As we exit the first quarter of 2022, all the buzz is around the slowdown in M&A activity.
It’s true that deal activity in the beginning of 2022 is a drop from Q4 2021, as well as a drop compared with Q3, Q2, and Q1 of 2021 because there was so much pent-up activity as pandemic closures waned.
Read More >
On this week’s episode of M&A Masters, we sit down with Laurin Parthemos to talk about culture. Laurin is a Principal at Kotter, a company named after Dr. John Kotter, the world’s foremost change expert. Kotter’s approach to merger & acquisition integration focuses on culture and people first.
Laurin says, “Culture is more and more seen as that differentiator within an industry to say we have a strong culture where people want to work.”
Listen as she walks us through:
Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability, and President of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Broker Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Laurin Parthemos, Principal of Kotter. With offices on both coasts, Kotter helps organizations mobilize their people to achieve unimaginable results at unprecedented speeds. And I gotta tell you it for a marketing thing, that’s a lot to unpack in one sentence. So there’s a very efficient intro right there. Laurin, welcome to M&A Masters. Thanks for joining me today.
Laurin Parthemos: Yeah, thanks so much for having me.
Patrick: Now, before we get into Kotter, which is a major consulting firm at the forefront of change. Let’s just start with you. How did you get to this point your career?
Laurin: Absolutely. So I like to say I kind of grew up in the banking industry. So I started my career off in one of those typical but no longer really exist big training programs, working on the lending side. Transitioned into M&A myself doing fundraising for startups, then working with the tier one investment banks, all their processes and operations and how to actually optimize and be efficient. And really, throughout my entire time, through each and every one of those phases within the industry, I really just found myself scratching my head as to why everything was so KPI focused and why things weren’t working, and really leaning on my previous role.
And what I was doing back in my college days, which was being a sailing coach, and really trying to motivate people and teaching people how to continue going, despite obstacles that you’re seeing. And I really realized that that human element in terms of change, and how you’re dealing with the day to day is just missing in so many organizations. And it’s that unpredictable factor that really can make or break an organization. So when I was looking for my next opportunity, I came across Kotter and that light bulb moment happened, where I just realized, oh, my gosh, I’m not the only one who thinks that.
And not only is there a whole body of work behind this, but it’s operationalized. And it’s actually out in the industry. And it’s not just theories talking about potential research, but it’s actually happening in the real world. So I’d say the short and sweet is that I just kind of was trying to find my home in terms of people who understood that change isn’t just about financial success metrics, that if you don’t have that integrated body of work underneath it, that takes into consideration all factors, then you’re not gonna be successful.
Patrick: Well, I think that change is at the core of M&A. Alright, and the objective with a good M&A strategy is it’s it’s a situation where you’ve got, it’s not company A buying company B, and now you’ve got something, okay. It is one group of people agreeing to partner with another group of people with the objective that look, the whole is going to be greater than the sum of its parts. And because we’ve got people at the core of this, okay, that’s changed, people are resistant to change. And so it’s always fascinating to see how you address that.
A lot of organizations just, you know, they they muscle through that however they can, and you know, they’ve got that attitude. Well, you know, we’ve gone through this before, and we’ve done it before, we’ll do it again. And you know, suck it up. Let’s go. And it’s just so counterintuitive to what’s really happening out there. And so now we come to Kotter. And it’s Kotter with a K which was formed after Dr. John Carter, Kotter, excuse me. And he’s a leading expert in leading change, not just change itself, but leading it. And so talk about Kotter, the organization and what kind of services it’s about on a macro level.
Laurin: Yeah, absolutely. So the foundation of our business really was John Kotter’s body of work. He’s a former Harvard Business School professor that was doing extensive research around leadership and what makes organizations successful. And in the 90s, he published an article called Why Transformations Fail. And it was 10 years of research, over 100 organizations studied. And realized that 70% of those organizations actually failed some metric that leadership had established in terms of what does success look like in terms of this transformation. Can be whatever budget win over time.
But the ones that were successful had this foundation of what he called the eight accelerators, and essentially these various different pieces and it’s not steps that you can kind of check off like a waterfall method but various different pieces with an ecosystem that when activated, means that you’ll be more successful. And so what we do is actually bring those eight accelerators to life when we partner with organizations, and especially in the M&A field. We work a lot on the post deal integration side. Really, really a function of that’s when people start thinking about culture, it’s not because that’s when we should be brought in.
Patrick: They’re not running into the obstacles yet. You know, coming together, and then once you’re together, okay, now what? So, yeah.
Laurin: Yeah, absolutely. So what we like to do and what really sets us apart, I think, is that we partner with organizations. We do not come in as a consulting firm and say, here’s our plan. Here’s what the research we did here’s statistics, plop the plan down, leave and call it a day. We work directly with people from across the organization. So that diagonal cross section there all the way from senior leaders, to those junior people on the ground to come up together with plans that will actually make a change successful. And when you’re thinking about that integration process, worst case scenario, you’re going to have a group of people who just feel a sincere sense of loss when they go through.
And these integrations, because realistically speaking, you’re dealing with a body of people. And this isn’t the leadership, but the actual employees on the ground doing the work and making the organization successful, that have just had their futures determined for them. They no longer have control, and they’re no longer able to have any certainty around what’s going on. Because it’s just a flash Band-Aid rip most of the time. And so that if you read our latest book that came out this summer, Change, we talk a lot about that in terms of the survive and thrive mindsets. And announcements like that really activate that survive.
So you immediately have a rush of cortisol running through your body. You’re not able to really think strategically anymore as an individual, and you really are just in that fight or flight mode in terms of how do you do things. So we try to not only acknowledge that that is a realistic possibility, but actively counteract it to make sure that people aren’t thrown into that. But come up with ways for your own organization, to move away from that into that thrive mindset where you can actually think creatively and be more future oriented in terms of how you can be successful.
Patrick: Well it’s interesting, because you talked about the people, again, we’re falling back on this people are at the center of this. But it’s interesting, because there are there are other shows out there where they interview firms that merge together, entrepreneurs that sold their company and merged. And one of the common questions comes up. When did you tell your people? And and a lot of them agonized over that because you know, what was the outcome? Obviously, you’ve got that fight or flight, immediate response, particularly when this process has been going on for months. And then the announcement comes to the to the team, like within days of it happening, or in some cases, hours of it taking effect.
So you’ve got that natural thing. The other thing is interesting, I appreciate this is that what Dr. Kotter did was he was looking if integration didn’t go well, well, rather than than looking at the ones that failed, which is easy to do, try to pull out the what was common about the ones that succeeded. Because that’s the formula to move forward rather than, you know, Monday morning quarterbacking, you know, others of those deals. So that’s, that’s a unique thing. And this whole issue now where you guys have and again, we’re still macro, but the science of change, and there’s an awareness there.
And I think as more understanding happens, that’s fantastic. And that’s leading, you know, we’re Kotter’s kind of leading, leading the change. You know, the the group on that. One of the things that you and I had spoken about before, and we will get into this a little bit more, but it is a big, you know, kind of California, wishy washy kind of thing is is a topic of culture, and how you know, Kotter, one of the things that you guys look at is, you know, the importance of it. And it’s beyond this whole thing of well, these guys dress, you know, have a dress code these people don’t. It goes way deeper than that to talk about culture a little bit for me.
Laurin: Absolutely. And I will say that one of the things that is really important is that we don’t deal with culture in the sense that that’s the only thing we care about. But that’s how we differentiate ourselves. Because there’s all we obviously care about business practices, and what are the strategies and processes behind something. But culture should always be tied to that strategic objective. And there should always be that measurement going forward. It’s just as important as how we do the work. It’s not a fun little tier off to the side. So when we think about culture, it’s really the behaviors of that organization.
So how are decisions made? How are you communicating with people? If you’re a people manager? What are those practices around actually growing the organization? How do you handle professional development? What are your policies around whether it be feedback or how you’re actually just going about the day? Are you a nine to five, only organization? Do you work outside of those bounds? And it’s just all those tiny little behaviors that then culminate into this larger topic of culture. And it’s not that kind of wishy washy California, as you mentioned earlier, but it’s all those little tiny practices, how much does your vision come to life in your day to day? Or does it not? If it doesn’t, that’s okay. But it’s more of an acknowledgement of how that actually is brought in. And understanding the foundations of that is really what’s important.
Patrick: And the issue with culture also is, as you and I’m stealing from you from an earlier conversation, but it’s the importance of bringing joy and higher achievement in. This isn’t some esoteric, you know, we’re gonna have a company look, and this is it’s really, you know, performance, this enhances performance.
Laurin: Absolutely. Culture is not just a piece of paper where someone wrote down, like, we are a technology focused firm, where we love collaborating, and then it gets thrown into a drawer and never spoken of again. Culture, whether it’s defined or not, is how people within your organization actually operate. And that’s the key of success and knowing how does that actually work? And if you change some of these levers, in terms of how do we slowly migrate people into one direction, or maybe quickly in another, in order to pull levers to improve performance for the organization as a whole.
Patrick: And the thing in there, Kotter’s, not alone in this, you’re just at the front of the line on this, but this culture really is trying, organizations are trying to see if they can quantify it, if they can measure it, and then see if they can harness it as a strategic advantage. And and I think, you know, the dynamic of the workforce now is an unmistakable element of the outgrowth of culture. Let’s just talk about that where we had the scenario in the banking industry.
Laurin: Absolutely. So you’ll see it easily in the financial services industry, where what used to be that exciting field of investment banking, where you had all the graduates wanting to funnel themselves in and fight for those top tier positions in banks are no longer going towards those at the same rate. They’re going towards FinTech, those various different organizations, that could be startups, they could be larger at this point, starting to get some extra funding and are really expanding. But it’s, the hallmark behind it is really, because the cultures are very different.
There’s the thought process behind having to work those long hours for the same amount of pay. And the same amount of incredibly high or the hierarchical demoralizing, what can be seen as demoralizing for this generation, environment, versus one where they can create their own path, and they can start defining things for themselves is much more exciting for these generations. So there’s a huge shift in the talent pool in the younger generations wanting to find something new and culture is really at the heart of it.
Patrick: But with culture it’s also, it’s not just, you know, retaining talent and keeping people but you’ve got to be aware of it when you’re bringing one force to join another force. And and you’ve got to know the potential clash of cultures there. And you’ve experienced that. Talk about that real quick.
Laurin: Absolutely. So we had one organization that it was two competitors, who were top in their field. Unfortunately, I can’t give the actual names. And I would love to give actual details, because the details are just 10 times more impactful, but when we anonymize it, you can’t really see that full picture. But two, huge top of the industry, competitors formed into one. Merged together. And as we were going through their integration strategy, and what really needed to come out of it, we realized really early on that if we were going to make a proof point of this integration in terms of how to be successful, we needed to generate wins early on. And I would say that’s fairly typical across the board.
