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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.

Mentioned in this episode:

https://www.tenthstreetgroup.com/
https://www.linkedin.com/in/sly-buford/
https://www.tenthstreetgroup.com/
https://www.slybuford.com/

Transcript

Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority and 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 Sly Buford, founder and chairman of Tenth Street Group. Based in Boca Raton, Florida, Tenth Street Group is an investment firm that invests in middle market businesses in the US. Their mission, which is probably the most efficient mission statement I’ve ever heard, to help companies grow, scale and exit. That’s just right on point there. Sly, welcome to the show. Thanks for being here.

Sly Buford: Thank you for having me.

Patrick: Now, there’s no pressure on you. But before we get into the Tenth Street Group, let’s talk about you. You’ve got an amazing story, this unique in mergers and acquisitions. Share with us what brought you to this point in your career.

Sly: Right, so I like to start off by saying that I have a really untraditional route into the world of business finance and investing. I think everything for me started back in high school. Right. I wasn’t the brightest student, I wasn’t the smartest student. In most cases, a lot of my teachers would consider me a class clown. You know, but what I was was a decent athlete. Right. And, you know, as a decent athlete, I was able to earn a scholarship to to play football in Montana. So I went to Montana, that was a culture shock. You know, the, you know, the snow, the, you know, the bears, mountains, you know, so it was, now that I look back now, it was a good experience. 

But then it it, you know, it was such a culture shock, I at least wanted to be back down in the south. So I transferred six months later after the season, reached out to a coach who was recruiting me in high school, and at Nicholls State University, and I ended up in Louisiana at Nicholls State. You know, funny thing at Nicholls State, I’m there for two and a half years. And once again, going into my going into my senior year, messing around throughout college, you know, not going to class not doing the things I was supposed to, it get caught up with me again. You know, on and off academic probation. And I ended up getting suspended a week before school was actually supposed to start. I had about a week left to get off campus before scholarships started to kick in, you know, paying for room and board and things like that. 

And, you know, I packed all my stuff with about $250 to my name. I bought a Southwest ticket back to Florida was home for maybe three days. So my mom was encouraging me, look, you got to do something, you have to go off and do something you just can’t sit around and dwell on, you know, everything that happened. So three days later, I found myself in South Florida. I ran into a guy who happen to be a high school football coach. He, you know, after talking and I find out he’s a high school football coach, and he’s finding that I’m fresh off the field, you know, from being suspended. He offered me a job to come on staff as a as a coach. So, so now I’m a high school football coach and a substitute teacher. Preferably, you know they had me working in the ISS room as well as the ISS guy.

Patrick: I’m sorry, what’s ISS?

Sly: In school suspension. So it was like my own self when you get kicked out of class, they sent you down. And yeah, so. So I’m in that room all day, every day just Googling my life away. But um, I quickly found out, you know, that I won’t make it too long financially, being a substitute teacher and high school football coach. Luckily, for me, I was still doing, I still had the habits of an athlete. Right the discipline, I was still waking up at 5am I was still eating right, working out, you know, doing all of these things because I was just used to doing, you know. But I started to gain this tribe of people as I started building relationships. Now here are people who wanted to work out wanted to eat right, and all these things. So I just flipped it and turn it into a business, a training business. 

So I became a personal trainer. As a personal trainer, you know, I gained this small audience of people who want to work out with me and things like that, turn it into a business as a trainer and renting this is gym. And at this gym is where like, the entire trajectory of my life had changed. You know? So, you know at this gym is where I’ve met some of the wealthiest people that I had ever come in contact with at that point in my life. These were private equity fund managers, hedge fund managers, real estate developers, politicians, bankers. So I got to meet some of, you know, the wealthiest people that I had come in contact with, maybe other people have come in to come in contact with these people before. 

But for me personally, it was like my first time hearing the term private equity, or, you know, these other terms that they teach me. But those two years as a trainer is kind of like how I got my MBA, right. They would always encourage me, Sly you need to get into investing. Sly, you need to learn how money works. Sly, you need to learn how banks work, you need to learn how private equity works, you know, you need to learn how taxes work, and all these different things. So it was always lessons throughout the sessions of business or finance or investment. You know, one day, I had a, one of my clients invited me to a real estate development that was built, but there was, he had some spec homes going on, you know, different plots of land, and he was still building. 

And he texts me one day, hey, Sly, meet me here at whatever was like six o’clock or something like that. So I grabbed something to eat after my last session, drove over, you know after talking sports or whatever, we were talking for about 20 minutes, he started walking me around and showing me what he was doing. He says, Sly look, if you ever run into a property that meets this criteria, and he, you know, just ran down some things, you said to do two things. Write the address down and call me. I would say about 90 days later, I had done my first real estate deal. And from that moment forward, I’ve been in, you know, finance, business and investing ever since.

