Sean Edmonson and Adam Deutsch | Transactions with Transparency and Trust

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

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

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

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

Listen now…

Mentioned in this episode:

Transcript

Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions.  And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Sean Edmondson, Vice President at Tecum Capital, and Adam Deutsch,  Director and Co-founder of NewHold Enterprises.  Now, as we record, this news of a vaccine for COVID-19, was just released. And that signals that at the very least, we’re at the end of the beginning of the pandemic. And we can now begin looking forward to getting back to business. To that end, I like to showcase how M&A deals may go forward by following a blueprint of a joint venture like the one Sean at Tecum and Adam at NewHold completed. And they did this in the height of the pandemic shutdown. Sean, Adam, welcome to the show.

Sean Edmonson: Thank you.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patrick: Adam your thoughts?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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