You always want to be generating wins to boost morale and create that snowball effect of moving forward. And the way that we were going to do it and be most successful and most impactful was to get the sales teams working together. Because if the sales teams could work together, who were rivals and did not like each other, if we can get them on the same team collaborating and actively working as a unit. Then that makes the proof point for the rest of the organization to say you know what, they can do it, why can’t I. So what we did is after we brought them together, we really allowed them and created a space where they can decide what that collaboration looks like and decide what their path forward is. It’s like I said, it’s not us coming in and detailing out high level plans, it’s working with the organization to create that for them.
So what they decided to do is that they were going to sell one product together. And it did not matter what industry you focused on. So they were selling products across a variety of different sub sectors. And they all went back and said, you know, what, by the way, have you seen XYZ in the market? Really exciting. I know, it doesn’t apply to you, but maybe look into it. Might be of some interest. And through that, and all of them deciding, we have a goal of we want to sell X amount of this product, we’re all going to do it together doesn’t matter who does it. Let’s do this as a team. It ended up being by far the largest selling product in that industry.
Patrick: So you get the results right there. I just, you know, when you go the uber hyper competitive forces, okay, now they’re forced to work together. Okay. If they can work, then everybody else can. But what really struck me about this is not only I mean, it’s easy to see also, because we’re in marketing and sales, we appreciate this. But it’s also the, you didn’t take this universal approach, where okay, we’re going to change everything. Okay, you’re just let’s just get, prioritize a couple things and like you said, get some wins and moving forward.
I think that’s what happens is, everybody appreciates that, as they’re bringing on onboarding services and so forth, it’s just get those little wins to move down, let’s get those first downs and move on. We don’t have to have the big long pass because a lot of times that could delay things. And then people are just there again, in that space of they don’t know things are changing. They don’t know how it’s factoring, but they don’t see anything happening. And then you get nervous there. So I really appreciate how you guys can break that down.
Laurin: Absolutely. I would say one of the most important things that often gets overlooked in terms of these plans is that it’s just saying, okay, we introduced you guys to each other, we’re done. High five or something along those lines. And it’s culture and the people integration isn’t taken into the same level of detail, as you see technology integration, or process integration, which does need to be considered at a high level. And if you think of Roger’s law of diffusion, when you’re regarding innovations.
It’s the same principle that you need to start with a group of people who are willing to accept that change, create those early wins and proof points, because as you create and generate those small wins and create momentum, you’re creating that rationale for the people who are more resistant to change and wanting to step back to say, you know what, this group did it, they were successful, I’m bought in. And then when you get those people who are partially resistant to change, you start getting the people who are very resistant to change, and you start making a movement that way. It’s not forcing it, but it’s creating proof points of success around that entire process,
Patrick: Define or give me a profile of your of Kotter’s ideal client. Where are you looking as the ideal client where you can make these changes?
Laurin: Absolutely. I think, realistically speaking at Kotter, we consider ourselves generalists, but what we really like to focus on are those calcified industries. The ones who haven’t necessarily changed yet, and are looking for that new generation to be that catalyst to move forward. And that’s really where we’re going to see our most success. I would say, anyone who is in a leadership position, where they are already having these thoughts and feelings around this is I want to change differently. I’ve done this time and time again, without success by going through the traditional methods. Let me try something new. That’s going to be our target audience. Because if we have someone within an organization who is willing to try some of the things that, from a traditionalist standpoint, sound a little off the wall, but are proven time and time again by both research and outcomes from our clients, that they do work.
Patrick: This doesn’t happen unless you get buy in from the top, obviously. Now, Laurin, you mentioned calcified industries. Give us an example of a few others. You mentioned banking, what besides banking would be calcified?
Laurin: Absolutely, I would say healthcare as a whole very much in that wanting to transition phase and wanting to accelerate phase but hasn’t necessarily gotten there yet. Very much government entities, still working on how to actually become as efficient as humanly possible within their structures. You’ll see it in higher education who are still very slow moving on various pieces depending on the cycles that they’re in in terms of their semester. You’ll see, and you do see it across the board. And you also see, you’ll see it in manufacturing at times and supply chain. It’s very much, I would say a universal piece for all the ones that aren’t talked about in the news necessarily on a regular basis, I would say the rest of them are still looking to really accelerate.
Patrick: Talk about the onboarding process, how long it takes and things like that.
Laurin: Absolutely. So onboarding for us, when we first start working with a client, we take a couple of months to actually do that discovery work. And discovery isn’t just kind of sitting in the background, reading some old documents. Yes, we do do that we need to do that and do our research to see what’s actually happened. But it also can consist of doing culture change surveys, and actually figuring out what that network within your organization looks like. And how ready is your organization with what are the general sentiments in your organization. Going through and doing stakeholder interviews, and not just interviewing leadership, but interviewing various different people within the organization who are doing the work to really understand what that landscape looks like, and then going into an alignment session to really define out what is your big opportunity in terms of this.
And that’s not saying it’s going to replace a mission or vision statement, because they do not. They supplement it. Because an opportunity is a window of time, it is a strategically held short term opportunity where you can charge towards that and everything that the organization does, should support that opportunity in terms of achieving it. And that opportunity will then flow into your mission and vision and your strategic objectives that you want to achieve for the 10 year vision, or the 30 year vision depending on what you have.
Patrick: Gotcha. Now I appreciate, Rome wasn’t built in a day. So this isn’t, you know, an overnight fix. But matter of weeks, months? Ballpark?
Laurin: I would say months. It depends on after we go through that discovery phase of a few months, we go through and define custom plans and roadmaps for an organization based off of the level of need. If we’re doing a one off, you’ve purchased an entity, great, you’ve got the target company, you need to integrate it in much shorter timeframe, then building out a conglomerate where someone purchased a ton of various different entities. And now you’re trying to make one holistic unit. So really depends on what landscape we’re dealing with. I’d say about a year timeframe, we really like to work through organizations and do a lot of this work on that shorter end, not because it takes that entire year long necessarily.
It depends on the organization again, but more so embedding behaviors, take does take time. So you can have that switch. And if you read anything on habits, you can quickly change but then you can regress back if those behaviors aren’t reinforced. So it’s doing, making sure that that repetition is there and making sure that that reinforcement is there across the board in terms of how you incentivizes there in order to make it as successful as possible.
Patrick: Gotcha. Well, I think that this is important. And one of the things I just pulled from you is that this isn’t just limited to strategic acquirers where they’re going to make an acquisition here or there. You could literally have this for private or private equity clients where they have multiple, very diverse portfolio companies. And although they don’t work hand in hand, the various portfolios, intermix with each other that often, many PE firms are trying to do that. That’s one of their strategic advantages is seeing how they can take, leverage strengths and to overcome weaknesses among the portfolio companies. We want to get, you know, our culture, not just within the PE firm of the investors, but within the portfolio across the breadth of the portfolio. And so I could see that being something that would be very, very helpful.
Laurin: Absolutely. It’s something that we’ve been talking to clients about in recent years. And I would say, if you think about venture instead of PE, for example, just making all of those bets and saying not all of them are gonna pan out, we’ll have a couple of successes that are runaway successes to pay for the investments that don’t necessarily work out. But how can you actually structure your portfolio to complement each other? And actually work together as a cohesive unit? Not necessarily from going as formal as a joint venture, creating those agreements, but how can you actually work your portfolio to maximize and create cultures where it is okay to collaborate with each other?
Patrick: So, I mean, this is great, because it’s not just culture isn’t just micro, here is macro on the other side, and that’s a great place where you can be brought in because you’re proven at that level. You’ve done it at that level as well. Laurin, we’re having this conversation just after first of the year. So we’re all getting used to change on writing 2022 now on the dates instead of 2021. So it’s going to take a little while for people to do it, but we’ll all change and then we’ll be sitting in 2023 but what do you see going forward either with Kotter or macro change M&A? And what do you see for the coming year?
Laurin: I would say, in general, and this isn’t necessarily for 2022. But it’s been a general progression in recent years that there’s more acceptance around what’s considered the quote unquote, softer side of deals and culture. You’re not as frequently getting that eye roll. When you say culture in a boardroom, as you might have 10, 15 years ago. Where people were like, oh, it’s culture, okay, wonderful. Like, that’s not necessarily happening anymore. And, for example, we were working with a firm and within a year, they actually referenced culture at a 22% increase in that one year timeframe after we started working with them.
And directly targeted in their annual report, the reason behind their incredible success during the pandemic, was because the culture that they had fostered beforehand. And culture is more and more seen as that differentiator within an industry to say we have a strong culture where people want to work, and especially when you’re starting to think about the great recession. And as people are leaving organizations, when you’re doing an integration, as we talked about a little bit before doing things to people and activating that survive mindset, you have a more vulnerable employee population who is more quickly going to have that thought bubble of, if I can’t define this for myself, and I no longer have control, why don’t I leave?
And it’s already prevalent, but it’s even more so in these target companies. So something to absolutely be aware of, as you’re going through in the next year of how do you really retain the talent and the culture of your target, and integrate some of their best practices and their culture into the acquiring company, and create the best of both.
Patrick: You mentioned the softer side, the two biggest developments in the last couple years. You’ve got ESG and the awareness of that. And then culture is hand in glove with that. So I agree completely with you is that going forward. Laurin Parthemos it’s been a pleasure having you here. For our audience members who are interested in this, how can our audience members find you and Kotter?
Laurin: Absolutely. So you can find Kotter on our website at kotterinc.com. I have a lot of resources there and various different articles or background research that we’ve done. You can find me personally at email@example.com. I will not go through the trouble of spelling that you can easily look on your podcast page. Check out the show notes. It will be there. And then you can also find me on LinkedIn. I’m more than happy to speak with anyone who’s interested personally.
Patrick: Well great. Laurin Parthemos of Kotter, thank you so much for being here today.
Laurin: Thanks for having me. It’s been a pleasure.
Our guest for this week’s episode of M&A Masters is Gina Cocking, CEO and Managing Director of Colonnade Advisors LLC.
Colonnade Advisors is a boutique investment banking firm that specializes in merger and acquisition advisory services, providing financial advice to business owners interested in selling their companies, buying competitors, and raising capital. Gina was employee number one at Colonnade, then left to pursue other interests. She returned to Colonnade Advisors as a Managing Director in 2014.
Despite overlap between our practices, there are a lot of parallels going forward and I think you will greatly benefit from this episode.
Listen as we talk about:
Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on executive and transactional liability, and president of Rubicon M&A Insurance Services. Now a proud member of Liberty Company Group of Insurance Brokers. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Gina Cocking CEO and managing director of Colonnade Advisors, LLC.
Based in Chicago, Colonnade is a boutique investment banking firm that specializes in merger and acquisition advisory services with exceptional strength in serving the clients in the financial services sector. Now while there’s been little overlap between our respective practices up up to date, there are a lot of parallels with what we’re seeing going forward and Gina and I’m very excited because my audience is really going to benefit from your perspective today. So thank you very much for joining.