Patrick: When we look at Tenth Street Group. Okay. You didn’t name this Buford Capital. Where did the name come from?

Sly: Well, Tenth Street Group comes from an intersection of where my family’s from. Where my family grew up in Lakeland. So the intersection is Tenth Street and Martin Luther King Boulevard. So, you know, as I was transitioning out of my previous company, the real estate company that I mentioned Elite Capital Partners, which was a private equity, commercial real estate company, where we bought value added multifamily real estate. As I was transitioning, I don’t want to say out of that, because I still invest in real estate, but sort of to speak. I think that everything of Elite Capital Partners was tied up into real estate. That’s what everybody knew it for. That’s what all I was known.

Patrick: That’s the brand. Yeah. So you just pivoted and expanded.

Sly: Right. So that’s what I wanted to do. So I was sitting back thinking, okay, how moving forward, how do I want to be known moving forward. And not sitting back one day and say, every time that I sign an LOI, or every time that I signed an asset purchase agreement, and anytime that I sign, tax documents, or whatever, and I write Tenth Street Group, or I write the name of the company, I want it to remind me of who I was from. So Tenth Street Group is where that name came from, so.

Patrick: That’s fantastic. Let’s talk about where your focus is for Tenth Street Group, because you’re going from real estate and you’re in lower middle market M&A. Explain to us why lower middle market, you could scale on other things. Why are you selecting that? And we’ll get into your appetite for deals later. But give us a little, color this up for us on how you chose this section of the industry for mergers and acquisitions.

Sly: So once again, sitting back thinking, how do I want to, you know, level up my career and try to take what I do to the next level? I started to think I knew at that point, I had bought small businesses on and off. Bought and sold businesses. So I wanted to level that up. One thing that I sat back and thought is okay, I don’t want to be a full fledged private equity firm, right. So a lot of times what we what I explained about Tenth Street Group is we’re not, we’re a hybrid between the independent sponsor and the the private equity firm. I know you say we will, we’ll get to that. 

But it’s, I was sitting back thinking, well, if we raise the fund, we became a full fledged private equity firm and we raise the fund. I never, I didn’t want to be tied down to whatever that investment thesis was. Right. So, second part of that is, I think the area of the lower middle market is a really neglected space, right? It’s when you think about it, out of 30 million small businesses, this is a space where a lot of these small to medium businesses, they’re too big for the average local, small business and it is too small, or is is too small. It’s too big for the average local small business. But it’s too big for your average private equity firm.

Patrick: Yeah, that’s exactly. We see that all the time where you’re too big to be small, right? You’re too small to be enterprise, you’re in that danger zone. And, and the challenge we see on that is that, you know, owners of those firms don’t know where to go. And if they, without knowing about organizations like Tenth Street Group, they default and look to see if well, maybe there’s some strategic company or competitor out here that may want to buy me, or I may join forces over at this side. Or I’ll go to, you know, an institution or a bank and see what happens. And what happens is, those organizations are good, but may not have their best interests at heart. Unless they know about organizations like yours, okay, that cater to this specific niche of the market, you know, where are they going to turn? That’s why we love having you and broadcasting you out here like this.

Sly: Right. Yeah, these these, you know, these small businesses, when you look at the stats, 50%, they do 50% of the country’s GDP, right. But on top of that it’s the space where the least amount of invested capital is invested into, right?

There are over as of today, there are over 6000 private equity firms, even though you’re not completely a pure private equity firm, but there are about 6000 of them, more than half of those firms are dedicated and targeting on the lower middle market. So you got a lot of targets there. But there are a lot of other competitors out there investing with you. And we’re not even counting the independent sponsors. There are even more of those. Okay, what is it that Tenth Street Group can provide to the right fit? What are you bringing to the table for companies in the lower middle market?

Sly: One of the main things that we bring to the table is the know how, other than capital, is and know how of growth and scale, right. On top of that, what I mean is acquisitions, you know, actually, a lot of companies that we like to work with, can serve as more of a platform company for us. Right. So with having a solid platform base, we can help with acquisitions, you know, partnerships, entity structuring, you know, is really a deal by deal basis of what we can provide. But adding revenue, there are things that each business has that we may invest in one business that doesn’t necessarily provide the same value for the next business, so to speak. Right. 

So, like I mentioned, other than capital, we bring a whole suit of things, acquisitions, and partnerships, and, and having that, that know how of either growing vertically or growing horizontally. So just different things that the average business owner doesn’t think about when it comes to growth and scale. Because a lot of times these businesses, even though they are profitable, the business owner has been stuck for the last 3, 4, 5 years, and the business has been around for 15 years. And they’ve grown it up until that point, but it’s strategically how do they how do they get the company to the next level? So yeah, that’s what we like to bring to the table.

