business they’ve created, that accounts many times for 95% of their net worth. And they look at the ways that that could come back and haunt them. I mean, that they really get really upset and worried.

    Patrick: Yeah, and I think it is ideal because on a sell side product, the seller has full control whether or not the insurance is placed. Your traditional rep and warranty policy, you’re absolutely relying on the buyer to to agree to move forward, even if the buyer doesn’t have to pay for it. The seller’s willing to pay for it. The buyer has to undergo diligence. And there are a lot of buyers on the lower middle market that just don’t want to do that. And there’s there’s a good case for that. But it’s nice to have this option. So we’re very proud to be allowed a dynamic market that is meeting these new needs. 

    Ron: Now, I want to know more about that. 

    Patrick: We will definitely be talking about that. Absolutely. Now, Ronald, as we’re going through this, we’re nearing the end of the pandemic, and in the Delta variant and so forth. We’re, I mean, 2021’s closing rapidly going into 2022. Give us a picture. What trends do you see either macro in M&A or specifically for your, your segment?

    Ron: Well, there certainly are a lot of people out in the market right today, who are fearing capital gains tax rates, which, no matter what we in some fashion, we’re probably gonna see, there’s hard, it’s hard to imagine scenario where we’re not going to see some tax increases. Whether they’re going to be the magnitude that the administration has proposed, I don’t know. But a lot of people assume that they will are trying to plan for that. Of course, what they can’t plan for is wins when a tax might be enacted. A big assumption that might be whether it’s actually enacted before or after the end of the year, it might be effective at the end of the year. So there are quite a few people trying to get deals done before the end of the year. It’s really too late to get started for 99% of potential sellers to get there at this point. But that hasn’t caused a drop off in interest. 

    There’s lots of activity in our sector and lots of other sectors. And you know, I can see next year being is probably as big a year as this one. Barring some sort of economic event that would that would stop it. It’s beginning to feel, of course this makes me feel potentially stupid. But it’s beginning to feel like there’s it can’t be stopped. Because or the economy is structure itself. And we’re where the money comes from. There’s so much money that needs to be invested, of course, that might change of interest rates rose dramatically, or something like that. But right now, there’s a lot of pressure to get deals done. And that’s been favorable to sellers, because prices have have been pretty, pretty nice. In our segment. We have a lot of people that are, you know, retirement age, the baby boomer sell off of businesses that were built by baby boomers is feels like it is becoming a reality. Yeah, people have been talking about that for years now. 

    Of course, the baby boomer generation is pretty big, that you better get out while the getting’s good before everybody else gets the good deals. I suppose or some might be some truth to that. But I don’t think a lot. You know, in the consolidating industry, it’s fascinating. There’s been all this activity in landscape over the last, especially the last five years. And you know, you really have to look pretty hard to see the impact of it in terms of the industry as a whole. Private equity firms asked me if the industry is picked over. No, you know, it’s a regenerating thing. There’s always new companies going in. You know, and I noticed not long ago in some studying I was doing that, despite all the transactions that have happened, the size you have to be to get into to be one of the top 100 landscape companies in the country is not going up every year. It’s not that much bigger than it was five years ago, and one year it went down, even though industry revenues were up. 

    And there’s new young people, leading businesses and, and and creating new things. Yeah, it’s nowhere near all picked over. And that’s before you can start start looking at some of the new things that are happening. Yeah, you know, there’s no doubt this industry is having as big a labor crisis as anything other than perhaps restaurants. I mean, there’s some similar reasons, and some of them are different. But it’s a it’s a big problem. So, you what we have today, we have people really seriously looking at things like robotic mowing.

    Patrick: Ron, would you say that you know, if somebody wanted to try to get a deal done before year end, the seller? Could they come to you? Is it possible to pull something off?

    Ron: It’s possible if they’re the perfect candidate. And highly desired one, are there people out there like that, but, but it would be it would be a big challenge. I you know, I would talk to people and, and make an assessment of what the best opportunity is, but, but it would, it’d be pretty tough.

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

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

    Patrick: And I would tell you, ladies and gentlemen, if you wanted to get established as an authority, it’s always nice to have written the book in a particular discipline because if you wrote the book, you’re sharing your knowledge with the community and the community should come to you for all of that. And you have that like you said. You’ve got two books on your website, they’re ebooks, you can download immediately. I strongly encourage them. Ron, thanks for your generosity there with the community. And thanks for being guest today. It was just a real pleasure talking to you. 

    Ron: Well, thank you for having me on. I’ve enjoyed it very much. I wish you the best.

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

    On this week’s episode of M&A Masters, we speak with Skip Maner. 

    Skip is a General Partner of NewSpring Capital and founder of the firm’s dedicated buyout strategy, NewSpring Holdings, and was recently featured in Mergers & Acquisitions Magazine. 

    For over 20 years, NewSpring Capital has been seizing compelling opportunities and offering a fresh approach to building businesses in the lower middle market. There’s a lot more to them than meets the eye and we have just the right person to walk us through it, so listen and discover:

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



    Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on executive and transactional liability, and president of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Skip Maner, general partner of NewSpring Capital. Based in Pennsylvania, NewSpring Capital for 20 years, has partnered with high performing lower middle market companies and dynamic industries to catalyze new growth, and seize compelling opportunities. Recently featured in Mergers and Acquisitions magazine, Skip is the founder of NewSpring’s dedicated buyout strategy NewSpring Holdings. And so then there, you’re going to find there’s going to be a lot more to NewSpring than meets the eye. And we have just the person to walk us through this. So Skip, thanks for joining me today. 

    Skip Maner: Thanks, Patrick. Happy to be here. Thanks for having me. 

    Patrick: Now, before we dive into all things, new spring, let’s give our audience a little bit of context. And we’ll start with you. What led you to this point in your career?

    Skip: Well, it’s I guess, I’ve been in private equity for about 26 years now. So it’s been quite a ride. And I guess I think I started when I started my private equity journey when I was in college, when I started two companies. I wasn’t I wasn’t the Elon Musk of the time, but it was enough money to pay for beer and a couple of books, maybe. But, uh, you know, after I graduated from college, I started two additional companies. And I really think, again, that’s where I started in private equity, because I’ve always, you know, really, I think, taken a highly operational approach to the companies that I’ve ultimately invested in, in my, in my career. I was 23 years old, when the bank called me and told me, I wasn’t making payroll. And I had to figure it out. So I’ve sat on that, that entrepreneurial, and that founder side of the table. I went back to business school after selling two of the companies. 

    And, and really, part of the reason I went back to business school was to, you know, you know, small business owner oftentimes feels like the world, you know, the world revolves around them. And it really, it was far from the truth. And there were things happening in the macro environment that I really wanted to understand. And so graduated from Wharton in 95. And got into private equity, really in the in the mid 90s. So I’ve seen a lot of the the cycle and a lot of the maturation of the industry. I think when I graduated from Wharton, you know, probably less than 10, 5% of us went into private equity. You know, that’s probably closer to 25-30% now. So it’s, you know, it’s been, it’s been a great ride, again, seeing many, many cycles, and, you know, thankfully around to talk about the cycles.

    Patrick: Well, contrary to its name, okay, NewSpring I mentioned in the intro is not new to private equity, you’re one of the rare firms out there that been around now for two decades. So, as we get in, we talk about NewSpring, let’s kind of open it up with I always like finding out, you know, the culture of a company or the insight, if you figure out, you know, how they came up with their name, specifically, because it’s not named Maner Capital. So we’ll start with the name. Tell me about NewSpring.

    Skip: Yeah, well, I think it’s all about, you know, we’re all about growth, and we’re all about formation. And I think, you know, just the combination of really that, you know, ideas springing forth. And, and, and, you know, and surrounding them with, you know, with this idea of how to take companies to the next level. NewSpring seemed like an appropriate name, I can’t take credit for it. Some of my partners and predecessors yeah, could have been, again, I think the the culture around again, we focus on the lower middle market, and again, so that could be companies in our definition, between 10 and 100 million in size. Those are even at 100 million. It’s still very small companies in the whole scheme of the world. And I think that the notion of NewSpring really helps. We want to take a fresh approach to, you know, the company building experience.

    Patrick: Right, and it sounds like you’re on the beginning of a cycle, you’re not at the end of a cycle. So, you know, you’ve got that emphasis and as being, you know, experienced at 20 years ago, is really impressive, but 20 years in this space, you’re not doing just one thing, NewSpring is a series of a number of silos. Let’s talk about those for a moment.

    Skip: Yeah, and it’s look, it’s it’s a fun story to talk about because again, the longevity of the firm, you know, again, I can’t take credit for it is really really Impressive. So, you know, when I guess I’m you know, proud to be a part of it. We just invested our $2 billion over that 20, 22 years that we’ve been involved in 184 companies. And what’s really interesting, and this is, you know, talks a little bit about the maturation of private equity, it took us 17 years to invest the first billion. And then it took us five years to invest the next billion. And we do that through we have five investment strategies, again, each focus on a different segment of what a lower middle market company might need. 

    So I’ll get to my my segment last, but we have a growth strategy that invests in software and tech enabled services companies. They just closed their their fifth fund, and they do minority capital, minority equity capital, onto the balance sheet of companies that really need a last round of capital to get them to profitability. They’re averaging, I think company investments such as maybe 20 million in revenues. Our health care fund, which they’re closing their third fund right now, is focused on again, similar growth stage companies with tech enabled services companies all around the healthcare space, especially pharma, and niche clinical providers. And then we have a mezzanine fund. Our mezzanine fund is closing their fourth fund, and that is focused on subordinated debt, and really supporting other private equity sponsors into buyout transactions. And then we recently founded what we call NewSpring Franchise. 

    NewSpring Franchise is a group started to really buy into compelling and interesting franchise and multi unit businesses, consumer oriented businesses. And then what I run is what we call NewSpring Holdings. NewSpring Holdings is is our buyout function that we started in 2015. And what we do is, do control buyouts into founder and family run businesses. We really like to find companies that have, you know, been on a journey for, you know, five to 20 years, but, you know, may have a transition issue or a desire to grow to the next level, and want a partner to do so. So again, it’s with those those five strategies that we kind of look at the lower end of the market. And, again, it’s a nice broad horizontal approach, where really, you know, a lot of the you know, the need that a middle market company might have a lower middle market company might have, you know, we can solve in this building.

    Patrick: Well, that’s something because, and I’ve got a real soft spot for the lower middle market, particularly because you’ve got owners and founders that started with nothing and created tremendous value where like I said, nothing existed before. And they don’t know how to get past that inflection point, there’s some their content to stay where they are, but there are others are wanting, you know, the they either, you know, by just their success, they’re a victim of their success. So they either get to the inflection point by becoming, you know, they’re too small for enterprise, but they’re too big to be small. And they, they need some outside force, outside assistance to help them. And if there aren’t, you know, experienced owners that have gone through that process multiple times. 

    They don’t know where to turn. And but you know, and if they don’t know anybody, they get by default, they go to an institution or a brand name, or something is out there. And they really are left short. And what happens is, unfortunately, they’re they’re underserved. But they’re overcharged. And that’s why it’s helpful to have firms like NewSpring out there that are really committed to this segment. Talk to me about the issue where you’ve been around again, I keep hammering on this, but you’ve been around for over 20 years, and you did not scale upstream in terms of deal size. Why is that?

    Skip: Well, you know, I think it’s because we love the opportunity at the lower middle market. I mean, again, you have, that’s where most of the companies are, and if you look at where, you know, where we are in, you know, in the in the cycle, you know, the oldest baby boomer right now is 75 years old. And we’re in the midst of what’s going to be as the baby boomers age, you know, the largest transfer of wealth in the history of the world. That’s something like $10 trillion is tied up in, you know, family run businesses. And you know, we want to be we wanted to be a part of that. So that’s why NewSpring chose to stay and keep our fund sizes small, so that we could continue to to really be experts and build a preeminent firm that focuses on these lower middle market companies. And you’re right that you know, the needs or the needs are very different. 

    You know, I Patrick, you hit the nail on the head, which you know, when you we find a business owner that’s, you know, as a $40 million business and they’re making $5 million in EBITDA a year, you know, and and they had their, they’re at a point of inflection and what in order to grow the business, they may have to take the EBITDA backwards or you know, go on a hiring spree or do things they haven’t done like go international. What we’ve done is build our firm to serve all those needs. And really what, you know, it starts with being able to apply a different risk profile. An owner, all their eggs are in one basket. And when we do a transit transaction with an owner, you know, we’ll go in and we’ll say, look, we’re going to provide you with a with an ample amount of liquidity today. 

    So you can diversify your wealth. But then we’ll ask the owner to, to roll in 20 to 40% of the of the ongoing transaction. And, you know, frankly, as an owner, that’s like having a, you know, a, you know, somebody manage your wealth for you. But it’s just in your private equity asset, because what we’re going to do is apply our approach and what we’ve done at NewSpring Holdings is really build this go to market strategy, where we’ve surrounded us, ourselves and our eco sphere with very senior executives who have built businesses. Again, we’re not former investment bankers we’re former operators. My partner, one of my partners, ran a two and a half billion dollar business that he built organically and through 100 acquisitions over over a 30 year career. 

    And we’ve surrounded that team were of functional operating experts where we can go in and if we get involved, these are experts that help, you know, take a company and position it then for different organic means that we might bring to the table or a significant amount of M&A. We’ve done we have four companies in our in my portfolio today, we’ve done close to 30 acquisitions in the last five years into those four companies. And we really think you can create an exponential outcome by by doing both organic and acquisitive tactics.