Gina Cocking: Oh, thank you for having me. I’m excited to be on.
Patrick: Now before we get into Colonnade in the financial services sector and all that great stuff. Let’s kind of ease into this. Why don’t we start with you. What brought you to this point in your career?
Gina: This is my favorite topic. You know, I love being an investment banker. I really, really do. You I get to learn about businesses from best in class entrepreneurs. We at Colonnade, don’t do restructurings, we only work with successful companies. I get to spend my days hanging out with entrepreneurs and leaders of companies that have built organizations that have grown and are now selling for large prices. Like a masterclass every week on how to run a business. So I have loved to be in investment banking. When I started my career out in investment banking and left it for a little while. Hated those years when I was gone and had a chance to come back.
I started, I went to University of Chicago undergrad and I joined a firm that is no longer around called Kidder Peabody. It was a bulge bracket investment bank in the 90s that was owned by GE of all places. But at Kidder Peabody, I did mergers and acquisitions, a lot in insurance and, and general industrial companies. I spent a year with Madison Dearborn Partners, a large private equity firm. When I was in business school at the University of Chicago, I spent a summer with JPMorgan in equity capital markets, and then had the chance to come back to JPMorgan after graduation, where I did a lot of mergers and acquisitions out of the Chicago office.
I’d left JPMorgan after a few years to join the person who was then the head of the Technology Group at JPMorgan when he founded Colonnade Advisors. So I was employee number one at Colonnade. We initially focused on technology companies and business services companies. I was with colonnade for five, four or five years and had a challenge balancing having a young child at home having a husband who was a partner in his law firm, and just generally handling all the travel that’s in investment banking. So I left investment banking, and I became the CFO of a number of companies. I was the CFO of an equipment finance company, a company that did about we had a portfolio about $35 million.
I was the CFO of a private equity backed manufacturing company, and I was the divisional CFO at Discover Financial Services. So Discover the credit card company also had a $29 billion direct to consumer bank that I oversaw finance for. A $5 billion personal loan portfolio at that time. And then also all of non card operations. I oversaw the finance teams for that. And then in 2014, I had the chance to come back to Colonnade which was a thrill of a lifetime. Investment bankers don’t often have the chance to leave the industry and then come back.
Patrick: Yeah, you can get very stale very quickly.
Gina: Exactly. Exactly my partners took a risk and brought me back and it was perfect timing because my career and what Collonade had been doing dovetailed together. They had been focusing on financial services and business services during the intervening years and so I brought back my operation experience and financial services and we’ve been growing ever since.
Patrick: Then at the core of that is the expertise where your role as a CFO, so you can’t bypass that discipline and have that expert not have that expertise. And so you definitely were staying, you know, in the game as somebody. Now with Colonnade now that you transition from technology over into financial services. That is a market that is not for the beginners, okay. You’re going in, particularly in the area that you are because you’re in the ideal spot I mean, everybody would love to be selling, you know, in real estate that prime real estate and the mansions and all that which is where you are.
You’re definitely not in the startup phase or the turnaround phase. So you don’t have the right degree journey once you now have all these really ideal targets, okay? And so that’s not with a lack of competition. So talk about Colonnade and how you cut your own niche within financial services, and talk about the type of competition because I mean, I can imagine you’ve got the big gorillas like Goldman, you know, come coming into that area too.
Gina: Sometimes, sometimes, yes. So we have found at Colonnade, that focus has been the key to our success, and the success that our clients have. We have dialed into a few niches that have really helped us understand the buyers of those companies, and understand the accounting issues that come up in those companies and the operational issues that come up. And I think that really gives us an edge over other investment banks that companies may consider hiring, they just don’t have the same type of experience. So for example, one of the areas that we have done a lot of work in is insurance premium finance. We have done like 27, 28 transactions in insurance premium finance that we’ve actually printed.
There are a couple of buy sides ones that didn’t actually end up, our clients didn’t win. But we’re involved in pretty much every insurance premium finance transaction that happens in the industry. So I guess you could say that we’re the national leaders in that practice. We are quite active in the automotive finance and insurance space. So that is a $81 billion dollar at retail industry. So that includes vehicle service contracts, car warranties, tire wheel contracts, all those types of products that consumers can buy at an auto dealership. There’s been a lot of M&A activity in that space. And we’re very active. We do a lot of work with equipment, finance companies.
And so small and large equipment finance companies, we work with both balance sheet intensive businesses on the financial services side, and businesses that are asset light. For example, just last week, we sold Open Road Lending to Clarion Capital Partners. Open Road Lending is a direct to consumer auto refinance company. So they placed the paper then on their lending partners books. They do high transaction volume, billions of dollars worth of loans over time, but they aren’t putting those loans on their balance sheet. So those are the types of companies that we’re working with. And what we have found is because we as I said, I’m dialed into these types of companies.
We have pattern recognition. So we know what to watch for with these deals. We know to watch for with these companies. And then sometimes complex accounting issues that come up. We see this a lot in the auto F&I space. Rather than just using gap accounting or even cash accounting. There’s actually another methodology called modified cash accounting. Modified cash is what those types of the auto F&I companies actually trade on. So we are pretty well versed in how to handle modified cash accounting. And so that’s what we bring to our customers or our clients is by focusing on several within financial services, even in several niches. It really lends to our expertise, and we bring a lot to our clients.
We also do a lot of work in business services. In business services, often it’s business services that overlap with financial services. So it might be businesses services related to auto dealerships, or business services companies that are in auto dealerships. Or Insurance Services companies, or financial services companies that really aren’t doing anything with consumers, but actually, technology or products into financial services companies. And so we keep our universe kind of corralled into what we look. That means sometimes we turn down deals, but the general industrial deal will frequently turn it down, which can hurt. But it keeps us focused and helps us give a better product to our clients.
Patrick: Well, I can imagine the more you look at an industry, you focus and drill down, you’re going to find these niches and this entire universe of different classes of businesses within there. Yeah, I think what happens oftentimes where, you know, my experience is, you know, people are, are looking to have the problem solved. And if you could understand the unique problems that are particular to that particular business, okay, right. And you can solve their problem and they trust you to solve their problem, you’re going to be a lot more successful and a lot more effective.
And you just cut out the waiting time and the delays. With all the noise with everybody else. You don’t venture in there. I would say to anybody, if you’re in these particular silos, okay, this is where you have to find a specialist like Gina in Colonnade and say, look, we have, we have the types of problems that we know they can solve, they don’t have a learning curve to undergo at our expense. And we’re gonna maximize that. So I think that’s outstanding. One of the dynamics that I want to check with, with you on with investment bankers is that a lot of what we do is in the lower middle market. Sub 100 million dollar transaction value in many cases sub 10 million.
In those areas, you know, engaging an investment banker is looked upon as almost a luxury or, you know, it’s optional. Sometimes at the event it you know, at the advice of an aggressive strategic buyer, saying you don’t need, you don’t need that. But it’s optional. When we get to where you are, if you can share with us, you know, your, your, your deal size, your target range, but at at this level, with this sophistication, I mean, you’re mandatory, right. Tell us what the difference is.
Gina: Sure, you know, our typical deal size, is say, 75 to 125 million, we do larger transactions, we’ve had quite a few that are larger, we do smaller transactions. A threshold, though, is really about 4 million in EBITDA. And the reason for that is is the buyer universe we work with a lot, the PE firms we know well, are generally of that size. So when we’re working with smaller companies, we don’t have the same types of relationships to identify those buyers. So we tend to work with companies of that size. Now, generally, what we find is, you know, in working with a lower middle market versus a larger company. The larger companies usually have leadership teams that have more experience in M&A. They either have gone through it themselves, they’ve gone through a capital raise, or they maybe have bought companies already, they’ve done inorganic activities to get them to where they are.
And so we work with them, they’re more prepared for us to walk in. Their books are in better order, their story is tighter. It’s prepared, they have contracts in place where they need to, it’s not as much on the back of the envelope. With earlier stage companies, oftentimes, what we find is, you know, there’s a little more softness into what they do. So they might not have contracts with some of their key partners. They might not have employment agreements in place with their employees, or non disclosure agreements, or non compete agreements with employees. They might do sometimes what we call an electronic shoe box for their financials. You know, they don’t have audited financials, because the CEO says, it’s a waste of money to have audited financials.
Patrick: We’ve had QuickBooks for 10 years, we’re fine.
Gina: Exactly. exactly. It is never a waste of money to get an audit. It’s like not going to the dentist. Do you not go to the dentist and let your teeth fall out? Do you run your company without an audit? You don’t know what’s happening. Like, well, I don’t worry about it Gina because I don’t have, I’m not worried about fraud my company. That’s not why you do an audit, you might not have your financials in accordance with gap. If they’re not in accordance with gap, you may not be making as much money as you think. Or you may be making less than you think. And that can impact your value.
So what we find in working with some of the smaller companies, is we need to roll up our sleeves a little bit more, and help get them market ready. And that is helping them build a detailed financial model. Helping them go through a sell side quality of earnings, helping them prepare schedules that they will need for the process. Helping review some of their contracts and talking about what they need to have in place. In addition to the coaching of how to go through a process. But really the rolling up our sleeves and getting involved with the companies is where some of our biggest value add is for companies that have never gone through a process like this before. And we kind of bake that into even from our first conversations when we’re reviewing their financials, and helping them think through things and we always talk about when we go in.
Whatever is on your income statement. We’re going to talk through with you every item. We’re going to help you figure out what kind of adjustments and add backs you have. You may have personal expenses running through your income statement and that’s okay. You won’t under a new buyer. So let’s adjust the financial statements for those personal, the income statement items. If you’re doing it because for tax reasons, whatever that’s between you and your tax accountant in the IRS. Let’s add it back though for understanding what your true company profitability is. And we’re really good at doing that.
Patrick: Overall the whole process I mean, the huge thing is you got to manage expectations and guide them through the process. And kind of be the sounding board. So you play all that bedside manner, in addition for the inexperienced as well as the experienced.
Gina: That’s right. You know, we just recently lost out we lost out on a deal. A firm didn’t want to hire us because they said our valuation wasn’t high enough. They said you guys are undervalued. Colonnade, you’re undervaluing us. So they went a different route. And they thought they were going to get a lot more for their company. And they went through a process and there was a higher, there was a higher sticker price on the company originally, and then the deal closed, right where we told them it would. And so we do work to manage expectations. We don’t over promise and under deliver. I can’t sleep at night doing that. So we we go out with a valuation, we are pretty honest about what we think the company is worth, because we know we can deliver.
Patrick: And I think I think the other value add that you bring in this is that you’re helping sellers and you know, owners and founders with this, you got a nice network of reliable buyers where you may know what they’re looking for, you have the relationship, and they trust you and you trust them. Because if they’re just kicking the tires for an exercise, and they’re not going to be there, they’re not on your list. Talk about that real quick on the relationships on that side, because I think that’s something you don’t need tons of buyers, you just need one really good one. It could be two, but you just need one.
