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  • 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

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    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 www.boynecapital.com. And it’s spelled B as in boy, O as an Oscar, Y, N as in Natalie, E as an echo capital.com. 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 rsie@boynecapital.com. It’s spelled R as in Robert, S as in Sierra, I as in echo. No, I as in Italy, E as in echo @boynecapital.com 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.

  • 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

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    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 NCKcapital.com 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.