    Patrick: I think it’s just a competitive advantage that I hear you have one of the questions I asked was, you know, what do you bring to the table. But I think, clearly, this operational approach and grow through operation is a huge advantage over other firms or investors out there that are more financially guided. And I think that by doing this, I can’t imagine just putting myself in the in the shoes of an owner. I want to grow, I want to change, I want to do this, but I don’t want to bet the company on it. And there’s no margin for error. And so you not only need the expertise from somebody outside, and that cares and wants to partner with you, but you want to be able to diversify, you know your wealth so that you aren’t betting your entire future on a change that you need to do anyway. And so I think it makes it a lot easier.

    Skip: Yeah, we call it we call it a different lens of ownership. Again, you know, it’s an owner is gonna make a certain decision that we would all make a rational decision, you know, if they own 100% of one. And, you know, this really allows you to expand and put a different lens of ownership on. Again, we’re, you know, we’re not an ATM, you know, money isn’t free. But again, if an owner is able to diversify their wealth, they could make different decisions. And then then again, by sitting next to us, you’ve got the former CEO of $3 billion company, you’ve got, you know, we’re gonna put board members on the company that are industry experts here. And on our, on our boards today, we have the former CIO of Comcast and the former chairman of NASDAQ, and other really preeminent individuals that are going to be the industry guides. And then we’ve got the functional guides that can fill in holes, if there’s holes at the companies. Or that can be strategic advisors to those companies as they embark on what is, you know, what is a new kind of op tempo and a new kind of way of looking at the business. 

    Patrick: The other advantage I see for private equity over strategics, and other you know, M&A investors out there is that you mentioned this with the role of equity is the opting for a second bite at the apple for owners and founders, which I think is great, where they go ahead and agree to, you know, a hold on to a 30% minority stake in their company. And that 30% in five years could be worth more than the 70% that that they that they got to closing originally. And I think that’s a formula for success. How could anybody turn away from that?

    Skip: Well, and I can promise you that we work every day to make sure that happens, because that’s the way that we’re going to make money. And, you know, look at the example is this that if you know, the four companies we own today, the aggregated revenues, when we got involved in them were about $50 million dollars. Today, they’re over 700 million in revenues, and about, you know, close to 60 million of EBITDA. So, you know, those owners and the stake that they’ve rolled in and retained is you know, is benefiting from that. And for me, you know, losing sleep every night over how we’re going to make them all successful. 

    Patrick: And of course we put it in a disclaimer right now that past performance is not an indication of future results and all that good stuff. I mean, you’re seeing this, because you’ve got a lot of, you know, very smart people. And they’re all committed, which, which I really appreciate too and then part of the passion with the lower middle market, is that trust, that you’re all kind of pulling in the same direction. And that’s outstanding. As great as all this sounds, I’m sure, you know, some listeners are sitting there saying, how do we get in on this. Give us a a profile of your ideal target. What is NewSpring Holdings looking for?

    Skip: Yeah, so again, this is the NewSpring Holding segment of NewSpring, but we look for companies, let’s say between 10 and 15 million in revenues. What we do is like to get started with, again, it’s a term everybody uses with a platform, and what we will have done prior to that is really, you know, try to take a deep look at an industry where we believe there’s a decent amount of fragmentation, the companies that we target are all profitable. And because we do use a small amount of debt, you know, in all of our transactions, you know, we’ll come in, again, when we get involved, we buy a majority stake, give an owner a nice payday today, but let us, you know, move into the driver’s seat with that owner as a partner, that, you know, we can create the best outcome together. 

    And so then what we’ll do is, we’ll we’ll launch into a, you know, a program where we, again, if we got involved with, we think there’s a lot of fragmentation, and then we will try to aggressively not only work the 100 day plan, where we’re putting the organic growth tactics in place, but then, you know, do a significant amount of M&A around that. And so, you know, really, it’s, it’s an owner is who would want to get involved with us. It’s an owner, that’s saying to themselves, my gosh, I know, there’s something better out there, but I don’t want to do it, as we talked about. I don’t want to take that risk, but it’s its owner like that, it’s an owner, that they may have, you know, may not have a way to you know, trans transition the business may not be like, you know, stated succession plan. And so, you know, those are places that we can, you know, that we find that we can, you know, really, really maximize.

    Patrick: Gotcha. with and in terms of industry, because you got a healthcare group, and you’ve got the franchising. Industries, geographies, any kind of limitations or anything?

    Skip: Yeah, primarily US based. And then, you know, we tend to look at the world through a horizontal view. And that means we look for tech enabled services companies. And so we look for a type of company. And that puts us in different vertical markets. In our four companies today, we’re in FinTech, government services, last mile logistics, commerce, etc. And, and then cloud. So again, different vertical markets, but you know, the types of dynamics, we find that our companies really pervade the vertical market. Again, what we’re usually find when we go into a company is that they, they haven’t, they don’t have a big salesforce. 

    They haven’t focused on marketing. The finance organization is usually used as a way to, you know, how much cash they have in the bank and and how much their taxes are. And so what we try to do is turn each one of those functional groups into a strategic weapon, and really help position for growth, that again, when we deliver the company, you know, to the to the next level, it’s, you know, we’ve scaled it, we’ve de risked it because a lot of times companies have customer concentration or supplier concentration or owner concentration. So what we would have done is diversified all that and that that should mean that we deliver to more than the middle market, that a company that is significantly less risk attached to it.

    Patrick: Well and I would think on the exit side for this, you know, the firms out there are getting bigger and bigger and you’ve got SPACs, and so they’re all these bigger entities that are buyers out there for your lower middle market that when they’re ready to graduate, there’s there’s a whole you know, very eager marketplace looking looking to make the acquisitions. You, you sparked the thought that I had, tell me about a an epiphany that you witnessed with one of your portfolio companies where you mentioned the 100 days where you come in, you do the analysis and you’ve got the game plan and you have laid out a plan of action. And tell me a time where in that in those early months, you just saw that owner and founder all of a sudden see the light bulb come on, say, I never thought I could pull this off. Anything like that?

    Skip: Yeah, look, it’s and this is why I love what I do. Because we really think that we create fundamental value where, again, there’s a lot of ways to make money and, you know, financial engineering, and in levering companies up and cutting costs, that may be one way. The way we make money is through growth. And so it’s really fun. Again, a lot of the companies we get involved with, you know, I’ve not I’ve not been in growth mode, again, for the reasons we’ve talked about. And so, I think one of the most fun things is when we come in, and, you know, again, I’ve heard this many, many times, you know, from from founders, well, we tried to hire a sales force, I had a sales manager, you know, I went through three of them in two years, and it just wasn’t working out. So we just gave up. 

    Patrick: That’s painful, yes. Those are painful comments.

    Skip: And, and so you know, it’s, it’s really hard to grow a company unless you, you know, again, turn sales into, you know, a real function with real strong people. And so I think one of the most fun things is, is to, again, you know, we have, we have the experts here to, you know, to start to bring in and build that sales function. And it starts with better defining the customers better defining who, you know, you don’t want to do business with as well as who you do want to do business with, because again, a lot of things we find are, you know, again, any revenue is good revenue. And that’s not always the case when you want when you want to, to grow. And so, you know, really the most fun epiphany is when you, you start to see the effect of bringing in an institutional quality sales team, and you start to see those growth numbers tip up, tick up, because organic growth is oftentimes, you know, far cheaper than then, you know, any other type.

    Patrick: Okay, I just a lot of fun, particularly that because I think, you know, either labor, personnel, or sales marketing are those very nuanced types of types of practices that are really tough, and they’re very scary. And that’s, that’s something you bring on. Now, you’ve had over close to 200 acquisitions throughout this whole tenure. Let’s talk real quick about how that process has changed, because it’s gotten a lot easier for the whole M&A process. And one of the ways that it’s gotten easier is to reduce risk for the parties involved. And you know, that’s being done now by a product brought in by the insurance industry called reps and warranties insurance. 

    And the purpose of the product is essentially, it takes the indemnity obligation between seller to buyer, transfer that away from the seller for a couple bucks for premium to an insurance company. Therefore, if there’s a breach of the seller reps, rather than a major escrow or fear of a big clawback by the buyer who’s been financially harmed, because even though they did the diligence, something was missed. And in a perfect world, nothing would be missed, but that happens. And so this product has become a very elegant, elegant, elegant tool that’s now available for the lower middle market. But you know, don’t take my word for it, you know, Skip good, bad or indifferent. What’s been your experience with rep and warranty insurance?

    Skip: Yeah, look, it’s for perspective. I remember the first time I used it was maybe 15-16 years ago, and trying to find somebody to underwrite, you know, rep and warranty insurance, you know, there was sagebrush rolling through the streets. It was a very different market. And, you know, so I think you’re right, it has increased the lubricity of getting a getting a transaction done today. So we use it in 80-85% of our transactions today. It really takes I mean, it works just like insurance instead of one owner, you know, basically having all of the risk of, again, having made a mistake, or having some warranty claim come up from, you know, five years ago, it’ll again, allows the pooled interest to underwrite to that and it’s only the exception where we don’t use it in in the trend, and again, in the significant amount of transactions we’ve closed in the last five years.

    Patrick: Yeah, I think I think the nicest development, and the success of rep and warranty has been eligibility has increased, not tightened. The claims haven’t hurt the industry. And you know, very much at all, so rates have been low, they’re beginning to rise solely because the demand. Demand for the product has gone way up. And and that’s what’s driven it. One of the things I did want to point out because it’s just not broadcast that often is that rep and warranty was originally reserved for deals with a transaction value of $100 million plus. Pre COVID, just pre COVID, that threshold dropped by a couple of markets down to deals as low as $20 million in transaction value. There is now as of July 2021, a market out there that has a product that can insure M&A deals with transactions from 1 million transaction value up to 10 million and insure the entire transaction. 

    Slightly different product it is for sell side deals. But what we think is important is that as you know, the market grows, that there are just different options available out there. And what we like is just the sheer number of add ons that are happening. And so there may be preferred destinations for platform investments, there are going to be way more add ons. And if you have tools that are now available for those add ons, all the better. Skip as we record this right now, you know, we’re passing through the pandemic, and now we’re dealing as Californians would almost call the aftershocks with the Delta variants. So things are kind of hanging on. But we’re coming in now we’re racing into end of 21, looking at 2022 what trends do you see going forward? Either, you know, macro or just NewSpring yourself?

    Skip: Well, it’s I mean, first of all, you know, again, the dealing with COVID. I think we all know that, you know, we thought the vaccine was a total panacea. I think it’s definitely helping but I think, you know, COVID is now becoming more, you know, perhaps a longer term part of our overall lives. And so, you know, that op tempo that COVID has created, there’s no, it’s not going to go away anytime soon. So I think we’re, you know, we’re, we think we’re going to deal with an economy economy that is, is, you know, is affected by that. You know, at the same time, you know, there’s a lot of dollars sloshing around in the economy. 

    You know, with what the Fed has done, and what the tray and Treasury slash Congress has done at the same time, you know, there’s, there’s a, there’s a lot of capital out there. And, you know, thankfully, you know, the quick action, you know, that the the government and Fed did, back in March, April, May last year, I, you know, served its purpose. You know, I think 2022 is gonna be a great year. It’s, you know, I do worry about, you know, going further out that, you know, we’re going to see, you know, some issues in the economy, you know, our companies are already seeing wage inflation, you know, you can take price hikes away, but, you know, you don’t take wages back.

    Patrick: No. Yeah, that’s true.

    Skip: You know, with, you know, with a lot of the things that happened with COVID, which some of which are good, some are bad. Number one, you know, a lot of people decided to retire and are not coming back to the workforce. So that takes a significant pool away. You know, the lack of immigration over the last five years. You know, we need immigration to grow our economy. You know, on the good side, you know, a lot of, I think, the most business formation in the history of the country in the last year. 

    Patrick: Yes.

    Skip: So that’s a good thing. So, look, you know, there’s a lot of good and bad, you know, I think the key to founders and other people in private equity is you always have to assume that the, you know, again, I’ve been doing this 25 years, I think this is my third downturn, you know, and, you know, I guess we’re in an upturn now, but, you know, things go in cycles. And so you have to, you have to invest and run your businesses thinking that, you know, you know, take advantage of what you can but but know that you’ve got to architect for the downside. 

    And, look, we’re doing the same things, you know, today that we were doing, you know, last year. It’s a seller’s market. It is not a buyer’s market, because there’s all those dollars out there. So it’s a great time to be a seller. We have to be disciplined. And, you know, I guess our thought is that if we do our the right things by picking the right companies, and then running our game plan, that we can create the growth dynamic, that, you know, that allows us to kind of, you know, succeed in upturns and downturns.

    Patrick: Skip, how can our audience members find you? How can we find NewSpring Capital?

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

    Patrick: Great, well Skip, a lot of fun. It was a pleasure speaking with you today. Thanks so much. 

    Skip: All right. Appreciate it, Patrick. Take care.

  • Limited Bandwidth for R&W Insurance in 2021
    POSTED 9.7.21 M&A

    We’re well into the second half of 2021 now…and Representations and Warranty insurance is more popular than ever. Given the protection it provides both Buyers and Sellers in an M&A deal that should be a good thing.