Gina: We are, well I went to the University of Chicago. So I believe in free markets and, and the free market will determine what the price of something is. We can we can do lots of valuation work. And I am I actually won a contest when I was in business school on valuation. But that was like a national competition that U of C participated in. So I’m really good at valuation. But I will tell you, it doesn’t matter. What matters is what somebody is willing to buy your company for. And the best way to determine what the price of your company is, is through a broad market process.
And that’s going to multiple buyers in finding out who is going to bid for the company and what price. When you talk to just one potential buyer. And it’s like, you know, I know this company, and they’re going to buy me and I’m going to get a great price. Of course, the buyer’s going to say, I’m going to pay you a great price. And we get a great price, you don’t know what the rest of the markets willing to pay. They might be willing to pay you 10 times, the next company might be willing to pay 14 times.
So it’s best to do a broad process and talk to as many buyers at the same time, and get everybody to put their best foot forward on what the price of the company is. And that will kind of keep the process moving quickly. Because everybody’s worried about losing out on the deal. And it will uncover what the market really believes the value of your company is. And that’s what investment bankers do. We help uncover the highest value through usually through running a process.
Patrick: And it also is just aligning interests, is making sure you get from point A to close and you get through that. Now in addition, all these wonderful things that you do in this is a parallel between Colonnade and Rubicon is you’ve been very active with sharing information, sharing content, sharing, you know, educating the community and and just sharing your knowledge base and what you’re seeing out there. And you’re doing it through some excellent white papers.
You have just launched and if you could talk about this, in that you’ve just launched what you call a an index on SPACs, called the SPAC Attack Index with your partner, Jeff Guylay. And then in addition, and then finally, it’s a crime if I don’t mention that you’re the host of Middle Market Mergers and Acquisitions podcast, you have a podcast as well. So give me your philosophy with what you’re sharing and the various things you’re out there. We will in the show notes direct every our audience, they will all go and swarm your site. Why don’t you talk about that.
Gina: Well, first of all, these activities we do are a little bit self serving, because they’re good intellectual exercises. When we write a white paper, it’s hard. It’s painful. It takes a lot of work. But it causes us to come up with a point of view and really think about industries and think about what are the drivers of valuations? What are the drivers of market activity? Who are the buyers, why are companies doing what they’re doing. They are a great exercise for us and our clients benefit from it. And you know, it’s all about having discipline. I could sit there and write a nice, we could all sit there and write a paper for ourselves, but not quite as motivated.
But when we do it, we’re publishing it, you know we have more motivation to do that. And so we find that number one, that’s a great side benefit of these papers. Number two, these pieces are really out there to help educate potential buyers. So private equity firms and strategic companies that are maybe thinking about the F&I industry, or they’re really trying to understand what’s happening in the SPAC market. By doing these, we are raising awareness and educating those parties. Like we’ll do white papers on the automotive F&I industry and private equity firms.
When thinking about the space, they will Google, they’ll Google auto F&I M&A, and one of our white papers will come up and they’ll find some insights. And then like, wait, now I’m smarter. Now I can go bid on a company that Colonnade or someone else is selling and I have a clue as to what I’m doing. And we use it to educate the buyer universe. So we have better buyers. And to then the buyer universe is usually reaching out to us and saying, you guys obviously know this space, well, we want to see your next deal. And that’s why Colonnade is so good for our clients, because we know who the buyers are, because they’re coming to us.
Patrick: I think that what we do is the more we educate the community out there, it will to our benefit eventually. If you do it solely as as a you know, as a scheme to drive up clicks or whatever, I think is going to backfire. If you have purity of intent because with your your MBA, or your business school stuff in Chicago, so your ideal capitalist, I am an ideal abundance guy. And I keep thinking, the more we put out there, the more the higher quality is going to be available. And it’s also we start by giving. If we give you something and get this out there, you know, people are going to benefit and it does come around.
Gina: Now, I would say also, on our podcast, one of the reasons why we do our podcast, it’s a little bit different target market. It’s not the private equity community, because our podcast is on middle market mergers and acquisitions. They know how to do that. It’s really to help companies out there, owners of companies that are thinking about going through a process and how they can think how they prepare. I mean, it’s it’s intimidating.
When you sell a company, if you’re an entrepreneur and you’re selling your company, it is one of the biggest decisions you are going to make in your professional career, maybe one of the bigger ones in your life. It’s kind of like going into buy a car. It’s your first time car buyer. It’s a little intimidating. So like, I don’t know anything about cars, and they’re all talking about all the stuff I don’t understand. Same thing in M&A. And so what we hope is that our podcast by going through and deep diving into the tactics, and the techniques and the processes that are used in M&A.
Patrick: Each step of the way. You’re addressing each step of the process. Yes.
Gina: Exactly. So then you’re not, you know, when a company is ready to talk to an investment banker or talk to a buyer, they kind of know what’s coming. They’re not thrown for a loop. For example, when somebody says, well, you know, we need to do an escrow they’re gonna be like, wait a minute, wait a minute, I remember from the podcast that reps and warranty insurance is the way to go. I don’t need to tie up my capital and my money for two to three years when escrow works out. We can solve this through reps and warranty insurance and by the way Mr. Buyer you should pay for it.
Patrick: You’re walking right right into you know, our area of expertise. You actually have a fantastic episode on reps and warranties that I highly recommend. One of the things you mention about in the mindset there for owners and founders, especially the ones that haven’t experienced you know, an acquisition before. It’s not only just going into buy a car for the first time. It’s buying a car when you’re only 15 and a half. So really don’t know what you don’t know. You have this kind of you know, this is a you know, I consider this not just a life changing, but a potentially generational change opportunity for families.
And going in there I mean, you have that whole issue of fear. And you know, the fear of the unknown what’s going on and it’s not your fault is just you know, you don’t know. And and the buyers unfortunately are not going to you know, make you feel any better when they’re talking about indemnification and well we’ve got these it’s just usual standard of business we have, you know, your reps and we need to be able to have a money back guarantee. And you know, that brings in tension which can be you know, released with reps and warranties which essentially takes the indemnity obligation away from the seller goes to an insurance company.
Gina: That’s right.
Patrick: Buyer suffers a loss. Buyer doesn’t go after the seller, buyer goes right to an insurance company and I’m just good, bad or indifferent. Your mission is almost a standard so I get the impression you trust but you know, don’t take my word for it, folks. You know, Gina, what’s your impression with reps and warranties?
Gina: You know, I think it’s essential in deals today. Number one, it takes away, as you mentioned, the tension or the potential for conflict. So here’s a scenario, entrepreneur builds a company, and sells the company to a private equity firm, or majority stake to the private equity firm. But that entrepreneur still has 30% equity rollover in the company. And an entrepreneur is continuing to run the business. One year down the road, something comes up, that is, could be an issue that would go against the reps, representations and warranties in the purchase agreement. Okay, that’s really stressful.
Now you have a situation where you have the private equity firm, the board and CEO of the company, are in conflict over something that CEO is like I didn’t even have anything to do with that issue. That was one of my employees two years ago. And they’re arguing about that. And how do you get past it? How do you run the business day to day, and still had a good healthy relationship? Reps and warranty insurance, separates that problem and reduces the tension that’s there.
Patrick: Yeah, I think it’s very elegant. That happens to Silicon Valley quite a bit where you, I mean, the dilemma happens where you’ve got a good sized buyer, there’s a, you know, there’s an escrow, or a withhold of, let’s say, five, five to $10 million, and you’re bringing on this rockstar development team, and they’re looking for their money after 12 months. And then there’s a breach that happens, was out of everybody’s knowledge out of everybody’s control. And the dilemma for the buyer is this. Do we clawback this money that they’re waiting for? Okay, that they’re counting on? Or do we just eat the loss?What do we do? Right? Now there’s rep and warranty insurance in place, all of a sudden that that’s a non issue.
Hey, you’re putting the claim and it’s all taken care of. So we find that. I would say that the biggest development that’s happening in the reps and warranties market now as this has been a product with the province of deals with transaction values of a 15 million legitimate and up. You can go lower, but the diligence requirements are such that it’s usually more favorable at the $50 million threshold and up. However, there is a new program out there is a sell side policy, which will insure owners and founders of companies with enterprise values of 500,000 to 10 million.
And a policy will cover to the entire enterprise value. It is a newly launched program out there, we’re very excited about it. We think about it, while this is too small for a Colonnade type client it is not too small for add ons. And there are a lot of in particularly in technology here in Silicon Valley, there are a lot of seven $8 million add ons that are brought on every day that have they don’t have access to the benefits of reps and warranties. So we always want to highlight that.
Gina: That’s a really good product. And we work a lot with companies that are doing add on acquisitions especially, we see this a lot in the automotive F&I space, where they’re buying agencies and those agencies are smaller transactions. And you don’t want to involve you know, they’re too small, historically, for reps and warranty insurance. But you don’t want to tell the guy I’m buying your agency for $8 million. And by the way, we’re going to put $2 million into escrow. I mean, that’s horrible. So you’re just kind of setting up a rough situation. So that policy solves a lot of problems.
Patrick: Absolutely. So what’s what I’m very proud of with with a dynamic insurance market that we have is there are needs that are coming up and in the market is rising to meet those needs. So I’m excited to see how this goes forward. And and Gina as we’re looking forward, okay, we’re, you know, latter part of 2021. I blinked and this year just went through. You know, what do you see for, you know, forget 2021. What do you see for 2022? I mean, macro or just with Colonnade?
Gina: Sure, well, let’s look at the the macro side, you know, we are in a low interest rate environment, we are in an inflationary environment. And we are in an environment that we have a very large private equity overhang through the pandemic, we even in May, June of last year, private equity firms were raising new funds. There’s a lot of assets allocated to the alternative asset class, the private equity asset class. And so there’s a lot of funds to be deployed. So there are buyers for companies. There are more buyers probably and there are good companies to bought. And that’s driving up valuations.
Patrick: It’s a seller’s market. Yes.
Gina: It’s a seller’s market. And I don’t think that is going to going to abate in in 2022, maybe even to 2023. I usually don’t look beyond 18 months, but I still think it’s going to continue to be a strong M&A market. And there are companies that have come through the pandemic now. We’ve been through the worst of the pandemic, and we’re seeing either they did well through the pandemic or their recovering coming through the pandemic. So 2022 is the year that they’re going to sell, we kind of will say, you know, let’s not, let’s not focus too much on what happened in 2020, or first part of 2021. But things are back to normal, they’re going to sell in 2022.