Patrick: And not to steal your words. But I we talked earlier, this is what really struck me because you just said Patrick, capital is not the problem. Know how is the problem. And if you’re in a manufacturing business, or whatever, business service operations, you know, those functions and you know, that market, you know how to do it, but the idea of growth through acquisition, you don’t know about acquiring. Who, how? How would that work? That’s where you come in and bring, bring that to the table, that skill set. And you’re at the at the level where you’re doing these smaller deals, so you weren’t competing against the Black Rocks in the Goldmans and you know, Silver Lake and so forth. You are out there in an area where you can actually be hands on helping, and I think that’s really essential. Are you dealing largely with owners and founders that want to stay on or do they just want to get bought out?

Sly: It’s a deal by deal basis. But, what we prefer is the owner to stay on, right. The reason is, because, well plenty of reasons, but one of the reasons is because, number one, the owner knows the business better than any one of us, yeah. Any one of us can can just step in and run the business. Two is we want them to take the ride of growth and scale along with us. Yeah. But I think another important point to that is, in order for that to be successful, we have to have the owner think like an investor. Yeah, right. I think that’s a point where a lot of times that’s missed. And I think what works for us is, right before a deal is signed, or some sort of partnership is signed, I like to have that heart to heart with the owner to say, hey, okay, so here’s what we’ve agreed on. In order for this to be successful, we put the playbook together. 

In order for this to be successful, we’re going to eventually have to have you transition your mindset from thinking like an operator to thinking like an investor. And a lot of times, this cuts out the friction, when they know this from the very beginning. Like, hey, there’s some things that we’re going to do, where you may not fully understand why or you may be against it. Instead of having the document signed, and we get into the business, and we start trying to transition this transition that. But you’re met with friction of, hey, I’ve been doing it the same way for 20 years, like, why are we doing this now? You know, well, because of XYZ. 

I try to prevent that from happening by having a conversation beforehand, to say, hey, look, you’re gonna have to transition from thinking like the operator to thinking like an investor. Here’s how an operator thinks. You know, they worry about how many cups in a coffee shop, they worry about the the inventory, they worry about who’s opening and closing. You know, that’s, that’s thinking like an operator. Thinking like an investor, what we want to do is we’re going to be thinking about acquisitions, partnerships, investors, capital, we’re trying to transition that mindset. And I think that that’s what was one of the most important things that goes along with the transition.

Patrick: Okay. No, I think that’s that’s spot on. Which everybody needs to know. And that’s nice that it’s done up front, as opposed to somebody who’s just trying to cold call and do a broker deal and so forth and go in that direction. Give us a profile. What’s your investment target? I mean, industry, size? It’s US based. Any other profile that you can outline for our listeners?

Sly: Yeah. So typically, what we’re aiming for is what I like to call it a lower end of the lower middle market, right? So these are companies doing anywhere between 500,000 to 5 million or so in profit, or EBITDA. Or doing a million to 25 million in revenue. Right. So a combination of the two, maybe lower, maybe higher, you know, depends on the deal. But we’re industry agnostic, right. So we’re not tied to one specific industry. And I like it that way. Right. Like I mentioned before, if we were to take the private equity, the complete private equity route, you know, once you raise that capital, you’re tied in for those five or seven years. 

So we’re industry agnostic. Growth potential, the business has to have growth potential. Right. And I think tying back in that, that growth mindset of the, the operator, right, because if they don’t have a growth mindset, and they actually want to grow, then it wouldn’t work out. But it but as far as, like management, we want management to stay on, preferably have a solid management team. So those are the deals that we’re looking for. I would say also, we’re not, we’re not heavy, heavy, heavy into technology. And what I mean by that is, we’re not looking, we invest in technology, right. 

I’m getting ready to sign a deal with a software development company, where we’ll be investing directly into software companies helping software companies grow and scale. Right. But what I mean by you know, heavy technology is we’re not looking to invest in technology that’s not going to change the world,  right. Have some that some you know, nothing, some brain power changing taking technology where they’re going to exit to Google for a billion dollars.

Patrick: You’re not looking for a unicorn or anything, right, right. Okay. No, no manufacturing, no, no technology, manufacturing, no unicorns. That’s not the worst. That’s not the worst position to be in. I think your options are still wide open. Curious where there’s been a big surge in accelerating mergers and acquisitions, particularly in the lower middle market has been a product called reps and warranties insurance. And what that does is it takes a lot of the risk away from the deal parties, where rather than the seller having to be on the hook for buyer’s losses post closing, because of a breach of the seller reps, okay, the seller can get a clean exit because what they do is they take those reps, get them reviewed by an insurance company, the insurance company looks at the buyer’s diligence says okay, for a couple bucks, we’ll take the risk. 