    However, that popularity, based on the trust both sides of the table have placed on this coverage, has also brought about an unintended consequence that has resulted in PE firms and Strategic Buyers scrambling to get their deals covered.

    Here’s the deal: insurance companies are declining to cover otherwise great risks due to bandwidth. In other words, they don’t have the teams of Underwriters they need to research and understand the deals and then determine coverage and terms for all those parties wanting coverage.

    As a result, if your deal is under $400M in transaction value (TV), you can’t go to one of the major nationwide insurance brokers. They’re just stretched thin and are concentrating on the deals that will bring in the most substantial fees. They’re no longer looking at $100M or even $200M deals.

    So, at this point, if you come under that threshold and are interested in R&W insurance, you must find a boutique firm to secure your coverage.

    Why is this happening… and why now?

    There are a few factors:

    • Everybody wants R&W insurance now – overall volume is increasing. People understand its benefits, that claims are paid promptly, and that it can speed up a deal to closing and smooth out negotiations. So many users of RW are so satisfied with the coverage that they are using it on all their deals – and telling the others how effective it is. As a result it is on the verge of becoming ubiquitous.
    • M&A activity overall is ramping up. In fact, it increased by 48% in Q1 2021 compared to the same period in 2020, according to a report from GlobalData, which also noted that momentum from the last half of 2020 continued into this year. The cause: low interest rates, Buyers with cash to spend, surging stock market, and flood of deals postponed by the pandemic now moving forward. And with valuations only going up for target companies, there is an urgency to get through a merger or acquisition quickly. The attitude is to get it done now.

    More M&A activity = more demand for R&W insurance.

    • The number of “mega deals,” those $1B+, in particular is going up – and they get priority from insurers because they’ll make more money in fees than on smaller deals.
    • Companies can’t add Underwriters fast enough to meet demand. This is partly due to COVID but it’s also because upstart new insurance companies are poaching entire underwriting teams from established companies—further hamstringing their work. In fact. One leading R&W insurer recently had a very significant number of their Underwriters recruited away by a competitor, who wanted an experienced workforce right away.

    Who Is Behind This Trend?

    M&A activity is at record levels right now, across the board. Driving demand are:

    • PE firms that are sitting on a ton of dry powder.
    • Strategic Buyers that have sat on the sidelines and are now getting back in the game.
    • SPACs – There are 400 out there actively looking for targets. These special purpose acquisition companies are created solely to acquire an existing private company in a process that is a much easier, quicker, and cheaper way to go public than a traditional IPO. SPACs must make an acquisition within two years of being formed…and the deadline for many of them is looming.

    3 Steps to Take Now in Light of This Trend

    Despite these trends, all hope is not lost to secure R&W coverage this year, even if you’re deal is under $400M in TV. But you do have act quickly and put in some extra effort to make an insured deal happen. (And you should still prepare yourself for waiting until 2022.)

    Here’s what you should do now:

    1.  Line up all your diligence experts right now, e.g. lawyers and accountants.

    R&W policies right now are being placed on $400M TV deals and up. If your deal is smaller than that, look for boutique broker. Go to solid, experienced regional boutique firms in law, accounting, and insurance to get response you need. If you need a Quality of Earnings report, the big 5 nationwide accounting firms won’t touch you at this point.

    Contact these smaller firms and get on their calendar now.

    2.  Engage with an experienced, boutique regional R&W insurance broker now. The sooner you get your engagement lined up, the better, even if you are at the Letter of Intent stage.

    In both cases you want to avoid the backlog at bigger, national/international players.

    3.  Expect and plan for increases in diligence costs, insurance costs, and R&W premiums. The sooner you act, the better as costs continue to rise. It’s simple supply and demand.

    To give you an idea, the total cost for a $5M Limit R&W policy was under $200,000, now it’s running $225,000 to $240,000.

    But also remember that the protection and peace of mind these policies offer is well worth even the increased costs… and all things considered this coverage is cheap.

    As you can see, there is real urgency here.

    If you’ve got a deal in the pipeline and are thinking of using R&W insurance to cover it, we should talk now so I can help guide you through the process.

    You can contact me Patrick Stroth, at

  • 9 Reasons Why TLPE is Amazing – and One More
    POSTED 8.10.21 M&A

    An innovative new product, very similar to Representations and Warranty (R&W) insurance, is available now and will provide coverage for small, or “micro,” M&A deals.

    Transaction Liability Private Enterprise (TLPE) insurance is available for deals with a Transaction Value of $250,000 to $10M.

    London-based insurer CFC Underwriting is the company behind this innovative new insurance product, and with 230,000 deals in that range of TV, they decided to go after this underserved market.

    While similar to more traditional R&W insurance, TLPE coverage differs in key ways, and not just in that R&W is intended for much larger deals.

    One of the most noteworthy differences is that TLPE policies are sell-side only, which means they are triggered only when the Buyer brings a claim against the Seller because of a loss caused by a breach of the Seller representations in the Purchase and Sale Agreement.

    Also, deals can be insured for up to 100% of enterprise value.

    This is a very new product. Not many people have heard of it. But it definitely reaches an underserved market, and many Buyers and Sellers involved in micro-deals will get a lot of value out of it.

    (If you haven’t already, I’d recommend you read my first article on TLPE insurance to get more of the basics about this unique coverage.)

    Why Is TLPE Insurance a Good Idea?

    Securing TLPE coverage is a no-brainer if you’re involved in a deal under $10M. TLPE insurance is new, it’s just launched. It’s meeting a big need out there.

    And while this may be controversial… I’d say it’s as good as R&W coverage, if not better in some cases.

    It’s better for Sellers, that’s for sure. Here’s why:

    1, Availability

    In professional sports, the greatest “ability” is “availability”. You may be the best athlete, but if you don’t show up on game day, your talents are useless to your team.

    By the same token, R&W insurance is an invaluable tool. But it’s simply not available at any cost to the lower middle market transactions.

    2. The Cost

    The cost of a sell-side TLPE policy is less than a similar sized R&W policy, by as much as one-third. There are several reasons for this.

    3. No Underwriting Fee

    In addition to lower premiums, there is no underwriting fee for TLPE. These policies are underwritten by the Seller completing an application (just like any other insurance policy). Underwriters then use that application as a basis for evaluating risk. This method reduces the overall cost for the program by $35,000 to $50,000 per deal.

    4. The Deductible Is Less

    To further reduce costs, the retention, or deductible, for TLPE policies is significantly less than a traditional R&W policy. TLPE will feature deductibles as low as $10,000, all the way up to $100,000 for a $10M limit – that’s 1%. Compare that to R&W with a minimum retention of $250,000 to $300,000.

    5. Lower Escrows and More Cash at Closing

    The lower deductible enables Sellers to negotiate lower escrows, or withholds, with Buyers. This further increases the amount of cash Sellers get at closing.

    6. Sellers Are Not Beholden to Buyers

    With TLPE insurance, Sellers are not forced to ask permission of Buyers for protection from breaches of Reps and Warranties. In a traditional R&W policy, no matter how much the Seller wants it or thinks they need it for peace of mind, if the Buyer doesn’t agree to include coverage in the deal, it doesn’t happen.

    The alternative in the past was a traditional sell-side R&W policy. However, the Underwriters on sell-side policies in these cases would not be able to rely on an application as they do with TLPE.

    In fact, they would conduct even more stringent due diligence. This costs more and can even limit coverage because Underwriters are not equipped to underwrite R&W on that side. (In buy-side policies, they rely on the Buyer’s diligence.)

    Sellers don’t need the Buyer’s input at all for underwriting a TLPE policy as everything hinges on the Seller’s input, not the Buyer’s. Seller’s seeking peace of mind can acquire it entirely independent of an uncooperative buyer.

    7. The Short Timeframe

    The underwriting time in TLPE is in most cases a matter of days, definitely less than a week. Compare this to the minimum timetable for traditional R&W insurance underwriting of two to three weeks from beginning to end.

    8. Peace of Mind

    The Seller has control of policy placement and coverage terms, which means they feel better knowing that whatever proceeds they’re supposed to get from the transaction… they are going to keep.

    9. Legal Defense Costs Covered

    A sell-side TLPE policy provides legal defense to help the Seller against Buyer claims. The lawyer for the policyholder (Seller), who will protect them and try to negotiate a lower settlement, is at the cost of the insurer, not the Seller. It’s built into the policy.

    With traditional R&W insurance, even if there is a claim brought by the Buyer, the Seller would have to engage an attorney to respond to make sure they aren’t taken advantage of. In fact, the Seller usually isn’t involved – the Buyer is taking action against the insurer to get their claim paid.

    But if the Seller has a $1M to $3M escrow they still need their own attorney for that piece of it.

    Where to Go Next

    If you have an upcoming deal under $10M, it’s clear that if you’re the Seller, TLPE is a must-have.

    If R&W is Wall Street, then TLPE is Main Street. Insurers in this space want to insure mom & pop retail stores, franchise restaurants, small tech companies, or maybe a small manufacturer.

    The cost is super low thanks to the three ways TLPE saves you money (lower deductible, no underwriting fee, more cash at closing), the process is quick and easy, and this new type of insurance offers a lot of protection to make sure you take home the proceeds you deserve from your sale.

    All this being said, there is a key similarity between TLPE and R&W coverage:

    The claims paying ability is no different between the two. You can count on great claims services with TLPE, just as you’ve heard about R&W.

    I’m happy to speak with you about both TLPE and R&W insurance, whichever is most appropriate for your deal. It is important to work with a broker experienced in TLPE insurance when trying to secure this coverage as there are key conditions and limitations.

    And one last thing about TLPE:

    10. TLPE Policies Can Be Placed Post-Closing

    This means if you did not get protection for a previous deal, and it is in that $250,000 to $10M range, it can actually be revisited if you’re interested.

    To get more details on how TLPE might fit your specific deal, be sure to contact me, Patrick Stroth, at

  • Angus Marshall | An Exclusive Look at M&A Insurance for Main Street
    POSTED 8.3.21 M&A Masters Podcast

    Our guest for this week’s episode of M&A Masters is Gus Marshall, Head of Transaction Liability at CFC Underwriting, Ltd. CFC is a specialist insurance provider, pioneer in emerging risk, and market leader in cyber and transactional liability.

    Today we are talking with Gus about CFC’s exciting new product launch, Transaction Liability Private Enterprise (TLPE).Gus says, “Reps and warranties insurance is currently Wall Street and we want to make it Main Street with TLPE.” He’ll break this new product down for us and tell us:

    • How TLPE creates groundbreaking opportunities in micro markets
    • 5 Key TLPE coverage highlights
    • 3 key points to making TLPE work
    • And more



    Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on executive and transactional liability, and president of Rubicon m&a Insurance Services. Welcome to m&a Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here as a clean exit for owners, founders and their investors. Today I’m joined by Gus Marshall, head of transaction liability for CFC. CFC is a specialist insurance provider and pioneer in emerging risk and market leader in both cyber and transactional liability. Gus is here today to present CFCs newest transactional liability product, which was just launched and titled transaction liability, private enterprise or TLP. 

    Now on a personal note, M&A Masters has been doing podcast for over two years, Gus is the very first transaction liability insurance person to be here. And it’s a real key day for us because Gus is here to talk about a new product is the first time in rep a warranty for a long time that a new product has been launched. And this is a product that is designed specifically for an unserved market in the m&a community. These are trying transactions with enterprise value of 10 million and less. I’ll say that again, for you owners out there with companies 10 million or less investment bankers, Business Brokers, or buyers seeking companies at a value of 10 million 10 million or less. We now have a product that has not been around. Gus is a great pleasure to have you. Thanks for joining me today.

    Angus Marshall: Thanks for joining Patrick, delighted to be here and flattered to be amongst such August company, m&a masters.

    Patrick: Yeah. And before we get into the TLP, and CFC, let’s talk about you tell us personally, just what brought you to this point in your career.

    Angus: So, you know, prior life, so to speak, I was a m&a attorney at Norton rose Fulbright, here in Sydney. And it probably would be remiss of me to not mention my background, which is somewhat unusual and dynein, from my parents in law’s house in Sydney, and I’m in the pottery studio. But I’ve converted it to a makeshift m&a Center. But ordinarily, I’m based in London, as you said CSC. Prior to my my joining CFC, I was head of m&a for the UK and London market at AIG. And I moved to CSC about two years before that. And as I mentioned, I was a an m&a attorney at Norton rose Fulbright in Sydney. 

    And I think might be interesting to your audience to know that the Australian m&a insurance market, it’s one of the most developed in the world. So in many ways I had the perfect market in which to learn the key skills of underwriting and advising underwriters as an attorney here in Australia, before moving to London, close to a decade ago now. So I’ve been knocking around the m&a insurance market for pretty much a decade. And it’s been an absolute pleasure to be involved in such a nascent, innovative and emerging type of insurance sector is to insurance has come to me.

    Patrick: Yeah, and it was for our audience members to understand CFC is a long term player and rep award to actually just full disclosure, Rubicon just plays to a recent traditional rep and warranty policy list, CFC. So you guys have been around for a long time. And it was let’s talk about CFC and just the nature because it is very innovative. And you talk about the culture that created the opportunity where, you know, it came up with a new product like TLP.