So I think there’s M&A activity is still going to be high. There’s still going to be a lot of interest in it. I do think it’s a tough environment for businesses to operate. You know, wages are going up, and wages are going up because of inflation. And because people want more money for doing their jobs, and the I’ve never was not a big fan of higher minimum wages. I am a big fan of people getting paid more, because they demand it. If nobody’s going to work for $10 an hour, then you need to pay a lot more. And so that is impacting companies.
And so when wages go up, either margins shrink, or that gets passed on to the end customers. And so it gets passed on to the end customer, things are getting more expensive as a result. And there that might cause some dislocations in the economies and there and some industries will be hurt more than others. We see this and in travel and leisure and entertainment, and in retail restaurants. Other parts of the US economy are doing really well. People are figuring out ways, other ways to deploy their capital. I think financial services products is one of them.
Patrick: I think that there’s just going to be new platforms for buying selling for financing things, just the way people pay for things is changing. And so we’re going to be a lot of force changes. There’s going to be I think, I’ll go out on a limb and say not only will things not slow down, I think if there is a slowdown, it’ll just be a slowing in the pace, but we will not see M&A fall off the cliff. There are many demographic issues, there are too many technology change issues that are going. There are all these forces that are coming out. I think the other thing that is a wonderful, wonderful outcome. And nobody thought about this is how many people stopped work the pandemic.
And when they’re returning to the workforce, they are not returning as employees, they’re looking to buy and start their own companies. And I mean, as basic as landscaping and car washes, could then go and then we got roll ups with that. And you know, and a lot of other things. So I think, you know, I would say the American spirit for innovation is not limited to Silicon Valley. It’s everywhere. And I think it’s gonna be a lot of fun and they’re great firms like yours out there with Colonnade that are holding the hand for those for those pros that you know they made it from, you know, A to AA, and you’re getting them to jump AAA into the majors. So I think it’s great, and I can’t thank you enough for this. Gina, how can our audience members find you?
Gina: Sure. The easiest way is to go to our website for Colonnade Advisors, which is c o l a dv.com. I am on LinkedIn as is my partner Jeff Guylay. So Gina Gina Cocking on LinkedIn, Jeff Guylay, LinkedIn. Colonnade Advisors on LinkedIn. And that’s where you’ll see a lot of our content and so we we we post regularly and we post about things that we think matter to companies in the financial services industry, young companies and to buyers at companies and so we try to be pretty informative with what we put out there.
Patrick: And I one plug for your podcast I will tell you this just fun little fact with podcasters okay. There are over 1 million podcast series on Apple iTunes, okay, and people think barrier to entry there are too many, okay. Your average podcast series doesn’t go past four episodes. You are well past that as you’re already on, on the upper half, upper half. So congratulations. Gina thank you again.
Gina: Thank you, Patrick. It’s good to speak with you.
On this week’s episode of M&A Masters, we speak with Ron Edmonds founder and president of The Principium Group.
The Principium Group is one of the most recognized names in lawn and landscape mergers & acquisitions, or as I say, the Match.com of landscaping, one of those niches hiding in plain sight in M&A.
This is an exciting area in the industry, so listen in as Ron walks us through:
Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on executive and transactional liability, and president of Rubicon M&A Insurance Services, a member of the Liberty Company Insurance Brokers Group. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today, I’m joined by Ron Edmonds, founder of the Principium Group. For the past 17 years, the Principium Group has been providing M&A advisory services to business owners and investors in lawn care, landscaping and other facility services. One could say the Principium Group is the match.com of landscaping, and talk about niches that are hiding in plain sight. I’m very excited because I never would have thought about this as a specialty in M&A. Ron, it’s great to have here. Welcome to the podcast.
Ron Edmonds: It’s great to be here, Patrick.
Patrick: Ron, before we get into the Principium Group, let’s start with you. How did you get to this point in your career, and then we can talk about the focus, but let’s get right as some context for our audience members.
Ron: But like a lot of other people, I’ve my career has taken some paths and turns. And yeah, I’m a CPA by background in college education. I’ve practiced as a CPA with a national firm for 14 years, I guess. And then I was a CFO, for about nine or 10. And that business was sold. And I was, you know, 40. And looking for a new career. Career number three, which is pretty common these days, not too many people like my dad who had one job after the military, around. And I was actually kind of frantic, which seems kind of stupid now. Because I actually thought I was old, and to be hired as in a new company or something like that. And but while I was trying to figure out what to do what I want to do next, I did a little consulting. And I ended up getting a consulting arrangement with a company called True Green Lawn Care.
Most people have heard that it’s by far the largest company in the fertilization business. And they’re based here in Memphis, where I am and, and they were looking for some skills to work with them on where and making their acquisition process, more effective, efficient, and safer, actually. And they had just greatly increased what they were doing, because historically, they’ve been getting most of their new customers from telemarketing. And that was about the time the no call list had come out. And they had to pivot pretty dramatically. And so I took on this assignment that I expected to last about 90 days, and they were my primary client for close to four years, I still occasionally do some work for them. This 20, 15 years later. But that got me a taste of lawn care and landscape saw a little bit about what dealmakers looked like, and in that industry, and I thought there was a place for somebody like me with my kind of background and personality, and I could make a fit, and it worked pretty well.
Patrick: So it’s amazing how, you know, some adversity or obstacles can create new pathways. So the Do Not Call list comes out. And that’s just the door on a lot of marking and opens up something else. So that’s a great story there. Now, let’s go to the Principium Group and tell us about this. But I always like learning about the culture, you get some insight with companies because you didn’t call it Ronald Edmonds M&A Advisory, you picked Principium. So tell us about the name. And then how you, you know, are focusing here on the lower middle market.
Ron: It’s really pretty funny because I have the opportunity to talk to people about choosing names quite frequently, and actually advise people about changing their name in advance of going through an M&A process sometimes, because in the landscape industry, there’s a real issue with having your name on the door. And people, you know, really focusing on you as the individual as opposed to the business. Now, I gotta tell you, I wasn’t thinking about anything like that. When I named this company. And what really happened was, I had a partnership going that went sour. And a lot of people can relate to that. And a lot of people have had that lesson. I get to see people that have had good experiences and bad experiences with partnerships. But I had a I had to split up and I needed a name and a brand and a website and all those things just as fast as I could get them.
And I was enamored at the time of Greek words. And, you know, actually went through the dictionary looking at different Greek words that might make sense. And, and this one means, first things or important things. And to be perfectly honest, that was a little bit of a dig at my former partner. Because I thought he had not focused on the important things. And hopefully he’s not listening to this. Anyway, so we picked that name, and we’re able to get get a URL and everything. And they’ve devoted, you know, especially in the early years, and enormous amount of energy into recognition, marketing, on the web, and trade journals and, and email newsletters and all this stuff. And at some point in time, I thought, gee, what a lousy name I picked. And I said, how could you possibly, you know, I don’t know, there’s probably three or four tests of a good name.
But the first two are, they must to be easy to spell, and easy to pronounce. And this one fails those miserably. And, you know, I’ve started to change the name twice, but was convinced by people in the industry, that that would be ridiculous. Because it has recognition in our niche. And, and, and so we stuck with it, and it and most people in the industry, I think, do do recognize it, both from the level marketing we’ve done. And we’ve also were, we were doing content marketing, when content marketing wasn’t cool. And we’ve got everything we ever wrote on the web. And it’s, we found that you don’t have to spend a lot of money on search engine optimization, if you have all that stuff that’s accessible. And so if you’re going to look for information about about mergers and acquisitions in the lawn and landscape space, the odds are you’re gonna find us.
Patrick: Yeah, I mean, we’ll put this in the show notes. But I did say I was very impressed. Because you’ve got that right there on your homepage. You have two ebooks, private equity investment in landscaping industry as of 2020. And then what you need to know, when selling a lawn care business. I mean, you’ve got your how to’s right there, that couldn’t be more straightforward than anything else. And I think that I imagine landscaping, the industry is unbelievably fragmented. And you’re in the lower middle market, largely because there aren’t that many, you know, 50, 100 million dollar landscaping, or building services organizations out there.
So there’s, you know, when you’re in that, that lower middle market sector, if people don’t know about you, and what you guys can offer, they’re gonna default to other parties, or competitors, or business brokers or try to get into institutions. And they’re either maybe not being misled, but I think they’re going to be overcharged and underserved. So it’s very important. I’m so happy that you’re here to talk about what Principium Group can do for this segment. But you know, in the early days, okay, you were with that large company. Okay. And then and then you moved on, why landscaping? What did you see that everybody else was missing as an industry.
Ron: I like to say that I am, you know, clairvoyant and forward thinking person and saw that this would boom in a few years. But that’s not true. What I did see was an underserved market, which was clearly underserved, and big and had a lot of transactions going on. That hasn’t been as consistent as I may have hoped, at least back then it wasn’t. You know, it was just booming when I made the decision, and it slowed way down really quick. But we made some changes and broadened our scope, and have made it through pretty well, the, the downturns in M&A in the economy, which are usually in tandem, but not always.
It’s been so amazing to see the changes over the last 20 years, because 15 years ago, if you remember what was going on politically and in the economy, you know, if you talked about a government shutdown because of an impasse between the White House and Congress, no one would do anything. You couldn’t sell anything. You couldn’t. Yeah, they wouldn’t. They wouldn’t talk about it, they, they certainly wouldn’t sign any contracts. And that seems so trivial now, compared to the kind of tumult that we’ve experienced last few years. And it’s, and no one’s missed a beat. You know, I mean, it’s absolutely unbelievable that we could go through a pandemic that has been as hard and as long as this one and still have the M&A market moving aggressively forward. It is unbelievable.
Patrick: And one other thing is just to clarify this because again, I wasn’t aware of this, but you’ve got residential landscaping, and you’ve got business and commercial landscaping. The larger focus for you is commercial landscaping. And in an earlier conversation, you and I were, were having, I said, well, with the impact of the pandemic, there are going to be fewer and fewer people going back to work. So a lot of these office, you know, commercial buildings are mostly empty. Okay, how’s that going to impact landscaping? What was your response to that?
Ron: If they ever want to lease those buildings up again, they better look attractive and taken care of. And, yes, I think there could come a time when that’s an issue, but not now. You know, drive down the areas where there commercial office parks and office buildings, you’re not gonna see him a mess, or at least not on purpose. You know, they have their challenges right now. I mean, there are a lot of people in the industry that, you know, are really having a real struggle over labor and getting their work done. But it’s not because the clients don’t want it or aren’t willing to pay.
Patrick: Yeah, I we’ve got a number of shopping malls here in Silicon Valley. And a lot of the stores are shut, but the flowers are getting planted. And as you said, we don’t see any weeds growing anywhere.
Ron: Yeah, I’m not sure. I think retail is the best market to invest in. Yeah, I might add it will affect it in time, I imagine. But, but you’re correct.
Patrick: So well talk about real quick on how private equity in this case hit their radar, because that’s kind of interesting on what’s happening there.