Buyer, if you suffer loss, don’t go to the seller come to us. And that has taken a lot of the pressure off of deals. Until recently, these products weren’t available for deals under $20 million in enterprise value. So a lot of them may not have been around in a little while. But you know, it’s been a great accelerant. It’s been wonderful, but don’t take my word for it. Sly, good, bas, or indifferent. Explain any experience you’ve had with rep and warranty in your M&A experience.

Sly: Reps and warranty, the insurance part, zero action. So I mean, obviously, we’ve dealt with all types of insurance in different businesses or industries. But as far as that specific insurance, none, whatsoever.

Patrick: This is this is why we’re glad to have you here because that’s the area now that up until recently, if a deal was under $20 million, either was not eligible for insurance, or if it was eligible, it was subjected to really expensive due diligence. You had to get legal memos, you had to get audited financials or quality of earnings, and all of these really costly inspections, and so forth. Now, there are products out there, and one of them is a sell side policy called TLPE from CFC underwriting. And what TLPE does is it takes the seller’s information from the seller, they fill out an application, and for as little as 12 to $20,000 per million dollars in coverage, a seller can get up to $10 million of their enterprise value insured. 

So that the buyer who can’t get a buy side, rep and warranty policy can simply say seller, get the policy, if there’s a breach, we’re going to put a claim under your policy, we get paid that way. It impacts the escrow requirements, it impacts the costs, and it really accelerates the negotiation process between the attorneys. And so that’s why I’m thrilled to be meeting, you know, organizations like Tenth Street Group, because as you’re getting these smaller deals, you could get a lot of friction in the negotiations. And this could be one way that works around that.

Sly: Right. You know, we definitely have reps and warranties in the contract. But on the insurance side, we never pull the trigger on insuring those reps and warranties.

Patrick: That’s why it’s fun having you because then now we can we can maybe have that conversation as things go on. 

Sly: Most definitely. 

Patrick: As we’re coming through, we’re up, we’re just past the midpoint of the year. And what do you see in the months ahead between now and 2023? What trends either for Tenth Street Group, or M&A in general do you see out there?

Sly: As I’ve been in M&A, I’m starting to see a train of people step down to the lower end of the lower middle market, like I said, to implement the strategy, whatever their strategy is to build, grow and scale a company to deliver to a private equity firm, right? Because that’s what we do, right? We, we want to grow and scale and we want to deliver an optimized profitable, revenue generating company to a property equity firm or strategic buyer. Right. 

And I’ve seen a lot, specifically the last year and a half, I’ve seen a lot of people say that, you know, they want to, they’re opting out of the traditional private equity route to wanting to grow and scale a company to deliver to a private equity firm. And it’s mainly because of the $2 trillion that are looking for deals right. $2 trillion that are looking for deals with 30 million small businesses and baby boomers owning half of those, and they’re reaching that retirement age. They’re seeing an opportunity to I mean, it’s a great opportunity. Right. So one of the trends that I see is people taking advantage of that.

Patrick: I don’t disagree. I think that a lot of private equity firms don’t want to write a bunch of tiny little checks. They rather write bigger checks as a medium sized checks for bigger, bigger firms. You’re not going to need to hold on to something for seven years, but you can get it small, and I mean literally tiny. You can amp that up and having a 100, 200% growth on a small investment is a lot easier when you’re under 10 million than when you’re over 100 million. And so the pathway is easier, and you’re going to do as we do with insuring the lower middle market volume. And I think that I think that’s a very solid approach and I really appreciate this. Sly Buford, how can our audience members find you?

Sly: They can go to tenthstreetgroup.com. You know, find out more about Tenth Street Group and what we do. That’s tenth,  t e n t h street group.com. You can email me directly. I’m not, you know, I’m not Warren Buffett, I’m not difficult to get in contact with you know, so you can email me at Sly@tenthstreetgroup.com. You can call my office. You know, all of my information is on the website. I also have a personal brand, you know, where I’m, you know, trying to push out just information on investing, growing businesses scaling, business, exits, and things like that.  Or you can go to my website, slybuford.com. My name. And yeah, so that’s pretty much all the ways you can find me.

Patrick: Well I’ll put a plug in for LinkedIn. That’s actually how you and I met. And yeah, it was on an announcement of posts of the successful deal you had and some other things and was captivating, and I’m thrilled we met and it’s going to be great, because I think we’re going to be doing more talking together. Sly Buford for Tenth Street Capital Group, or excuse me, Tenth Street Group. Thanks again for joining us.

Sly: Appreciate it. Thank you so much.

Sly Buford | Strategies for the Lower Middle Market