    Angus: Sure, so CSC, founded about 20 years ago by our founder and CEO, Dave Walsh, who, at that point, identified a real niche in the market with cyber insurance. Now cyber insurance back then was certainly nowhere near what it is today. And like all businesses, cc’s had to evolve and we got some things wrong, and we got some things very right. But about the name, you know, this sort of tells you a bit about about that story. And that is, cc stands for click for cover, not only more, but it did. And the original theory there was we wanted to be a web based insurer for cyber where you could literally click for cover. 

    Now things have evolved since then, and we’ve we’ve dropped the cliff we cover now just CFC and also expanded across a whole variety of different lines of business to being a pretty cool line and you are about and how do we come up with TLP. So it’s at the height of COVID. We were, I think it’s fair to say fairly concerned about the outlook for m&a, I think everyone was. And we wanted to try and create some opportunities and some positives from what was a fairly depressing blip on the overall m&a lifecycle. And CST, we do a lot of SME business. And I think the board at CSC myself got together and we identified, I think, something that we always knew for a long time. And that is there really isn’t a product for what is such a massive part of m&a. And that is for deals under $10 million enterprise value, the so called SME micro segment. 

    And for us, this was quite a neat pivot, both from a tail standpoint, but also from a CFC standpoint. So for TL in our, what I call our main market, we write deals in the low and mid market. And I said a sweet spot is deals with an enterprise value of about $200 million and under. And so what we thought of trpa is, it’s really just a natural extension. Beyond that lob in market into the SME micro segment and the pivot, I mentioned about CSCs, we are already a very key SME insurer, both on cyber and other lines. So now we’re always a little bit displaced in tail only writing that log in market without writing the SME. So it’s a nice, I guess, return to CSCs roots being a key SME insurer.

    Patrick: Well, you had mentioned once when you were rolling out, DLP, what was the average deal size enterprise value were reppin warranties purchase?

    Angus: So it sort of depends on who you ask. But I think it’s it’s probably fair to say across the market, it’s about $352 million.

    Patrick: Yeah, $354 million, is your average deal that gets insurance. And they may only get, you know, 10 $15 million dollar policy. But I mean, and there are 1000s of those deals happening every quarter that blew me away when I first got into m&a was I didn’t realize how many of these things were happening man in typical for most people that are involved in m&a because they’re just looking at the Wall Street Journal, the news, and all they see are the multibillion dollar, you know, Whole Foods being bought by Amazon, you know, and so that’s, that’s their perspective. 

    And what really I found great was that, you know, as rep and warranty has been coming down market where they were, their threshold was $100 million dollar transaction value down to 15 million down to now they can do as low as 10, there’s been kind of that hard floor for the markets, they will make an exception from time to time to entertain a deal. But then you’ve got the converse issue. And the limitation with rep and warranty is the amount of diligence is required, in order in order for a deal to even become eligible, and you’ve removed all that. And so now we’ve talked about your thinking behind this vast market, and you’re ahead of everybody else, because I’m sure everybody else right now is busy with what they have. 

    I mean, that’s, that’s the interesting thing. And I appreciate the innovation of CFC is, rather than being, you know, having lack of bandwidth, let’s look at some other place where we can be real efficient. I think that was one of the focuses you hadn’t. Let’s talk about some of the things that are going to enable you not only to enter this market, but to sustain it because you talk about, you know, making sure that you have a real streamline application processes submission process. How are you going to do that? What are your plans that way?

    Angus: Yeah. So, I mean, there’s, there’s a lot of Next question. Let me start by just trying to identify some of the things that we knew we had to get right in order for this product to work. And you’ve already mentioned a couple. But you know, this is the context, right? So reps and warranties is currently Wall Street, and we want to make it mainstream. And we did that by saying, Okay, so what are the pain points for current reps? And how do we change that four TLP pain points are, the process was too long, the cost was too high. And I’m talking in the context of SME, of course, the cost was too high for SME because of that minimum premium interaction. 

    The third point is, you know, it’s not just the cost of the policy, it’s also the cost of the additional diligence required in order to have a policy underwritten in a conventional sense. So if you if you read that altogether, it’s going to be a compelling price point. It’s got to be speedy in underwriting and the third point i think that’s that’s really key. It’s got to be simplistic and and that’s really because we’re talking to a much larger distribution community and there’s always been this I guess, this missing Stick around reps and warranties insurance that it’s insurance by name, but not really by nature. And where you go with that is, you know, there’s no application process, the underwriting is kind of inverted as compared to other insurance products. 

    There’s not a high volume, there’s this prevailing view that you have to be an m&a lawyer to understand it, and to be able to broker it. And so there’s always been this natural resistance from insurance brokers to want to even venture into the world of m&a. And what we’ve really tried to do is not just achieve the speed and the price points, we also wanted to simplify it so that we could have as broad a distribution community as possible, feel confident that they can both recommend this product to their clients, but also place it from a technical standpoint.

    Patrick: Yeah, absolutely key because I can tell you the challenge that I see out there for brokers is brokers will not discuss a product or an offering with prospective clients unless they really are comfortable with it. Because I mean, human nature, they just don’t want to look uninformed. And they want to be able to answer client questions. So if they don’t understand they’re not going to talk about. But let’s talk about TLPE just in the basics, and we’ll talk about how it’s different. And most of our audience is familiar with the traditional rep a warranty policy. So let’s go step by step on a couple areas. Okay, how’s TLPE different number one? You know, let’s go over this and explain this. Okay. It is not a buy policy, this is a sell side policy exclusively? Talk about that Gus.

    Angus: Yep. So the main reason why we can expedite underwriting and also reduce the underwriting costs is we’re relying a lot on the knowledge of the seller. And if you play that through, in the SME micro market, the seller is often the manager of the business. And this plays into what is the basis for pretty much every other insurance product, and that is your insured is telling you the truth. If they don’t, then, you know, coverage is far more limited. But we relying on their knowledge and their integrity in buying insurance. And what we do with an application process, which is really the pinnacle or the center of our underwriting. The application process captures that knowledge and tries to tease out some of the more material issues that might be relevant to a transaction. This is all in the context of our theory. And our philosophy when it comes to micro and SME is we need not apply the same underwriting process to this end of the market. 

    Because these businesses, there is some complexity, but it’s nowhere near as complex as your multi billion dollar deal that gets insured in the main market. So it was inappropriate for us to adopt the same very interventionist type of process that aims to kick every single, little tire. In company, we wanted to make an application based underwriting can be achieved in but we can get a policy to insert within three days. And another point I’d make is there’s no underwriting fee. The underwriting fee is often charged on the main market, we don’t have that and we don’t need it. And we didn’t want it because that was just another barrier to accessing this part of the market with a new product.

    Patrick: Yeah, you just you just carved out 35 to $50,000 in costs off the top with that, I’ll comment on just on your application. Again, you can reach out to me or to Gus, but we can get you the application Rubicon M&A Insurance Services, has his application ready to set out on demand for anybody that asks for it. It is it is intimidating in terms of an application if you compare it to other insurance applications, but it is absolutely market for a due diligence checklist. Mirrors that. There are a lot of sections that don’t apply. But it is one of those things that is available out there. And it’s nowhere else in the market. Let’s talk about just because TLPE as great as it is not for everybody. Let’s talk about their particular industries that you like, let’s focus on the ones that aren’t eligible and why they’re not eligible.

    Angus: Yeah. So some of the industries that are ineligible for TLPE would be U.S. healthcare, pharma, financial institutions, excluding insurance brokers. So that is inappetite, but everything else is out. Now.

    Patrick: There’s a robust market for insurance brokers acquisition.

    Angus: There absolutely is, which is why we carved that back into appetite because, well, there’s there’s various reasons we can go into on that, but, you know, just sort of thinking about those out of appetite industries. I would say that the one that is practically relevant, and therefore, I guess material to the market would be that there are a lot of healthcare deals on a 10 mil. And healthcare has its own, especially in the US has its own risks and exposures which generally don’t lend themselves to a streamlined underwriting process. Financial institutions that I mentioned as well, I consider that to be somewhat academic as a kind of exclusion, or out of appetite sector primarily because we don’t expect to see many financial institution businesses at under $10 million. 

    So look, we include it for completeness, but as I said, not not hugely relevant, perhaps the easiest way to think about it is, is trying to think about the quintessential or kind of target. In short, it’s mom and dad, entrepreneurs who build a livelihood through a business, or a variety of connected businesses, and they want to retire. That’s a really cool market currently. And it could be anything from a chain of restaurants to a consulting practice to a construction firm. As I said, it’s kind of you know, what’s on Main Street. And that’s it’s pretty much 99% of what’s on Main Street is in appetite.

    Patrick: Let’s talk about a clarification you have for technology, because technology is all over the place. And then we’ll talk about a case study with a technology firm, but distinguish eligible tech from ineligible tech.

    Angus: Yeah, so I think it broadly breaks down like this, that a technology being sold pursuant to an asset purchase agreement, we can get our arms around. I think when you’re dealing with a acquisition of shares of a tech company, that doesn’t mean that it’s out of appetite. But what we’ll often see with those deals is a very, very high, multiple evaluate. And when we can’t reconcile the economic basis for a business, we find it difficult to provide an insurance solution. Whereas when it’s an asset deal, you don’t have necessarily that EBITDA valuation issue that we often encounter on share deals. 

    Now, I know there’s I sort of refer to a don’t mean this to sound pejorative at all, but it’s kind of like the after after market. In California, for technology, where a lot of companies of use, a lot of companies have failed, but they still have valuable technology that they want to try and realize some value for, and they sell that as an asset. That to me is a perfect fit for TLPE. Along with, you know, the mom and dad entrepreneurs that I mentioned earlier.

    Patrick: We can’t talk about TLPE without talking about cost. Okay, one major savings right now, there’s no, excuse me, there’s no underwriting fee, which is fantastic. Let’s talk about the pricing. And I because I’ve done this too is let’s compare, you know, a $5 million TLPE versus a $5 million limit, that’s to the full transaction, by the way, a TLPE versus a rep warranty policy.

    Angus: Yep. So average rate online range is between one and two. But I think really, it ends up at 3%. So it’s between one and 3%. Now for the non insurance, audience rate online is just an expression of premium over total limit bought under the policy. So between one to 3% and just some of the factors that influence that rate. So a lot of it comes down to what the naic is the North American industry code of the target business is. That sets the initial rate. And then there are positives and negatives to that rate based on the responses to the application. 

    And also importantly, based on the percentage of the policy limit relative to the enterprise value. So the more limit you buy relative to EV, the cheaper the policy becomes as a rate online percentage. So let me just let me just bring that to life that if you’re buying 10% of the total enterprise value, you’re rate online for argument’s sake, maybe 2%. But if you’re going to buy 100% of the enterprise value as a policy, then you’re rate online, will probably come down to about 1.2% for illustrative purposes. So it gets cheaper, the more you buy is the bottom line there.

    Patrick: But the bottom line is the price is determined not by the transaction value, but by how much insurance you buy. And then it’s a matter of, okay, well, you know, we’ve got a $5 million sale do we want to sell, you know, two and a half million dollars worth of insurance to insure you know, the full five, and then just you make a decision from there?

    Angus: Yes. Yep. And so that’s certainly one factor. And I think, interestingly, for the reps market, certain responses in the application may reduce your premium. So to give you an example, if you use, say multi factor authorization to control your cyber network, well, that would be a credit to your premium. If you buy cyber insurance. Again, that’s a credit. So you know what we’ve constructed the application not just to try and elicit information, but it also informs what the total price is.

    Patrick: The bottom line is, as you’ll see this, this can all be played out, you know, in a matter of a day or two with the application and so forth. When we get into this, and we remember now, as a sell side policy, unlike a buy side policy rep and warranty where a buyer experiences a breach, suffers a financial loss, they go right to the insurance company. Okay, with the sell side, what happens is that, in the event of a breach, the policy is specifically written so that it is triggered when the buyer comes back after the seller. Let’s talk about that real quick I just the dynamics of how this policy works.

    Angus: Yep. The seller gives reps to the buyer, the buyer discovers an issue, that issue constitutes a breach of the rep, the buyer brings a claim under the terms of the agreement against the seller. At that point, the seller has a claim under the TLPE policy. And the insurance will indemnify the seller in respect of the buyer’s claim.

    Patrick: I mean, it’s one extra step, where under rep and warranty buyer goes right to the insurance company, under TLPE, buyer approaches seller, which is no different than if there’s an escrow and the buyer is notifying the seller, hey, you know the funds in escrow, we’re gonna have to claw those back now we need to return. The difference is negligible. So this is a big departure. And so now you’ve got ask sellers, you have the protection that the rep and warranty policyholders have. So it is very helpful in that way.

    Angus: And one on that is the buyer can know about the insurance. In fact, the buyer can recommend to the seller take out insurance. And the dynamic there that I think is is quite attractive is if the buyer ordinarily is demanding an escrow from the seller, the seller can come up and say well, I’m not going to give you an escrow. But I will have insurance, which should give buyer comfort that there’s something that backstops any type of potential issue that that comes up in the future.

    Patrick: Yeah, I hate to interrupt but that mean, that’s the other issue that comes in here. Apologies, my lighting over here. But the other issue that comes up with in the micro market where rep and warranty is not available. The buyer’s major segue is a major escrow and they require the seller to carry a D&O tail, because there’s at least a policy and the buyer can say well, I’m gonna go make a demand because there was a misrepresentation. You know, is a contractual breach the D&O policy, we’re getting too into the weeds with insurance. But there are problems with that, but it’s better than nothing. Well, now you’ve got this product is designed specifically for these buyer clients.