Ron: Yeah, it’s, it’s really boomed in an amazing way. And we’ve been following this trend for, I guess, pretty closely for 10 years. And there will be a few deals that actually started publishing this annual survey of private equity activity. And it was a pretty thin report 10 years ago. And it’s, you know, so much, so involved now that it’s hard to keep up with it, it’s too much work to, to put out something like that. We still do it at least once a year. But I think part of it is the general private equity investment scenario in the lower middle market. And for service industries, they love recurring revenue models, and most of these businesses have a pretty big component of recurring revenue. But there’s just I’d like to say it’s really specific to lawn, lawn and landscape, but I’m not sure that’s really true. It’s caught the attention of private equity, but but they’re, you know, people crawling for, for deals everywhere you look, and everybody’s looking for a new idea. And then disappointed when they find somebody else has already figured it out. You have, for example, they are in some of the sub niches in landscape, one of the big ones right now is vegetation management.
You might not even know what that means, you know. And it’s not, and there’s there’s not trade magazines, promoting that. It’s a little bit easier, harder, to find them. But it’s a great big niche, with with a three, a three and a half billion dollar company and lots of you know, a good number of 100 million dollar companies and, and private equity loves that are looking for those deals. Those companies, by the way, what they do is work with utility companies, for the most part in making sure lines are clear. And so there’s both a routine service. And then when the hurricanes come, they make their real money. You can see the the big long lines of trucks running down the interstate headed in whatever direction that hurricanes caused havoc. And I’m sure I haven’t particularly noticed that with Hurricane Ida, but I’m sure it’s going on.
Patrick: You know, those of us that live out in the suburbs in Silicon Valley where you said we got all the tree care services, would that be considered part of it for for your area?
Patrick: Okay. Yeah, we’ve got lots of
Ron: That’s another hot area right now.
Patrick: Okay. Yeah, because we’ve got lots of older trees out here. If the high winds ever kick up, we don’t have hurricanes. But if high winds kick up, but all of a sudden we get powerlines get taken down from a fallen tree. You got to move quickly. So okay, you know, again, this, the more we talk about this, the more I learn about this. Now, you’ve been involved. I mentioned this, you’ve been involved in this industry for 17 years, okay, and I referenced Principium Group as the match.com of landscaping. Let’s talk about what you bring to the table as an advisor because you’ve got a nice Rolodex of not only, you know, potential sellers looking to get bought, and you’re representing them, but you’ve got a great list of buyers.
Ron: We do and we’ve networked and met people for for a long time now. And we use a variety of tools and meet new people. One of the ones that has been the most valuable to us is that that book that we put out on private equity investment in the landscaping industry, because just about every private equity firm that’s been interested in learning about investing in this area has downloaded that book. And the majority of probably, business owners that think they might be a candidate, have downloaded it, too. And so that’s one have been one our huge lead generators, I might add.
But but we’ve been real active in the in the industry and are willing to talk to anybody. And that’s one of the things I like most about it. You know, sometimes we’re not the right people to help. But we can often aim people in the right direction. But we do understand and have been involved with plenty of transactions, most of them have done pretty well, some have done great, a few have been really challenging. And we’ve got some depth of experience to help business owners get ready for a more positive experience. And we understand what their numbers look like what their businesses are doing and can can explain that to buyers and, and an often, you know, mega deal happen. It’s still, you know, particularly with smaller businesses, identify the buyers are they’re finding where they are, can be a little bit difficult. For larger businesses, the demand is enormous.
And when I say larger, I mean businesses that are basically at the very end of the lower, lower middle market. Yeah, you know, five to $10 million companies. There’s a really strong demand driven by private equity investment, and looking for add on deals. But that has flown through to other businesses. Most of the larger ones are, you know, not that there’s a lot of ones that are owned by individuals, some are owned by esop’s, that’s fairly common in the industry. Different kinds of ownership formats are out there, all of them are participating in the M&A activity today.
Patrick: One of the areas that the new tool. New relatively, it’s been around for several years, but it only really caught fire last four or five years has been an insurance product called reps and warranties insurance. And the purpose of reps and warranties is to take the indemnity obligation that’s in the purchase and sale agreement, and transfer it away from seller. So seller isn’t liable to buyer anymore and transfers it over to an insurance company. So that in the event of a breach of the seller reps, and that breach leads to a financial loss on the buy side, the buyer doesn’t have to go and try to claw back or pursue the seller.
They just go right to an insurance company. It simplifies the process, it lowers the temperature in the negotiation, particularly when we get to indemnification, which is near the end. And you don’t have this us versus them kind of conflict. They work together and go and do that is really been a boon for the M&A industry. And I’m just curious, you know, because you are in lower middle market, but you know, good, bad or indifferent without taking my advice on what, you know, rep and warranty. You know, Ron, what’s been your experience with reps and warranties?
Ron: Well, to be honest, it’s been pretty minimal. Yeah, you know, our work is, you know, probably 80% sell side. And it just really hasn’t come up too much. You know, I have been following it, listening to people like you talk a bit for the last few years. And it’s, it’s interesting to me, and I would certainly think it would play a role in some deals, especially as, as if there were products that were available that were focused a little bit smaller deals and what seems to be the case right now.
Patrick: Well, this is why this is an ideal time for us to be talking because as of July 2021, an insurance market called CFC came out with a sell side only product for the real lower middle market. These are companies with valuations of one to 10 million in enterprise value. And you don’t have to worry about a buyer. We’re not underwriting the buyer’s due diligence. The insurance company goes in sends an application to the seller, they fill out just like any other insurance application. There’s no underwriting fee, there’s no underwriting delays. And you the seller does not have to worry about the buyer approving the insurance or not, they just get the insurance and it protects them.
It’s one of the newer products out there that you know the purpose also for us talking is to make sure that the word about this available new product for this sector of the market that hasn’t been eligible for rep and warranty is now available. And so it’s one of the things that I’m very happy to have out there and I would say that given time, you’re going to see the success of this new CFC is called TLPE. Transaction liability for private enterprise, you’re going to see it grow. And then 10 million enterprise value won’t be its ceiling, it’ll probably start creeping up to 15 to $20 million, in a very short time. So it’s an opportune time to bring it up.
Ron: Yeah, I think that’s gonna be fantastic. Because one of the biggest issues that we work with all the time is fear. And when when sellers look at a transaction, where they’re selling a business they’ve created, that accounts many times for 95% of their net worth. And they look at the ways that that could come back and haunt them. I mean, that they really get really upset and worried.
Patrick: Yeah, and I think it is ideal because on a sell side product, the seller has full control whether or not the insurance is placed. Your traditional rep and warranty policy, you’re absolutely relying on the buyer to to agree to move forward, even if the buyer doesn’t have to pay for it. The seller’s willing to pay for it. The buyer has to undergo diligence. And there are a lot of buyers on the lower middle market that just don’t want to do that. And there’s there’s a good case for that. But it’s nice to have this option. So we’re very proud to be allowed a dynamic market that is meeting these new needs.
Ron: Now, I want to know more about that.
Patrick: We will definitely be talking about that. Absolutely. Now, Ronald, as we’re going through this, we’re nearing the end of the pandemic, and in the Delta variant and so forth. We’re, I mean, 2021’s closing rapidly going into 2022. Give us a picture. What trends do you see either macro in M&A or specifically for your, your segment?
Ron: Well, there certainly are a lot of people out in the market right today, who are fearing capital gains tax rates, which, no matter what we in some fashion, we’re probably gonna see, there’s hard, it’s hard to imagine scenario where we’re not going to see some tax increases. Whether they’re going to be the magnitude that the administration has proposed, I don’t know. But a lot of people assume that they will are trying to plan for that. Of course, what they can’t plan for is wins when a tax might be enacted. A big assumption that might be whether it’s actually enacted before or after the end of the year, it might be effective at the end of the year. So there are quite a few people trying to get deals done before the end of the year. It’s really too late to get started for 99% of potential sellers to get there at this point. But that hasn’t caused a drop off in interest.
There’s lots of activity in our sector and lots of other sectors. And you know, I can see next year being is probably as big a year as this one. Barring some sort of economic event that would that would stop it. It’s beginning to feel, of course this makes me feel potentially stupid. But it’s beginning to feel like there’s it can’t be stopped. Because or the economy is structure itself. And we’re where the money comes from. There’s so much money that needs to be invested, of course, that might change of interest rates rose dramatically, or something like that. But right now, there’s a lot of pressure to get deals done. And that’s been favorable to sellers, because prices have have been pretty, pretty nice. In our segment. We have a lot of people that are, you know, retirement age, the baby boomer sell off of businesses that were built by baby boomers is feels like it is becoming a reality. Yeah, people have been talking about that for years now.
Of course, the baby boomer generation is pretty big, that you better get out while the getting’s good before everybody else gets the good deals. I suppose or some might be some truth to that. But I don’t think a lot. You know, in the consolidating industry, it’s fascinating. There’s been all this activity in landscape over the last, especially the last five years. And you know, you really have to look pretty hard to see the impact of it in terms of the industry as a whole. Private equity firms asked me if the industry is picked over. No, you know, it’s a regenerating thing. There’s always new companies going in. You know, and I noticed not long ago in some studying I was doing that, despite all the transactions that have happened, the size you have to be to get into to be one of the top 100 landscape companies in the country is not going up every year. It’s not that much bigger than it was five years ago, and one year it went down, even though industry revenues were up.
And there’s new young people, leading businesses and, and and creating new things. Yeah, it’s nowhere near all picked over. And that’s before you can start start looking at some of the new things that are happening. Yeah, you know, there’s no doubt this industry is having as big a labor crisis as anything other than perhaps restaurants. I mean, there’s some similar reasons, and some of them are different. But it’s a it’s a big problem. So, you what we have today, we have people really seriously looking at things like robotic mowing.
Patrick: Ron, would you say that you know, if somebody wanted to try to get a deal done before year end, the seller? Could they come to you? Is it possible to pull something off?
Ron: It’s possible if they’re the perfect candidate. And highly desired one, are there people out there like that, but, but it would be it would be a big challenge. I you know, I would talk to people and, and make an assessment of what the best opportunity is, but, but it would, it’d be pretty tough.
Patrick: Ron, how can our audience members find you?
Patrick: And I would tell you, ladies and gentlemen, if you wanted to get established as an authority, it’s always nice to have written the book in a particular discipline because if you wrote the book, you’re sharing your knowledge with the community and the community should come to you for all of that. And you have that like you said. You’ve got two books on your website, they’re ebooks, you can download immediately. I strongly encourage them. Ron, thanks for your generosity there with the community. And thanks for being guest today. It was just a real pleasure talking to you.
Ron: Well, thank you for having me on. I’ve enjoyed it very much. I wish you the best.
On this week’s episode of M&A Masters, we speak with Skip Maner.
Skip is a General Partner of NewSpring Capital and founder of the firm’s dedicated buyout strategy, NewSpring Holdings, and was recently featured in Mergers & Acquisitions Magazine.
