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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.

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

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

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

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

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

    Listen now…

    MENTIONED IN THIS EPISODE:

    TRANSCRIPT:

    Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Service. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Ryan Milligan, partner of ParkerGale. ParkerGale, is a Chicago based private equity firm that focuses on lower middle market technology companies, and is guided by their principal: products that matter, cultures that last. And on a personal level, I’m especially pleased to have Ryan here today because it was ParkerGale’s podcast, which is entitled The Private Equity Funcast that opened the entire private equity world to me four and a half, five years ago. And I’m eternally grateful for that. So Ryan, welcome to the show.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Patrick: Real helpful for passwords, though.

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

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

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

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

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

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

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

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

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

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

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

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