    Angus: Yeah. Look, it’s um, you’re absolutely right. And one of the questions that, you know, even though this product has only been been launched for just over a month now, one of the questions we often get is, well, why don’t I just buy D&O, run off? And this was to your point, Patrick? Yeah, I mean, up absolutely can but D&O genuinely excludes liabilities in relation to a breach of contract. So as much as it was the only thing available that gave a scintilla of peace of mind, it was so imperfect that I kind of questioned whether it was even worth the money. Yeah, if your objective in buying it is to protect yourself against a breach of rep in a contract. And TLPE fills that gap. 

    So it’s there exactly for that reason. And that’s why we think that it’s it’s such a neat solution for the sellers. I should probably say, you know, the other question I’ve received a lot is, so why is it the sell side only and not not the buy side? And it’s a good question, because for those familiar with reps and warranties insurance, 99% of policies now are issued to the buyer. The key reason is, as I said in my remarks earlier, we really want to capture the knowledge of the seller, and offer only to the seller means that the underwriting required can be so much faster and so much more efficient. If we were to underwrite on the buy side, the cost would be higher, the and there would be probably an underwriting fee. 

    And one of the reasons for that is we’d have to forensically go into every single warranty and rep and make sure that they’re market. Because the buyer, don’t forget has a direct recourse against the insurers and has the can leave the seller right out of it. So there’s that that kind of moral hazard that the seller doesn’t care, the buyer agrees, very favorable reps. And if we were to be so streamlined that we couldn’t pick up on that, well, you know, I don’t think we’d have a product very long.

    Patrick: You wouldn’t be around. I mean, and this hasn’t happened in a vacuum. TLPE is not in a vacuum. And I can tell you, because we’re very proud that, you know, we do have a case study to talk about where TLPE brought a deal from the grave, and close within two weeks, and the situation is going to be one where we have a SaaS company. And a small $5 million transaction, they reached out to Rubicon and said, hey, you know, we just had our deal, you know, taken off the table, because we have a disagreement with the buyer and is specifically this, in the event of a breach of the IP reps, the buyer was going to go and pursue the seller, say, hey, you’re going to pay us any loss or damages as a result of IP reps. But we, the buyer, are going to retain full control of defense counsel. 

    So if an IP rep does get breached, we’re gonna get our attorneys on and defended vigorously, and you’re gonna pay the bill. Okay, it was a very large Silicon Valley based buyer that was doing this. And the seller, quite frankly said, Look, that’s a blank check to you guys, for your attorneys fees, there’s no way and that was a line in the sand that both sides had, and the deal was dead. All sudden, TLPE is announced. We said wait a minute, there’s another way. We could insure the intellectual property reps in the agreement. In the event the the buyer suffered a loss, they had control on their attorney that they were going to go ahead and do because that’s their loss up to the policy limit. So they could spend as much as they want to it. But you know, the, you know, there’s only so much out there. 

    But that provided that way that the two sides could bridge their disagreement. Deal closed. I mean, it actually took longer to get the bankers back in, get the finance realigned than it is to get the insurance. And that’s, you know, our role here, we want to be the conduits that are going to go and help deals close successfully. Because we got these owners and founders of these lower middle market companies, they create a great value from nothing. And they’ve got these small issues that you know, that can bridge that are a reasonable risk to take and, and that’s been, just a great, great avenue. And we see this happening more and more particularly out here in Silicon Valley. But you know, Gus, you know, you know, this deal. It was the first one you guys did any comments you have on it?

    Angus: Yeah, I think just to pick you up on some of the remarks you made Patrick, what was pleasing is, you know, we pitched TLPE and we still could shoot as peace of mind to kind of mom and dad sellers. Not that, in this instance, our mom and dad sellers, it was a sophisticated company. But you know, it’s it’s originally pitched as peace of mind. But what was so pleasing about this deal is it can be a deal facilitator, so much more than we thought it would end up being, both from avoiding the need for escrow, but also unlocking or bridging the gap between negotiation expectations. 

    So it’s, you know, it’s pleasing to know that a deal got done that otherwise wouldn’t have done and that’s because of insurance. And I often joke, you know, people say the hardest thing about insurance is telling your parents you got into the insurance industry, but we’ve, I gotta say I’m to the market, we’ve done a great job, I think of creating a very valuable product for deal facilitation, risk transfer, and overall, M&A efficiencies. And, you know, I gotta say I’m chuffed to be part of it and chuffed to have brought this TLPE product and excited that you were the first broker to place the first policy. 

    Patrick: Yeah, we’re looking forward to a lot, a lot more. The hardest, the first one is always the hardest one to get, and so forth. Give us your projections. I always ask my guests, you know, what trends that they see going forward? You know, what do you see going forward for for this, at least in 2021? And then from there?

    Angus: Yeah. So what I’d say first of all, is, with any new product, it inevitably evolves. And there’s also inevitably competition. I mean, that, you know, there’ll be another insurer that comes out with a similar product. And that’s great. I mean, we welcome. We welcome that. That’s a market operating as it should. But, you know, in terms of projections, I think we’re going to see some pretty consistent demand for the next six months whilst brokers who probably aren’t familiar with with M&A insurance, understand that there’s a product now that services that lower end of the market. And then, we see consistent growth thereafter. I think an interesting point to note, from an M&A perspective is there’s far less of a cycle in the the SME market than there is in any other part of the market. 

    And we like that, because we generally don’t have asset bubbles that affects risk in the main market for M&A insurance. And also, it allows us I mean, one of the big issues as you would no doubt have experienced Patrick, in the current M&A market is one of underwriter capacity, we are in the biggest M&A boom in modern history. And there just aren’t enough underwriters out there to service all the deals. So we think we’re TLPE we can have a fast, smoother resource allocation to service these deals. And, you know, what helps is CFCs long history in servicing 1000s of policies every single year that also renew every single year with a tech enabled platform. So that’s something that that we we bring to this product as well.

    Patrick: What was the number of prospective businesses out there? Transactions like 230,000?

    Angus: Yeah, that’s right. I mean, it’s it’s hard to accurately project or sort of private market addressable market, especially in the US with a lack of public disclosures required, unlike, say, the UK where some of your US listeners might be outraged to know that company accounts, even small companies are disclosed and available for free to everyone. That’s not the case in the US. And so it is hard to to assess the target addressable market, but based on various data points, we think there are about 230,000 transactions in the sub $10 million market taking to the US alone, that is so and there’s so much to draw from that right. But even if we’re only 10%, right, or we only get 5% of that market, that’s still easily more than what the the main market of reps and warranties insurance currently services.

    Patrick: Yeah, it’s just a it’s a great, great opportunity. Gus, how can our audience members find you, find CFC, questions about TLPE?

    Angus: Sure. So I think one of the key points would be, we have a webinar that was recorded, and then you attend it. And that’s quite a good point, just to run through some of the key parts of TLPE that’s available on CFC’s website. Look, I want to be found, I’m on LinkedIn, we’re on the CFC website, if you just jump on the CFC website, you’ll find my email address. Shoot any questions you have delighted to, to help, you know any M&A practitioners and lawyers and the like, understand what this product can do. But you know, equally we only engage and transact via an insurance broker. So Patrick, you’re you’re the first one to do it. That’s that’s worth a a deal tombstone, which aren’t often given away. But I think this warrants it. So I recommend that they get in touch with you first and foremost.

    Patrick: I would say that that insurance is a regulated product, it can only be placed through an insurance broker and and this is circle slides is just another layer of complexity in regulatory stuff. So I would stress if anybody wanted information or the application just have a look at this. Reach out to me at You can look up, the M&A Masters podcast, you can check there and ping us and we’d be happy to go in and respond. We’ve got to get get a couple more things up and running on the site. But absolutely, I’m walking me out. Anybody for this. It’s great because this is where we’ve wanted to live is to really serve the entrepreneur. We really look forward to it. Gus, you came up with, you know, the better mousetrap that’s out there and I hope the world beats the path to both our respective doors.

    Angus: Likewise, Patrick.

    Patrick: Thank you very much for joining us, and we’re gonna be talking to you again.

    Angus: Been a pleasure. Thanks, Patrick.

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

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

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

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



    Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority in executive and transactional liability, and president of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Jordan Tate, managing partner of Montage Partners. Montage Partners is an Arizona based private equity firm founded in 2004. They manage $70 million in capital and invest in established successful companies across North America. Jordan is great to have you here. Welcome to the show. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Jordan: That can happen. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    How It Works

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

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

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

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

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

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

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

    Quick and Easy

    TLPE offers streamlined and cost-effective underwriting:

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

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

    TLPE in Action

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

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

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

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

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

    What to Do If You’re Interested in Coverage

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

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

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

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

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

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

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

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



    Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Services, and trusted authority for transactional liability. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. I’ve got to say just on a personal note, real quick. When you’re doing these interviews, your big dream is to have a monster guest who’s breaking some news out there. 

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: Learn how to work Zoom.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Scott: Absolutely. Absolutely. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: Wow. 

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

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

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

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

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

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

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

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

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

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

    Scott: My pleasure. Thanks a lot, Patrick.

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

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

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

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



    Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today, I’m joined by Tom wells, managing partner of 10 Point Capital. Based in Atlanta, 10 Point Capital is an independent sponsor that specializes in a very interesting class of business, franchises. In particular franchise restaurants, which I’ve seen quite a bit of action in the last 18 months. So I’m excited to get into this. Tom, thanks for joining me today.

    Tom Wells: Thank you for having me.

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

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

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

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

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

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

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

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

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

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

    Patrick: Digit. Yeah. 

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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: So sustainability.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: No s.

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

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

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

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

    Tom: Thanks for having me.

  • Brien Davis | Investing in e-Commerce in a Post-Pandemic Market
    POSTED 6.29.21 M&A Masters Podcast

    On this week’s episode of the M&A Masters Podcast, we are joined by Brien Davis, Founder of Altacrest Capital. Altacrest is a private investment firm focused on consumer brands with enthusiast customer bases and centered mainly on e-commerce. 

    Giving clients the experience of an institutional sized team at the boutique level, Altacrest Capital’s focus on e-commerce has been even more fine-tuned in the virtual world of COVID.

    We chat with Brien about his journey from big companies to lower middle markets, as well as:

    • Building an investment thesis around e-commerce
    • Flexibility and strengths of being an independent sponsor 
    • Growth in the e-commerce industry
    • Risk and cost in transactions
    • The e-commerce markets that will continue to grow post-COVID
    • 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 Brien Davis, founder of Altacrest Capital. Altacrest is a Dallas based private investment firm focused on investing in consumer brands with enthusiast customer bases, largely through e-commerce. Brien it’s a pleasure to have you. Welcome to the show.

    Brien Davis: Thank you for having me, it’s a joy to be on.

    Patrick: Now, we’re going to get into Altacrest and where you’re dealing with all the cool kids with the enthusiast customer, right, all that stuff. But before we get into that, let’s start with you. What brought you to this point in your career?

    Brien: Sure, no, it’s been a bit of an entrepreneurial journey for myself, you know, which has been fun, because we get to work with a lot of founders of these young brands that are kind of going to the next level. But I have a similar background to my two partners, we both came, or all three of us came from large financial institutions. And, you know, I worked at Prudential Private Capital for about 15 years. Wonderful group, wonderful, people really enjoyed it. However, you know, the transaction sizes were getting bigger and bigger. 

    And I frankly, wanted to do something where I could be a little more hands on and have a bigger impact on helping to grow, you know, smaller, middle market companies. And so, for me, it was a great fit to make the transition and make the leap from the big firm. And then, you know, head up into Altacrest Capital, which we did about three years ago. And my two partners were in a similar state of mind. One of them is Tim Laczkowski. He and I has worked together at Prudential for about 15 years. And then Rick Sukkar, who was at JP Morgan for for quite a while as well. So it’s been a good fit for all of us.

    Patrick: Well, now you didn’t name it after after the founders, which is what, you know, your I would say, the less creative law firms and insurance firms are, they just named things after their founders? And I like I like getting an insight for a company, their culture and their background, a lot of it comes down to how they were named. So we’ll start with Altacrest, and how would you name and it, then we’ll talk about Altacrest.

    Brien: Sure. It’s actually the ancient Roman god of no, I’m just kidding. Nothing to do with that. We actually do have a little bit of a family connection to it. So Tim, who I mentioned earlier, was actually the first one to leave the big institution. And he went out on his own, and originally came up with the name Altacrest. And it’s an acronym of his family’s name. It goes wife, Amy, and his sons, Luke, Tate, and Andrew and that’s the alta. 

    And then they loved to vacation and Crested Butte. And I’ve done it for years and years. And it’s a beautiful place. When Rick and I joined, it was interesting is like, well, that’s a pretty personal sounding name for for Tim. And we were all coming in as equal partners. But we liked the vibe, you know, frankly, because we’re three of us all been married long time, we’ve all got multiple kids, and, you know, very family oriented. And so it just, it seemed like a great fit. And so we stuck with it. 

    Patrick: Well, I think and Tim’s last name, pronounced it again for me.

    Brien: Laczkowski.

    Patrick: Okay, if you see the spelling of it, that’s a real tricky way. If you started using that same formula, put everybody’s name in there, I think it would have been even more duck soup. So, I think you took the path of least resistance. And you did that. One of the things you mentioned is how you had been in in the larger institutional capital. 