For over 20 years, NewSpring Capital has been seizing compelling opportunities and offering a fresh approach to building businesses in the lower middle market. There’s a lot more to them than meets the eye and we have just the right person to walk us through it, so listen and discover:
Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority on executive and transactional liability, and president of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Skip Maner, general partner of NewSpring Capital. Based in Pennsylvania, NewSpring Capital for 20 years, has partnered with high performing lower middle market companies and dynamic industries to catalyze new growth, and seize compelling opportunities. Recently featured in Mergers and Acquisitions magazine, Skip is the founder of NewSpring’s dedicated buyout strategy NewSpring Holdings. And so then there, you’re going to find there’s going to be a lot more to NewSpring than meets the eye. And we have just the person to walk us through this. So Skip, thanks for joining me today.
Skip Maner: Thanks, Patrick. Happy to be here. Thanks for having me.
Patrick: Now, before we dive into all things, new spring, let’s give our audience a little bit of context. And we’ll start with you. What led you to this point in your career?
Skip: Well, it’s I guess, I’ve been in private equity for about 26 years now. So it’s been quite a ride. And I guess I think I started when I started my private equity journey when I was in college, when I started two companies. I wasn’t I wasn’t the Elon Musk of the time, but it was enough money to pay for beer and a couple of books, maybe. But, uh, you know, after I graduated from college, I started two additional companies. And I really think, again, that’s where I started in private equity, because I’ve always, you know, really, I think, taken a highly operational approach to the companies that I’ve ultimately invested in, in my, in my career. I was 23 years old, when the bank called me and told me, I wasn’t making payroll. And I had to figure it out. So I’ve sat on that, that entrepreneurial, and that founder side of the table. I went back to business school after selling two of the companies.
And, and really, part of the reason I went back to business school was to, you know, you know, small business owner oftentimes feels like the world, you know, the world revolves around them. And it really, it was far from the truth. And there were things happening in the macro environment that I really wanted to understand. And so graduated from Wharton in 95. And got into private equity, really in the in the mid 90s. So I’ve seen a lot of the the cycle and a lot of the maturation of the industry. I think when I graduated from Wharton, you know, probably less than 10, 5% of us went into private equity. You know, that’s probably closer to 25-30% now. So it’s, you know, it’s been, it’s been a great ride, again, seeing many, many cycles, and, you know, thankfully around to talk about the cycles.
Patrick: Well, contrary to its name, okay, NewSpring I mentioned in the intro is not new to private equity, you’re one of the rare firms out there that been around now for two decades. So, as we get in, we talk about NewSpring, let’s kind of open it up with I always like finding out, you know, the culture of a company or the insight, if you figure out, you know, how they came up with their name, specifically, because it’s not named Maner Capital. So we’ll start with the name. Tell me about NewSpring.
Skip: Yeah, well, I think it’s all about, you know, we’re all about growth, and we’re all about formation. And I think, you know, just the combination of really that, you know, ideas springing forth. And, and, and, you know, and surrounding them with, you know, with this idea of how to take companies to the next level. NewSpring seemed like an appropriate name, I can’t take credit for it. Some of my partners and predecessors yeah, could have been, again, I think the the culture around again, we focus on the lower middle market, and again, so that could be companies in our definition, between 10 and 100 million in size. Those are even at 100 million. It’s still very small companies in the whole scheme of the world. And I think that the notion of NewSpring really helps. We want to take a fresh approach to, you know, the company building experience.
Patrick: Right, and it sounds like you’re on the beginning of a cycle, you’re not at the end of a cycle. So, you know, you’ve got that emphasis and as being, you know, experienced at 20 years ago, is really impressive, but 20 years in this space, you’re not doing just one thing, NewSpring is a series of a number of silos. Let’s talk about those for a moment.
Skip: Yeah, and it’s look, it’s it’s a fun story to talk about because again, the longevity of the firm, you know, again, I can’t take credit for it is really really Impressive. So, you know, when I guess I’m you know, proud to be a part of it. We just invested our $2 billion over that 20, 22 years that we’ve been involved in 184 companies. And what’s really interesting, and this is, you know, talks a little bit about the maturation of private equity, it took us 17 years to invest the first billion. And then it took us five years to invest the next billion. And we do that through we have five investment strategies, again, each focus on a different segment of what a lower middle market company might need.
So I’ll get to my my segment last, but we have a growth strategy that invests in software and tech enabled services companies. They just closed their their fifth fund, and they do minority capital, minority equity capital, onto the balance sheet of companies that really need a last round of capital to get them to profitability. They’re averaging, I think company investments such as maybe 20 million in revenues. Our health care fund, which they’re closing their third fund right now, is focused on again, similar growth stage companies with tech enabled services companies all around the healthcare space, especially pharma, and niche clinical providers. And then we have a mezzanine fund. Our mezzanine fund is closing their fourth fund, and that is focused on subordinated debt, and really supporting other private equity sponsors into buyout transactions. And then we recently founded what we call NewSpring Franchise.
NewSpring Franchise is a group started to really buy into compelling and interesting franchise and multi unit businesses, consumer oriented businesses. And then what I run is what we call NewSpring Holdings. NewSpring Holdings is is our buyout function that we started in 2015. And what we do is, do control buyouts into founder and family run businesses. We really like to find companies that have, you know, been on a journey for, you know, five to 20 years, but, you know, may have a transition issue or a desire to grow to the next level, and want a partner to do so. So again, it’s with those those five strategies that we kind of look at the lower end of the market. And, again, it’s a nice broad horizontal approach, where really, you know, a lot of the you know, the need that a middle market company might have a lower middle market company might have, you know, we can solve in this building.
Patrick: Well, that’s something because, and I’ve got a real soft spot for the lower middle market, particularly because you’ve got owners and founders that started with nothing and created tremendous value where like I said, nothing existed before. And they don’t know how to get past that inflection point, there’s some their content to stay where they are, but there are others are wanting, you know, the they either, you know, by just their success, they’re a victim of their success. So they either get to the inflection point by becoming, you know, they’re too small for enterprise, but they’re too big to be small. And they, they need some outside force, outside assistance to help them. And if there aren’t, you know, experienced owners that have gone through that process multiple times.
They don’t know where to turn. And but you know, and if they don’t know anybody, they get by default, they go to an institution or a brand name, or something is out there. And they really are left short. And what happens is, unfortunately, they’re they’re underserved. But they’re overcharged. And that’s why it’s helpful to have firms like NewSpring out there that are really committed to this segment. Talk to me about the issue where you’ve been around again, I keep hammering on this, but you’ve been around for over 20 years, and you did not scale upstream in terms of deal size. Why is that?
Skip: Well, you know, I think it’s because we love the opportunity at the lower middle market. I mean, again, you have, that’s where most of the companies are, and if you look at where, you know, where we are in, you know, in the in the cycle, you know, the oldest baby boomer right now is 75 years old. And we’re in the midst of what’s going to be as the baby boomers age, you know, the largest transfer of wealth in the history of the world. That’s something like $10 trillion is tied up in, you know, family run businesses. And you know, we want to be we wanted to be a part of that. So that’s why NewSpring chose to stay and keep our fund sizes small, so that we could continue to to really be experts and build a preeminent firm that focuses on these lower middle market companies. And you’re right that you know, the needs or the needs are very different.
You know, I Patrick, you hit the nail on the head, which you know, when you we find a business owner that’s, you know, as a $40 million business and they’re making $5 million in EBITDA a year, you know, and and they had their, they’re at a point of inflection and what in order to grow the business, they may have to take the EBITDA backwards or you know, go on a hiring spree or do things they haven’t done like go international. What we’ve done is build our firm to serve all those needs. And really what, you know, it starts with being able to apply a different risk profile. An owner, all their eggs are in one basket. And when we do a transit transaction with an owner, you know, we’ll go in and we’ll say, look, we’re going to provide you with a with an ample amount of liquidity today.
So you can diversify your wealth. But then we’ll ask the owner to, to roll in 20 to 40% of the of the ongoing transaction. And, you know, frankly, as an owner, that’s like having a, you know, a, you know, somebody manage your wealth for you. But it’s just in your private equity asset, because what we’re going to do is apply our approach and what we’ve done at NewSpring Holdings is really build this go to market strategy, where we’ve surrounded us, ourselves and our eco sphere with very senior executives who have built businesses. Again, we’re not former investment bankers we’re former operators. My partner, one of my partners, ran a two and a half billion dollar business that he built organically and through 100 acquisitions over over a 30 year career.
And we’ve surrounded that team were of functional operating experts where we can go in and if we get involved, these are experts that help, you know, take a company and position it then for different organic means that we might bring to the table or a significant amount of M&A. We’ve done we have four companies in our in my portfolio today, we’ve done close to 30 acquisitions in the last five years into those four companies. And we really think you can create an exponential outcome by by doing both organic and acquisitive tactics.
Patrick: I think it’s just a competitive advantage that I hear you have one of the questions I asked was, you know, what do you bring to the table. But I think, clearly, this operational approach and grow through operation is a huge advantage over other firms or investors out there that are more financially guided. And I think that by doing this, I can’t imagine just putting myself in the in the shoes of an owner. I want to grow, I want to change, I want to do this, but I don’t want to bet the company on it. And there’s no margin for error. And so you not only need the expertise from somebody outside, and that cares and wants to partner with you, but you want to be able to diversify, you know your wealth so that you aren’t betting your entire future on a change that you need to do anyway. And so I think it makes it a lot easier.
Skip: Yeah, we call it we call it a different lens of ownership. Again, you know, it’s an owner is gonna make a certain decision that we would all make a rational decision, you know, if they own 100% of one. And, you know, this really allows you to expand and put a different lens of ownership on. Again, we’re, you know, we’re not an ATM, you know, money isn’t free. But again, if an owner is able to diversify their wealth, they could make different decisions. And then then again, by sitting next to us, you’ve got the former CEO of $3 billion company, you’ve got, you know, we’re gonna put board members on the company that are industry experts here. And on our, on our boards today, we have the former CIO of Comcast and the former chairman of NASDAQ, and other really preeminent individuals that are going to be the industry guides. And then we’ve got the functional guides that can fill in holes, if there’s holes at the companies. Or that can be strategic advisors to those companies as they embark on what is, you know, what is a new kind of op tempo and a new kind of way of looking at the business.
Patrick: The other advantage I see for private equity over strategics, and other you know, M&A investors out there is that you mentioned this with the role of equity is the opting for a second bite at the apple for owners and founders, which I think is great, where they go ahead and agree to, you know, a hold on to a 30% minority stake in their company. And that 30% in five years could be worth more than the 70% that that they that they got to closing originally. And I think that’s a formula for success. How could anybody turn away from that?
Skip: Well, and I can promise you that we work every day to make sure that happens, because that’s the way that we’re going to make money. And, you know, look at the example is this that if you know, the four companies we own today, the aggregated revenues, when we got involved in them were about $50 million dollars. Today, they’re over 700 million in revenues, and about, you know, close to 60 million of EBITDA. So, you know, those owners and the stake that they’ve rolled in and retained is you know, is benefiting from that. And for me, you know, losing sleep every night over how we’re going to make them all successful.
Patrick: And of course we put it in a disclaimer right now that past performance is not an indication of future results and all that good stuff. I mean, you’re seeing this, because you’ve got a lot of, you know, very smart people. And they’re all committed, which, which I really appreciate too and then part of the passion with the lower middle market, is that trust, that you’re all kind of pulling in the same direction. And that’s outstanding. As great as all this sounds, I’m sure, you know, some listeners are sitting there saying, how do we get in on this. Give us a a profile of your ideal target. What is NewSpring Holdings looking for?
Skip: Yeah, so again, this is the NewSpring Holding segment of NewSpring, but we look for companies, let’s say between 10 and 15 million in revenues. What we do is like to get started with, again, it’s a term everybody uses with a platform, and what we will have done prior to that is really, you know, try to take a deep look at an industry where we believe there’s a decent amount of fragmentation, the companies that we target are all profitable. And because we do use a small amount of debt, you know, in all of our transactions, you know, we’ll come in, again, when we get involved, we buy a majority stake, give an owner a nice payday today, but let us, you know, move into the driver’s seat with that owner as a partner, that, you know, we can create the best outcome together.
And so then what we’ll do is, we’ll we’ll launch into a, you know, a program where we, again, if we got involved with, we think there’s a lot of fragmentation, and then we will try to aggressively not only work the 100 day plan, where we’re putting the organic growth tactics in place, but then, you know, do a significant amount of M&A around that. And so, you know, really, it’s, it’s an owner is who would want to get involved with us. It’s an owner, that’s saying to themselves, my gosh, I know, there’s something better out there, but I don’t want to do it, as we talked about. I don’t want to take that risk, but it’s its owner like that, it’s an owner, that they may have, you know, may not have a way to you know, trans transition the business may not be like, you know, stated succession plan. And so, you know, those are places that we can, you know, that we find that we can, you know, really, really maximize.
Patrick: Gotcha. with and in terms of industry, because you got a healthcare group, and you’ve got the franchising. Industries, geographies, any kind of limitations or anything?
Skip: Yeah, primarily US based. And then, you know, we tend to look at the world through a horizontal view. And that means we look for tech enabled services companies. And so we look for a type of company. And that puts us in different vertical markets. In our four companies today, we’re in FinTech, government services, last mile logistics, commerce, etc. And, and then cloud. So again, different vertical markets, but you know, the types of dynamics, we find that our companies really pervade the vertical market. Again, what we’re usually find when we go into a company is that they, they haven’t, they don’t have a big salesforce.
They haven’t focused on marketing. The finance organization is usually used as a way to, you know, how much cash they have in the bank and and how much their taxes are. And so what we try to do is turn each one of those functional groups into a strategic weapon, and really help position for growth, that again, when we deliver the company, you know, to the to the next level, it’s, you know, we’ve scaled it, we’ve de risked it because a lot of times companies have customer concentration or supplier concentration or owner concentration. So what we would have done is diversified all that and that that should mean that we deliver to more than the middle market, that a company that is significantly less risk attached to it.
Patrick: Well and I would think on the exit side for this, you know, the firms out there are getting bigger and bigger and you’ve got SPACs, and so they’re all these bigger entities that are buyers out there for your lower middle market that when they’re ready to graduate, there’s there’s a whole you know, very eager marketplace looking looking to make the acquisitions. You, you sparked the thought that I had, tell me about a an epiphany that you witnessed with one of your portfolio companies where you mentioned the 100 days where you come in, you do the analysis and you’ve got the game plan and you have laid out a plan of action. And tell me a time where in that in those early months, you just saw that owner and founder all of a sudden see the light bulb come on, say, I never thought I could pull this off. Anything like that?
Skip: Yeah, look, it’s and this is why I love what I do. Because we really think that we create fundamental value where, again, there’s a lot of ways to make money and, you know, financial engineering, and in levering companies up and cutting costs, that may be one way. The way we make money is through growth. And so it’s really fun. Again, a lot of the companies we get involved with, you know, I’ve not I’ve not been in growth mode, again, for the reasons we’ve talked about. And so, I think one of the most fun things is when we come in, and, you know, again, I’ve heard this many, many times, you know, from from founders, well, we tried to hire a sales force, I had a sales manager, you know, I went through three of them in two years, and it just wasn’t working out. So we just gave up.
Patrick: That’s painful, yes. Those are painful comments.
Skip: And, and so you know, it’s, it’s really hard to grow a company unless you, you know, again, turn sales into, you know, a real function with real strong people. And so I think one of the most fun things is, is to, again, you know, we have, we have the experts here to, you know, to start to bring in and build that sales function. And it starts with better defining the customers better defining who, you know, you don’t want to do business with as well as who you do want to do business with, because again, a lot of things we find are, you know, again, any revenue is good revenue. And that’s not always the case when you want when you want to, to grow. And so, you know, really the most fun epiphany is when you, you start to see the effect of bringing in an institutional quality sales team, and you start to see those growth numbers tip up, tick up, because organic growth is oftentimes, you know, far cheaper than then, you know, any other type.
Patrick: Okay, I just a lot of fun, particularly that because I think, you know, either labor, personnel, or sales marketing are those very nuanced types of types of practices that are really tough, and they’re very scary. And that’s, that’s something you bring on. Now, you’ve had over close to 200 acquisitions throughout this whole tenure. Let’s talk real quick about how that process has changed, because it’s gotten a lot easier for the whole M&A process. And one of the ways that it’s gotten easier is to reduce risk for the parties involved. And you know, that’s being done now by a product brought in by the insurance industry called reps and warranties insurance.
And the purpose of the product is essentially, it takes the indemnity obligation between seller to buyer, transfer that away from the seller for a couple bucks for premium to an insurance company. Therefore, if there’s a breach of the seller reps, rather than a major escrow or fear of a big clawback by the buyer who’s been financially harmed, because even though they did the diligence, something was missed. And in a perfect world, nothing would be missed, but that happens. And so this product has become a very elegant, elegant, elegant tool that’s now available for the lower middle market. But you know, don’t take my word for it, you know, Skip good, bad or indifferent. What’s been your experience with rep and warranty insurance?
Skip: Yeah, look, it’s for perspective. I remember the first time I used it was maybe 15-16 years ago, and trying to find somebody to underwrite, you know, rep and warranty insurance, you know, there was sagebrush rolling through the streets. It was a very different market. And, you know, so I think you’re right, it has increased the lubricity of getting a getting a transaction done today. So we use it in 80-85% of our transactions today. It really takes I mean, it works just like insurance instead of one owner, you know, basically having all of the risk of, again, having made a mistake, or having some warranty claim come up from, you know, five years ago, it’ll again, allows the pooled interest to underwrite to that and it’s only the exception where we don’t use it in in the trend, and again, in the significant amount of transactions we’ve closed in the last five years.
Patrick: Yeah, I think I think the nicest development, and the success of rep and warranty has been eligibility has increased, not tightened. The claims haven’t hurt the industry. And you know, very much at all, so rates have been low, they’re beginning to rise solely because the demand. Demand for the product has gone way up. And and that’s what’s driven it. One of the things I did want to point out because it’s just not broadcast that often is that rep and warranty was originally reserved for deals with a transaction value of $100 million plus. Pre COVID, just pre COVID, that threshold dropped by a couple of markets down to deals as low as $20 million in transaction value. There is now as of July 2021, a market out there that has a product that can insure M&A deals with transactions from 1 million transaction value up to 10 million and insure the entire transaction.
Slightly different product it is for sell side deals. But what we think is important is that as you know, the market grows, that there are just different options available out there. And what we like is just the sheer number of add ons that are happening. And so there may be preferred destinations for platform investments, there are going to be way more add ons. And if you have tools that are now available for those add ons, all the better. Skip as we record this right now, you know, we’re passing through the pandemic, and now we’re dealing as Californians would almost call the aftershocks with the Delta variants. So things are kind of hanging on. But we’re coming in now we’re racing into end of 21, looking at 2022 what trends do you see going forward? Either, you know, macro or just NewSpring yourself?
Skip: Well, it’s I mean, first of all, you know, again, the dealing with COVID. I think we all know that, you know, we thought the vaccine was a total panacea. I think it’s definitely helping but I think, you know, COVID is now becoming more, you know, perhaps a longer term part of our overall lives. And so, you know, that op tempo that COVID has created, there’s no, it’s not going to go away anytime soon. So I think we’re, you know, we’re, we think we’re going to deal with an economy economy that is, is, you know, is affected by that. You know, at the same time, you know, there’s a lot of dollars sloshing around in the economy.
You know, with what the Fed has done, and what the tray and Treasury slash Congress has done at the same time, you know, there’s, there’s a, there’s a lot of capital out there. And, you know, thankfully, you know, the quick action, you know, that the the government and Fed did, back in March, April, May last year, I, you know, served its purpose. You know, I think 2022 is gonna be a great year. It’s, you know, I do worry about, you know, going further out that, you know, we’re going to see, you know, some issues in the economy, you know, our companies are already seeing wage inflation, you know, you can take price hikes away, but, you know, you don’t take wages back.
Patrick: No. Yeah, that’s true.
Skip: You know, with, you know, with a lot of the things that happened with COVID, which some of which are good, some are bad. Number one, you know, a lot of people decided to retire and are not coming back to the workforce. So that takes a significant pool away. You know, the lack of immigration over the last five years. You know, we need immigration to grow our economy. You know, on the good side, you know, a lot of, I think, the most business formation in the history of the country in the last year.
Skip: So that’s a good thing. So, look, you know, there’s a lot of good and bad, you know, I think the key to founders and other people in private equity is you always have to assume that the, you know, again, I’ve been doing this 25 years, I think this is my third downturn, you know, and, you know, I guess we’re in an upturn now, but, you know, things go in cycles. And so you have to, you have to invest and run your businesses thinking that, you know, you know, take advantage of what you can but but know that you’ve got to architect for the downside.
And, look, we’re doing the same things, you know, today that we were doing, you know, last year. It’s a seller’s market. It is not a buyer’s market, because there’s all those dollars out there. So it’s a great time to be a seller. We have to be disciplined. And, you know, I guess our thought is that if we do our the right things by picking the right companies, and then running our game plan, that we can create the growth dynamic, that, you know, that allows us to kind of, you know, succeed in upturns and downturns.
Patrick: Skip, how can our audience members find you? How can we find NewSpring Capital?
Patrick: Great, well Skip, a lot of fun. It was a pleasure speaking with you today. Thanks so much.
Skip: All right. Appreciate it, Patrick. Take care.