    And we’ll find out in a future episode, actually about your firm Prudential capital where they are not as institutional as you might think. But you were up there in the deals were getting bigger and bigger. And that’s been the trend for a lot of private equity firms, as things get bigger and bigger over time. But you’re committed to the lower middle market like we are. Talk about that a little bit. Why there? Why do you want to get your hands dirty?

    Brien: I love it, you know, we’re dealing with mainly companies from about 2 million of EBITDA up to call it 10. And quite frankly, at that point, you oftentimes it’s a founder, who had a wonderful idea, and is great at getting the company launched, and gets to a certain point where, you know, he or she wants a little help, you know, taking it to the next level. And it’s, it’s a situation where, you know, they’ve got really good management teams, and they’re, they’re beginning to build those out. But there’s still a lot of room for, for growth. 

    And the nice thing about, you know, coming from a place like Prudential where we provide capital from larger companies, we’ve seen the roadmap, you know, so we know what those companies look like at that size, and we’ve got a good sense for how to help these businesses get there. And it’s great. I mean, there’s a lot of them at the lower middle market just in terms of the volume of types of companies that are there. 

    But it’s also just, you know, there’s just more help that they need and more kind of value add they can do you get into the consumer products side, there’s been some unique things with ecommerce and things like that, that have even driven even more need for and more development of some of these younger companies that are growing rapidly and have really taken advantage of the changing and consumer behavior.

    Patrick: Yeah, I think what’s exciting about this is, first of all, there’s a large marketplace out there, when you look at the lower middle market. So there’s, I would almost say, idyllically, there’s plenty for everybody. But this segment of the market is really underserved. And what’s fantastic is, you know, you get these owner founders, and you’re right, they can take from nothing and create something, but they can’t scale it and get to a point of inflection where, okay, we’re, you know, we’re not really small, but we’re not big, what do we do. 

    And a lot of times, if they’re not informed, they may default to a strategic that may or may not have their best interests at heart. And so if they don’t do that, they go to an institution that maybe can’t meet all of their needs, but we’ll charge them a lot more money. And and that’s not serve them better. So it’s great that we can go ahead and put Altacrest capital out there and really highlight you as a destination, particularly for consumer brands. In ecommerce, that’s a nice niche, where, hey, here’s a place to turn because, you know, they’re getting the benefits of experience from an institutional sized team, but at the boutique level. 

    And so I think that’s fantastic. So I was thrilled to be able to have you there and spotlight a firm like Altacrest Capital. When you’re looking at this class of business, why this this line of business, the consumer products and the e-commerce? Why not just consumer products or whatever? Tell me about that.

    Brien: Yeah, it’s been fun. So one of my partners, Rick Sukkar, he’s been in consumer products for 20 plus years. Yeah, he did the big JPMorgan, institutional M&A, investment banking thing. And then about, you know, 10 years ago or more now, he went out on the operating side. And so he’s been an operations on some of these smaller consumer brands that are growing. And in his instance, it was more omni channel. And by that we mean brick and mortar, ecommerce, any type of channel you can think of to sell your your widgets, and, but where he saw a lot of growth, and where they had a lot of success was was on the the e-commerce side. 

    You know, Tim, and I come from a more of a background with a strong focus on free cash flow, generation, margin, etc, etc, a lot of the great things that we learned through our investing time at Prudential. And when you took the experiences that the three of us had had, and this was early in our formation, like I said, we’ve been together for about three years, we fine tuned around this investment thesis around ecommerce. And the reason for that is a couple things. One, you’ve got a massive tailwind behind you. 

    And this year, we obviously came up with this thesis before COVID. But obviously, that’s helped it as well. But you’ve got the shift of people going from brick and mortar to e-commerce. And so that’s a nice tailwind. The other aspect of it is the ability to grow a young brand can be very cash efficient. You can outsource the manufacturing, you can do the product design in house. So you can keep from a capital expenditure standpoint, from a working capital standpoint, you can keep it relatively manageable, too. 

    And so it’s a great little free cash flow generation model. And so you take some of the industry aspects, some of the business model aspects of it were like this, this makes a lot of sense. Yeah, we really want to focus on this. And so we bought our first company, Barton Watch Bands, in November of 2018. And it’s been a great ride. I mean, we’re seeing just a lot of those things. play out now, we did not anticipate, you know, a global pandemic. That wasn’t part of the investment thesis.

    Patrick: Neither do the the people from Zoom. But they’re doing ok.

    Brien: Exactly, exactly. So, um, but, but now, we’ve been fine tuning that since then. And the other part of it that that made sense for us to focus on this niche is really our network. And we call it our Altacrest ecosystem, if you will. But it’s, we’re pretty hands on. Yeah, we we help out a lot if with anything from operations, whether it’s, you know, bringing in a consultant we’ve worked with for a long period of time to help refine things to hiring COOs. 

    On the marketing side, we get, you know, involved in terms of helping out on digital marketing strategies, different agencies to work with different particular people to work with. PR, etc, there’s a lot of different ways that we try to bring resources to bear to these small companies that that didn’t have them before, in an effort to accelerate growth. And so that’s, you know, sort of our experience level coupled with what’s going on in the industry seemed like a good fit for us. And so and it’s been fun. We’ve done three acquisitions now and hoping to do do more as we keep going.

    Patrick: And with this, what you’re bringing to the table is, now you’ve got the experience in that particular space. So you’re not just doing financial engineering, you’ve got hands on operations, and we’ll talk about a layer but you’re also dealing with a human element, that gets, you know, can be vexing, quite frankly, for owners and founders. Particularly in e-commerce and consumer brands. Because their, their their focus is elsewhere. 

    And that’s a big blind spot, or can be a tragic blind spot for them. With your structure, okay, as an investment firm, you’re not a you know, big fund, private equity firm. Let’s talk about your setup. Why did you structure as otherwise known as an independent sponsor? What flexibility, or what strengths does it derive from that, as opposed to, you know, having a big fund behind you?

    Brien: We like it for a number of reasons. You know, one, you know, capital availability hasn’t been the biggest hindrance to doing deals for for a while, and that does ebb and flow depending on what’s going on the the economy and things like that. But for attractive investments, capital’s generally generally available. You know, it’s been harder to find is,you know, attractive deals and in sectors that are in something that we wanted to be in. And so, you know, two things led to, you know, doing the independent sponsor model. 

    One, frankly, just being honest, is a lack of history of the three of us investing together within this investment strategy. And so that’s something that is typically desirable in terms of pulling together a committed fund is a track record of investing in the same strategy with the same people for over a period of time. You know, the, the other part of it is the fact that we just like it, we like the flexibility, we have a lot of relationships, both institutional and high net worth, if you look at the capital that we’ve put into our acquisitions, it’s it’s some of our own capital, in addition to a mixture of high net worth individuals and institutions. 

    Most of those high net worth individuals, frankly, are our former private equity guys and women of some ilk. And so we like that, too, because it’s a nice value added base that, frankly, we use to, you know, bounce questions off from time to time, as well, in some of our portfolio companies.

    Patrick: And I would think, for sustainability, long term, you’re having this experience with these investors, and you’re, you know, having a track record of success. Should something change in the future, and you need to pivot, you can turn to them with a real great track record, if you did have to make a fund set up a fund, well, then you’ve got that source, I think that you’re keeping all of your options open. And you’re looking out for, obviously, what’s best for the companies that you’re investing you’re partnering with. And so why don’t we talk about that? What’s your profile of a target? What’s your ideal profile?

    Brien: Sure, I mean, I think the best way to answer that might be just giving you an example of a recent transaction that we did. So in September of last year, so you know, right in the middle of COVID, we closed on a transaction with a company called Big Dot of Happiness. Big Dot of Happiness, makes party supplies. So think of things that you’re going to hand out at a bridal shower, or a birthday party or a 50th, you know, celebration of whatever graduation celebration. And right there, you may think we’re absolutely insane that we’re buying a company that is built around the gathering of people in the middle of a pandemic, when you can’t gather people. 

    But that’s a we, you know, the process started before COVID began in terms of us having conversations and it got it admittedly got stalled for a while as we all digested what was going on in the world. But but this is a great example of a of a management team and a founder, who were just really impressive and they successfully pivoted from doing, you know, a paper invitation that says come to my party to uninvitations. Hey, you’re not invited to my party because I can’t have one. And the beauty of that business and this is part of the beauty of e commerce is you know, they have in house creative. They have in house manufacturing. And they have the logistics to get the product out the door very quickly. 

    So they can go from idea to in a customer’s you know, home in about 48 hours. Which is what allowed them to pivot as quickly as they did. And so it’s a really nice business. We think that they’ve done a great job pivoting through the transition that we had, we think, obviously, as gathering start to come back together, and, you know, vaccinations, increase, etc, that it’s a great business to be in. But the rationale for the transaction was this is the founder that built the business over 20 years. 

    She wanted a partner to help her take it to the to the next level, you know, she is, you know, incredibly talented at what she does, but she’s been doing that particular work for for 20 years. We’ve got some other experiences, obviously, that we’ve had in our careers. And I’ve tried to bring some of those experiences to bear. You know, one of the things right now we’re working on is the operation side, you know, we recently hired a new CEO, we’re super excited to have him on board. And we think that we can create even more of these wonderful little products and even more efficient way with with somebody like that. 

    And so they wanted to partner help in growing and things like that. But they also saw upside of the business going forward. So that’s another common thing that we see in our transaction is a degree of rollover equity. So the founder typically owns call it 15 to 30%, post deal, and kind of gets that proverbial second bite of the apple. And so we don’t we don’t require that. But it seems to be all three deals that we’ve done, have had that element, which has been been interesting.

    Patrick: Yeah, I don’t imagine your type of target looking for an exit at closing right now. They want to bring it to the next level.

    Brien: Most do. I mean, like I said, there’s there’s pretty good tailwind in the industry. You know, and COVID has done nothing but accelerate that. I mean, there’s some interesting trends that we could talk about in consumer products, where, you know, not all things are created equal depends on what product categories you’re in as to how COVID has impacted you and how you’re likely to perform coming out of it. But yes, we we believe that there’s still a lot of runway to go and a lot of great growth, and we’re excited to partner with them and help them achieve that.

    Patrick: Well, I think this is a great opportunity for this particular organization. Because I’d say just from personal experience, if you’re planning parties for a nine or 10 year old girl is amazing how quickly their tastes change, may have one theme one week, and then a week later, and quite frankly, this happened. I’m dating myself, but the movie, Peabody and Sherman came out. And my daughter automatically went from a princess type theme party to she wanted Peabody and Sherman in a week.

    Brien: Right. Right.

    Patrick: And as you know, scramble for my wife who wants to please her and everything and be you know, good mom.

    Brien: Absolutely. Really competitive moms. That’s a good thing.

    Patrick: I think that’s, I think that’s outstanding. One of the things that, you know, what I mentioned earlier on this is that, you know, the target your your, you’re coming for our new owners and founders, because you’re, you’re the lower middle market, these these organizations are just getting up off the ground. And you cannot remove the human element from these deals. And as fun and exciting as these deals are, they don’t happen in a vacuum, there’s risk. And what’s dangerous is where you have an experienced buyer, like you and your team that is working with an inexperienced, they’re not, you know, any lack of anything else, they just don’t do M&A every day. 

    And so for a lot of things that are familiar routine for you through the process, and they’re not familiar with the process, which can, you know, cause some stress. And, you know, going through the diligence process is one example. And once they’ve gone through that, they have the talk with their attorney about indemnification and how, what they hear in this and they’re not experienced, but you know, they hear the buyers essentially telling them, look, I know, we just went through this whole due diligence, but hey, in case we missed anything, we’re going to leave you on the hook to pay any of our losses for X number of years down the road. 

    But you know what, this is routine, there’s probably nothing out there. But you know what, you’re on the hook. And then the sellers looking, again, not experienced thinking. Wait a minute, I just told you everything I know. You can’t hold me responsible, financially responsible for something that I didn’t know about. And the buyer who’s experienced is going to have the immediate responses is wait a minute, I’m betting maybe 10s of millions of dollars that your memory is perfect. And I’m sorry, we just can’t do that. And so you have this, what started as a collaborative process through all this wear and tear, you’re at risk of it descending to an acrimonious, almost adversarial situation. 

    And you know, all of a sudden you’ve injected distrust into this and is part of the process and you know, the the seller eventually win the deal closes, the dust settles, they may forgive the process. But they don’t forget it. And the tragedy about that is all that can be avoided. And what’s very exciting with us in the insurance industry is, you know, we just come in, and we’re going to insure these deals. And so we will take through this product called rep and warranty insurance. We take the indemnity obligation away from the seller, and we take it to the insurance company. 

    So we just look at what the buyers diligence was on the seller reps, if they checked them out, hey, if those reps later get breached, come to us buyer, we will pay you. You don’t have to go ahead and clawback anything from the seller. So buyer has certainty of return if anything happens. Seller, well, the insurance replaces some or all of the escrow. So they get more cash at closing, so don’t have as much withheld. But even better, they get the peace of mind knowing that, hey, if something does blow up, you know what they get to keep all their money because the insurance company’s gonna take care of. And the tragedy is that if that isn’t brought in, then you risk this kind of acrimony happening. 

    And if it’s done, right, for the buyer, all they do is offer this coverage to the seller, the cost is so low, the seller will gladly pay the premium on this. So it’s cost free to the buyer to the buyer, arguably, a lot of times they split the cost, but it’s out there. And you know, it’s just a nice elegant solution, it was not available, this insurance was not available for, for deals under 100 million a couple years ago. It has now fallen down where companies that are transactional value of 10 million, as low as $10 million are now eligible. And so, you know, that’s a great thing that we can now bring to the lower middle market that wasn’t there. Now, but you know, don’t take my word for it. You know, Brien, good, bad or indifferent, what experience have you and your team had with with rep and warranty insurance?

    Brien: Now, I’m a fan. I mean, I’ve I’ve been doing, you know, transactions long enough to have been on both sides of it back when there wasn’t insurance that was offered. I remember back when we you had to be really big transactions for our RWI insurance to to be in play. And I think it’s great to see it come down. It is for the reasons you talk about it, because, you know, you go through these transactions, and everybody does a ton of diligence, and you think that you’ve uncovered everything. 

    And I’ve especially in situations where where we are where we’re typically buying it from a founder, and, you know, they typically are still owning a chunk of the company going forward. And so, in, and I’ve had situations where, you know, unknowingly there’s a breach of the rep, you know, there was something out there that they didn’t realize, and you know, there’s either litigation coming in, or it’s a problem in it. And I’ve been in a situation where it’s material. And so it’s enough to where you’re gonna have to, you know, discuss and negotiate, you know, a reasonable outcome. 

    And that is, it’s a really hard place to be, it’s a hard place to be if they’re your partner, and they own part of the business, it’s an extremely hard place to be, if they’re still running that business. So that’s a, that’s a part of it, as well, that that occurs. And so we prefer to use rep and warranty insurance in our transactions for those reasons. You know, there is a little bit more diligence on the upside, but frankly, on the front side, that’s that’s a good thing. You know, I think figuring out more things before the deal happens, as opposed to after is always a good thing. 

    And and I would say I mean, you know, the cost is, you know, is fine. I mean, there’s these transactions are not, you know, we’re super cheap in terms of transaction expenses, and we all too are tied to our part to keep them keep them down and that sort of thing. But, you know, in my mind, it’s not an area to skimp in and it can really improve the relationship, you know, post deal.

    Patrick: Yeah, I’m almost borderline on the part. Let’s, rep and warranty isn’t for every deal, there are some deals that just aren’t going to, you know, be eligible for. Where’s available, particularly if the seller number one and buy a lot of sellers and seller advisors and the investment bankers to get the pricing upfront. But, you know, if they’re willing to pay for it, I would almost think it’s just an act of good faith on the part of the buyer to say look, if you’re if you’re gonna pay for fine, let’s let’s move forward.

    Where we see situations which are unfortunate or where you’ve got some buyer that, you know, 400 times the size of the target company, and they’re just gonna use leverage because they can’t, and and that that’s tragic, but you know, then again, hey, another reason why a firm like Altacrest Capital would be a lot more desirable because they’re gonna have good faith and work with you.

    Brien: Yeah, yeah. No, and I think it’s a I mean, it’s a selling point, as buyer, if you say, yeah, we’re happy to do a rep and warranty policy as opposed to a big escrow, you know, it’s generally very advantageous to the seller. And so that’s a good thing. And I would say when it when, when rep and warranty insurance first came out, I would say there’s a little bit of trepidation of, you know, if you go, if you have a breach, and you’re going against the policy to get, you know, made a hole, what’s the likelihood of getting the claim, you know, relative to getting it out of an escrow for the seller. 

    And there was no concern when this was a more nascent industry. I, I personally have not had a claim. So I have to give that caveat. Right, I guess, insurance provider for reps and warranties. But I have been counseled by people that are very involved in including legal counsel and others that, frankly, they’re seeing it every bit as good, if not even better recoveries from an insurance provider, as opposed to trying to get it out of escrow.

    Patrick: We just like, you know faster, cheaper, happier, is how we go on those. So no, but great, great response there, Brien. Now, as we’re coming coming through this year, now, we’re, I think, confidently looking at the beginning of the end of the pandemic. And you had referenced earlier that you’re aware of trends in the consumer products area. So COVID, no, COVID. Give us give us your perspective on what do you see down the road?

    Brien: Yeah, I think it’s fascinating. I mean, I think M&A activity is, definitely picking up. You know, the second and third quarter of last year was pretty, you know, dead. And fourth quarter, first quarter, second quarter of you know, the last three quarters have definitely been picking up. Just in general, within the consumer space. I would say it’s been picking up more as well. But it’s interesting to see which companies are coming to market. And so within consumer world, you’ve got to think about okay, and in a COVID world, what has worked really well, anything tied to the home. 

    You know, we’re because people are spending more time at home, and then they ever have and home furnishings all that type of thing that’s been an interesting area of of growth. Yeah, how sustainable is that, you know, you could argue that everybody’s gonna go back to work, and that, you know, that, you know, ride is over. But but most people and I’m one of them, I think there’s some legs to, to some, you know, ongoing, you know, growth within the home industry, because I don’t know that people are going to go to the back to the office five days a week, you know, there’s going to be more home offices, there’s going to be more people working from home than than ever, ever before. 

    So that’s an interesting category to think about. And almost on the flip side of that would be apparel, especially apparel we use for work. You know, I mean, if you’re, you know, belts or something like that, where, you know, if you’re Lulu Lemon, I’m sure they’re killing it. Or, you know, anything like that sweat pants, anything, we’re outside of being on a Zoom call, you’re not not being seen day to day, those those categories are so well, but but apparel in general is definitely down. And so it’s part of the fun part of our job. 

    And part of the difficult part is figuring out, okay, we’re coming out of COVID I agree with you seemed like we’re starting to come out of COVID. And more and more people are getting active and doing things. But what is it going to mean for the next 2, 3, 5 years? And we don’t underwrite to, you know, six months or 12 months, or trying to think about 5, 7, 10 years down the road. But it’s, it’s gonna be a fun ride, as we figure this out. And there’s, you know, stimulus checks coming in that influence things. And, you know, there’s all sorts of factors going on.

    Patrick: Yeah, I just found and again, I hate to, you know, make this about me, but I just from a personal experience, we’re seeing that, you know, what, we may not be getting home furnishings yet, but because of all the wear and tear on everybody being home, you know, last year, day in and day out, I have a feeling we’ve got a lot of worn out furniture. So those upgrades. And then definitely the wardrobe, at least maybe temporarily, because a few of us might might have added a little bit of weight during this time. So some of those office wear may not fit today. We may need a bridge.

    Brien: Exactly, exactly. Yeah. No, it all kinds of, you know, unintended consequences. You’re not sure exactly how it’s gonna play out. But, but it’ll be fun to watch.

    Patrick: Yeah, it’ll be it’ll be a great seeing a comeback, which, which is always a lot more fun than then a shutdown or a slowdown. So Brien Davis of Altacrest Capital. How can our audience members find you? 

    Brien: Sure. There’s a couple ways to reach us. Our website. Feel free to take a look at us there. It’s That’s a l t a c r e s t c a p i t a If you want to reach out to me directly you can always find me at LinkedIn there Brien Davis and I spell it funny b r i e n Davis or feel free to reach out and shoot me an email at Brien, b r i e n

    Patrick: Yeah in our last conversation where you remember Brien’s name in the spelling is just think of the the Irish last name O’Brien. Drop off the O apostrophe br i e n. So I I’ve never forgotten that. Brien, absolute pleasure speaking with you fascinating with with the e commerce and consumer products because we’re usually seeing a lot of, you know, business to business stuff but real pleasure to meet you and I look forward to talking to you again soon.

    Brien: Thank you. It’s been great talking to you as well. I enjoyed it.

  • Domenic Rinaldi | The Number One Pitfall in M&A Transactions
    POSTED 6.22.21 M&A Masters Podcast

    On this week’s episode of the M&A Masters podcast, we sit down with Domenic Rinaldi, President and Managing Partner of Sun Acquisitions. Sun Acquisitions is an M&A advising firm specializing in both buy-side and sell-side advisory services. Domenic also hosts his own podcast, M&A Unplugged, ranked among the top M&A podcasts of 2021. 

    From a young age, Domenic had an itch to own his own business. In discussing why he chose the details of Sun Acquisitions, Domenic says, “Quite frankly, I love the lower middle market. They have more sophistication, more infrastructure, but they don’t necessarily have the money for the advisory groups…so they need firms like ours.”

    We chat with Domenic about his path to owning Sun Acquisitions, as well as: 

    • The ideal client both on the buy-side and sell-side
    • Encouraging empathy in M&A
    • Experiences with rep and warranty
    • The importance of preparation when it comes to transactions
    • Using podcasts to help spread information
    • 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, and that’s a clean exit for owners, founders and their investors. Today I’m joined by Domenic Rinaldi, President and Managing Partner of Sun Acquisitions. Sun Acquisitions is an M&A advisory firm based in Chicago that specializes in both buy side and sell side advisory services. Dom is also the host of the M&A Unplugged podcast, which was recently ranked among the top M&A podcasts for 2021. So we have both M&A, and podcasting in common. Dom, so great to have you. Thanks for joining me.

    Domenic Rinaldi: Hey, Patrick, thank you so much for having me such a pleasure.

    Patrick: Now, before we get into Sun Acquisitions, and M&A for 2021, let’s give our listeners some context here. Let’s talk about you. How did you get to this point in your career?

    Domenic: Yeah, so you remember that commercial a long time ago doesn’t look like you and I needed it. But the men’s hair club, you know, not only am I the owner, but I was a client. Very similar story. I, many years ago, was in transition and was trying to decide what I was going to do next, I launched a business search, I just I had always wanted to own a business from even a very young age, I was always very entrepreneurial, I had my own paper routes, I was, oh, have my own lawn mowing business. I loved to doing my own thing. And I think from a very young age, I really always wanted to own my own business. 

    But for many reasons we won’t get into, I launched a corporate career. Next thing, you know, you wake up 30 years later, and you’ve got you know, all this, you know, all these things you’ve done, but you’ve always had this itch to own your own business. And so I decided in my early 40s, that I really wanted to own my own business. And I had done the analysis of should I start something or should I buy something. And for me, the safer route was to buy something because I had what I call a train to pull. Meaning I had young kids, college education ahead of me, a mortgage. 

    So I wanted an ongoing concern with you know, ongoing cash flows and clients and, and so I initiated a business search, and I did it on my own. And the long the short story here is in doing all of this, I really got enamored with the M&A business. And lo and behold, as I’m doing my research and opportunity presented itself. It was a small little advisory firm that was for sale, did some diligence actually did a good number of months of diligence, and decided that this really was a path forward for me. And so I bought this business. And here I am, almost 20 years later, we’ve you know, 10, more than 10x, almost 20x the business since then. And it’s been a great ride.

    Patrick: You and I are both right around the same age. But we were just coming out of where everybody’s joining big corporations. And the idea of going out and starting your own little firm out there was daunting, because it was still it was there on the periphery. But if you grew up in a city or in a metropolitan area, you just had all the big companies around, so completely understandable. So now we go on to Sun Acquisitions. And let’s talk about that real quick. You bought it as an existing business. So tell me about you know, where the name came from? Why didn’t you name it Rinaldi and and just give us a description of Sun Acquisitions.

    Domenic: Yeah, so actually, I wound up rebranding the business, but only slightly. And what I thought was important in in talking to our webmasters, and our and our social media people is that our name should be descriptive, that the more descriptive it was, the better we would show up in search engine rankings and things like that. So really, I did it. We named it Sun Acquisitions, because we wanted acquisitions in the name. We wanted people to know that this is what we did. So when they came to us, there’s no mystery and from a search engine perspective, looking back now, it’s really worked out for us.

    Patrick: And then your your focus is more toward the lower middle market as opposed to the larger deals. So give us a context size and why the lower middle market as opposed to other you know, larger size.

    Domenic: Yeah, so when I was going back again to when I first bought the business, actually, it was really focused on the small business market, mom and pops and smaller businesses and, and so over the years, we’ve left that market and we’ve gravitated to lower middle market. Quite frankly, I love the lower middle market. It they have a little more sophistication than the small businesses mom and pops, they have more infrastructure. 

    And but they they don’t necessarily have the budget for the advisory groups that the big, the big boys do, right. And so they really need firms like ours, at at sort of price points that we’re at, that can help them both get their arms around what the value of their businesses are, if they’re if they’re selling or understand what the market’s like if they’re buying and then go out and help them get those acquisitions or those sales done.

    Patrick: Yeah, well, I, what I what I love about the lower middle market is, you know, it’s vast. And it’s established to a point where you know, that these companies, they’re, they’re too big to be small, but they’re too small to the enterprise. And, you know, they’re not aware of all the services that are available to them that are not at that retail higher price. And that’s why I love having having you on here just to spite the spotlight while you’re doing because if if they don’t know about you, and Sun Acquisitions, what happens is a lot of owners and founders that are looking at exit, they default to either a strategic acquire that may not have their best interests at heart. 

    Or they may go to some institution that, you know, they’re going to be overcharged and underserved. And really, there’s great value that you’re going to bring because you’re doing not only, you know, sell side advisory you’re doing buy side. So distinguish the two types of services for us, because you can bring, you know, a prospective seller buyers to the table or attract them and, and vice versa. So talk about one side of the table and the other side.

    Domenic: Yeah, so the sell side, we are representing owners of privately held companies who want to understand the value and the market timing and whether or not now is the right time. And if they are ready, we’ll represent them and take them out to the market confidentially and represent them throughout the entire process. On the buy side, there are buyers who want professional representation. They want firms like ours that will go out and essentially make a market. And on the buy side, what we’re doing there is bringing discreet proprietary deal flow to our clients. So we’re not bringing them deals that are on the marketplace, which right now, if it’s a decent quality deal is probably getting a lot of action, we’re going into the marketplace. 

    And we’re trying to uncover opportunities with owners in businesses that are not on the market for sale, and see if they’d have an appetite to talk to our buyside client who is also paying our fee. And so that’s how we distinguish between the two and right now that the buy side part of our practice is exploding, because there just are so many buyers out there in the marketplace.

    Patrick: And I can imagine these are largely strategics or do you have smaller private equity firms that work with you?

    Domenic: So largely strategics. But we do have some private equity groups that have retained us to go out and do this work for them as well.

    Patrick: Oh, I would think for private equity is an ideal fit to have Sun Acquisitions help them because when you’re you know, looking for proprietary deal flow, that’s a fancy way of saying you’re cold calling. And you’re you’re going out reaching out to owners and founders that may not be in the mindset to take those types of calls yet, and they come around, but at the time, that’s as a real tough slog and have a professional like you that can bring those to them, I think is a great value add that you bring.

    Domenic: Well, and the other thing that we hear from owners who have been contacted directly by private equity groups, because for a lot of private equity groups do this work themselves. But the things that we hear time and time, again from owners that have been contacted directly is they didn’t want to go down that path. They felt like they were overmatched. They were in over their heads. And they felt like they needed professional representation. So if a private equity group outsources to us, even though we represent the private equity group, we’re much less intimidating to the owner of that business. When we do that outreach, and we try to make that match.

    Patrick: Talk about the ideal profile for Sun Acquisition. Give me a profile of your ideal client both on the buy side and sell side.

    Domenic: You know, so I’d say on the sell side, we’re, you know, we’re largely working with companies that are a couple of million dollars of enterprise value up to $40 million. That’s usually our sweet spot. We’re fairly industry agnostic, although I admit we don’t do deals in energy and agriculture. We tend to steer steer away from retail, and restaurants. Those are just not places that we tend to focus on. 

    On the buy side. We’ll do transactions from you know, a million dollars up to a couple of 100 million depending on what our client wants, we represent both international and domestic clients. And we’ll do it in any industry they want. And we’ll even do international searches, which we’ve done a couple of for some clients. So the deal sizes there can be can be much different.

    Patrick: And geography is not a problem for you.

    Domenic: Geography is not a problem, we have our own in house Business Development Group. So we insource, all of that. So we’re not, we’re not outsourcing anybody, we control all of that outbound effort on behalf of our clients. And these are people that are trained on our industry. So when they get an owner on the phone, they understand the sensitivities, they understand what the dialogue should look like. And they’re very professional, and quick about it. So we can really exercise and implement these engagements in a very time efficient manner.

    Patrick: Well, I think one of the things is important about what you’ve mentioned a couple times on this, it just shows the empathy that you and Sun Acquisitions has for for target companies, for sellers out there prospective sellers, because, you know, they’re not doing M&A every day. And you know, so they’re inexperienced, or not naive, they’re just inexperienced. And so, there can be a little bit of a intimidation factor there, as they go into this, you know, what I consider, in some cases, a life changing transaction for that. And so, there, there is some fear out there. And, you know, one of the great developments has been out here now, mergers and acquisitions was, has been the development of reps and warranties insurance. 

    Where a seller has their representations of their disclosures with their company outline in the purchase and sale agreement. And to a buyer this is standard operating procedures. These reps are there, the buyer performs diligence. But then the buyer says, well, we’ve got this thing called an indemnification clause. So in the event we miss anything in the diligence is with the seller, if we missed anything, this provision allows us to come and claw back money from you for something that you didn’t tell us about may not have known about it, but you know, that’s what it is. And that scenario, particularly for someone who’s inexperienced, and as, as these owners, and founders are, they, you know, have the situation, fall from a collaborative conversation to a confrontational, almost adversarial. Because all of a sudden, you enter a little distrust there. 

    Because, you know, on one side, the seller is like, you can’t keep me responsible for something I didn’t know about. And the buyers is saying, well, that’s true. But at the same time, you got to understand, I’m betting 10s of millions of dollars, that your memory is perfect, okay. And so you’ve got that natural tension. The beautiful thing is by ensuring a deal with reps and warranties, that indemnity obligation is transferred away from the seller, to an insurance company, buyer benefits because they got certainty that if there is a breach, and they suffer financially, they can collect from the insurance company without having to, you know, attack the seller. The seller benefits, because the attachment points on these policies is usually lower than most escrows. So less money is held back at the transaction, seller gets more cash at closing. 

    Better yet, they have peace of mind knowing that even with that additional money they have, they’re not at risk of any more clawbacks coming back so they can go ahead and exit cleanly. And we’ve just seen this just you cannot understate the tension as released, when when this is brought into the deal. And happily deals now in the lower middle market as low as 10 million to $15 million transactions are eligible for rep and warranty. It wasn’t the case pre COVID. Now it is and so the more we can get that out, the better. But you know, you don’t take my word for it. Dom, what experience have you had good, bad or indifferent with rep and warranty?

    Domenic: Yeah, not a lot. Because it like, as you pointed out, it hasn’t really been available down to the, you know, deal sizes that we’re focused on. Right. And so we’ve been learning about it over the last couple of years, we’ve presented it in a couple of situations where we thought we could bridge a gap. But now that it’s coming down market and the price points are, you know, to the point where people can, you know, it really makes a lot of sense for a 10, 15 $20 million deal. We’ll be promoting this a lot more. And I think, especially with post COVID. With all of the new deal structures that we’re starting to see, with all of the uncertainty about is the business recovering. If it’s going to recover, what’s it going to recover to? 

    And I know there are some limitations around will it cover earn outs or not and things like that, but there are all sorts of new deal structures because of COVID. And I think if we can fit reps and warranties insurance into that, even in some small way, it will go a long way to bridging bridging gaps between buyers and sellers.

    Patrick: Fantastic. Now let’s talk about M&A Unplugged. And just as one podcaster to another I’d love for you to share your story on, okay why did you decide to become a podcaster? And what types of tell us about the content and so forth? How we can find it? I mean, I will comment on one thing for my audience about M&A Unplugged. As of today in post first quarter 2021. There are over 1 million podcast series out there right now. Okay. But the average podcast series is only six episodes doesn’t go more than that. Dom as a you and I talked before you’re approaching episode number 100. So you definitely got some sustainable messaging out there. There’s some great stuff. So tell us about M&A Unplugged.

    Domenic: Yeah, you know, I didn’t set out to actually do a podcast, we were trying to figure out how we can help people that do transactions with the number one pitfall that we see, over our 20 years of experience. And over, we’ve got over 400 completed transactions under our belt. And the number one pitfall is people don’t properly prepare. Whether you’re acquiring a business and you don’t put all the pieces together, and you’re not strategic, and you don’t really figure out the finance. Like if you don’t put all those things together ahead of time, you’re bound to hit some speed bumps, and you can lose deals are not met, not meet your returns. 

    On the owner side, we see it almost 100% of the time, they haven’t properly prepared, they haven’t put their house their their personal house in order their personal financial situation order, they haven’t put their business in order. And then sometimes they’re not even emotionally ready. And so we wanted a way to help people understand what preparation looked like, whether you’re looking to buy or sell, and what goes into getting a deal done so that when they are ready for their own transaction, at least maybe we’ve played some small role in helping getting you know, helping them to get smart, so that they can maximize their returns and minimize their risks. And when we thought about how can we do this, you know, could we blog? Can we do webinars? 

    Podcasting, back we did, we launched in 2019 was already taking off, but not even like it is today. I mean, it’s exploded since I started doing it. And the more I learned about it, the more I thought, wow, this is a great way to create content that’s evergreen people can consume it, they can go back to episode number one or two or whatever, you know, episode topic may fit fit them, and they can consume it. And they can consume it at regular speed, fast speed, like you know, I just me like it was a really flexible way. And and we captured video early on. So we also knew we could put this information up on YouTube. 

    And YouTube’s become a tremendous way for people to get content. And so the more I thought about it, and the more My team and I researched it, we arrived at the conclusion that podcasting was the way to go. And our mission has been simple from day one. We just want to help people avoid the number one pitfall of not being prepared. And hopefully we do that hopefully we you know, our episodes and our content deliver on that mission.

    Patrick: I can tell yours are nice and tight. And you know, they don’t ramble on very long but very informative. But that’s what you need is you need those kind of bite sized data points and talking points to kind of get you familiar with some of these unfamiliar, which has been a boon. I think also what’s been great is just the, you know, the silver lining COVID was just the evolution of Zoom with being you know, being able to have have these meetings, and so forth, then record them and get them out. So I think that’s just a wave of the future we’re not going to go away from we will do more in person as as as the as COVID wanes. But I’ll tell you, this is a tool that we’re going to leverage quite a bit.

    Domenic: I believe that.

    Patrick: Yeah. Now as we’re getting into, you know, we’re now a good chunk into 2021. Dom, share with us your perspective, what do you see for the rest of the year? Either be it M&A in general, or Sun Acquisitions in particular or M&A Unplugged?

    Domenic: Yeah. You know, so from what we would what we can see in the M&A market at this point in time, there continue to be more buyers than sellers. The buyer market has exploded for a number of reasons. Private Equity pre COVID had raised almost $2 trillion pre COVID. And that money is earmarked for private equity go out and make acquisitions. So you had all that money that was raised pre COVID. You also have all these strategics who are out there trying to grow their businesses. And what we hear time and time, again, is that organic growth has become very hard for people. And acquisitions, if you have a healthy balance sheet has become an easy way, a much easier way than going out and spending money on R&D or starting up a new division. 

    Let’s go buy something somebody else somebody else has already built. So you’ve got all these strategics in the marketplace. And then you’ve got this third level of investor groups that have popped up people with a good amount of money, who have decided that they’re done with corporate America. They’ve had two or three people pull, you know, a couple of million dollars together, and they’re out in the marketplace, and they’re looking for acquisitions. And we’ve seen that part of the market explode. So you have all these buyers with lots of money supported by a lending environment with very low interest rates. 

    And it’s, you know, it’s a lot of fuel for acquisitions. The piece that continues to be a little bit missing in action are the owners. We have good quality businesses, but not nearly enough to meet the demand of the buyers that are out there, which is why you see multiples being you know, as high as they are in the marketplace right now. So owners who are selling are getting very good multiples for their, for their businesses. And I’m also sort of surprised that the looming tax changes, even though there isn’t a decision on them. But there’s lots of talk about capital gains taxes going up, I’ve been a little surprised that that hasn’t moved more market and more owners into the market to sell their businesses. 

    So I’m a little uncertain at this point in time as to where the sellers are going to shake out. I’m still hopeful that before the end of the year, we’re going to see a flood of owners decide that 2021 is the year to get out. They’ve recovered from COVID. And all the buyers are still there to you know, to make those acquisitions. So I think it’s still going to be a very strong year. I think it’s going to be stronger in the second half than it has been in the first half.

    Patrick: Yeah, well, I’m stealing from a prior guest. But one of the things that, you know, people overlooked with COVID was, you had all that dry powder. But not only that, you know, time didn’t stop. And so the people that were thinking of an expert that are getting a little bit older, those owners and founders, they’re not getting any younger that time has come on. So I have a feeling that there’s going to be you know, not a surge, but you’re going to see quite a bit more movement. I think as as everybody kind of gets back to work. 

    I think there are a lot of owners that, you know, they want to dig out of the whatever lag they have from COVID and get back on their feet, because they don’t want the earnouts they want to go ahead and see if they can build up a bit. Yeah, and you know, more power to them. But I think as as you and I both agree that it probably you know, the in the foreseeable future M&A activities, definitely not going to be going away.

    Domenic: Yeah. Yeah. No, I think it’s, I think next couple of years, as long as interest rates stay relatively low and the capital markets remain open. It’s it’s going to be a robust M&A market.

    Patrick: I mean, just look at look at a SPACs are out there. And that’s on the high end, and they’re doing 100 million dollar deals. Hundreds of those from out of nowhere. So there’s a very diverse community out there for for everybody. There’s enough for everybody, which is, which is a nice way to view life I guess.

    Domenic: Absolutely.

    Patrick: Dom this has been fantastic. How can our audience members find you either with M&A Unplugged as well as Sun Acquisitions?

    Domenic: Yeah, so M&A Unplugged is on all the major podcast platforms. We also post the episodes on our websites And you can always reach me directly at my email, which is drinaldi. And Patrick, thank you so much, and kudos to you too, with your show. You’re also up there in the top shows in 2021 for M&A. So it’s a pleasure to do a show with a fellow M&A compadre.

    Patrick: I totally appreciate it. I was thrilled. I didn’t even realize that there was a list out there. And then when I saw it, I was like, you know, I didn’t care if it was a 15 way tie for tenth. I didn’t care. The fact we got on the list. I was thrilled. But it was it was nice, because this is a great way to meet you. And I wish you all the success and let’s keep talking. Okay.

    Domenic: All right, Patrick. Thank you.

    Patrick: Thank you.

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

    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 ther