On this week’s episode of M&A Masters, we speak with Jordan Tate, Managing Partner at Montage Partners. Montage Partners, based in Arizona, is a people-first private equity firm. For 17 years they have invested in established companies across North America, helping them reach transformative growth.
Jordan tells us about his path to Montage Partners, the interesting meaning behind their company name, and how it reflects both who they are and the companies they seek to invest in, as well as:
Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority in 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 Jordan Tate, managing partner of Montage Partners. Montage Partners is an Arizona based private equity firm founded in 2004. They manage $70 million in capital and invest in established successful companies across North America. Jordan is great to have you here. Welcome to the show.
Jordan Tate: Thanks, Patrick. Good to speak with you again.
Patrick: Now, we don’t see a lot of private equity activity here in Arizona. So you really caught our attention. Before we get into Montage Partners, let’s let’s start with you. How did you get to this point in your career, and then maybe trace, you know how you landed in Arizona?
Jordan: Sure. So a little bit of background, I’m 40 years old, I started my career as an investment banking analyst at Merrill Lynch, working on mergers and acquisitions, primarily with consumer and industrial companies, and what now seems like a lifetime ago. And then in 2004, I moved back home to Arizona to co found Montage Partners. And it’s been a fun 17 year journey. Over that time, we’ve now invested in 17 companies, having successfully exited our investments in eight of those companies. So we’re active investors in nine companies today, and have a ton of fun working with our partners and still view ourselves, in spite of the 17 year history, as being in the early innings of building, the leading lower middle market private equity firm in the US.
Patrick: Excellent. Now when we turn to Montage Partners, I credit you guys a private equity, that you’re not boring, you’re a little more creative in the way you name your company, as opposed to law firms and insurance firms, that name them after the owners and the founders. But what’s the story at how you came up with the name and tell us about Montage Partners.
Jordan: Yeah, thanks for asking not a question that we get all that often. But you’re right, we intentionally didn’t name the firm after any one individual. That is a reflection of our culture. So we’re very team oriented. And collaborative. The firm’s not about any one individual, it’s certainly not about me. And so the name montage comes from the fact that a montage is a picture of pictures with each of those individual pictures, being self sufficient, and unique and standing on its own. And that’s a reflection of how we think about the companies that we invest in.
So each of those companies is unique, self sufficient, successful in its own right. And together, those companies comprise the overall picture of what forms our firm Montage Partners. And then maybe the last thing I’ll share is on the partner side, that was intentional as well. So we look for a true win win relationships where it really is a partnership with the leadership teams that were backing and or the founders if it’s a majority recap situation. And while the founders cashing out significant liquidity may stay involved and continue to be an owner, what we’re looking for, are those true partners with people that we like and trust. And so that’s reflective of the name as well.
Patrick: And the the size area that you’re looking at for your investments, I would consider that the lower middle market, correct.
Jordan: That’s right. So in terms of size, we’re investing in established successful companies with one to 5 million of EBITDA. So no startups, no distressed situations. You mentioned across the US, we focus on four industry verticals. So business services, consumer products and services, industrials and technology. So one to 5 million of EBITDA, no startups, those four industry verticals. And then in terms of the catalyst for the transaction, there’s really three situations that capture all 17 companies we’ve invested in today. And those three are founder liquidity event. So whether that’s a founder seeking a full sale of the company, or a founder seeking a majority recap, where the founder may want to continue in the CEO role and or continue to be involved from an ownership perspective or a board perspective. That would be scenario one, and that’s very core to who we are. The second one is the management buyout.
So backing leadership teams with capital to buy their business from a larger organization. And there’s two examples there would be Equity Methods and Metal FX, both of which were actively investors in today, Equity Methods was prior to our transaction, a wholly owned subsidiary of Bank of America. And Metal FX was majority owned by a publicly traded utility called a VISTA Corporation. And both of those cases, we provided the capital to back the leadership teams of those companies to buy their business. So that’s number two. And then lastly, the third scenario is backing operators or independent sponsors, who have a thesis within a particular industry and or have identified a particular company and need an equity partner to support them.
Patrick: I’m just curious real quick with with the independent sponsors your your third point there, have you seen that activity grow?
Jordan: Absolutely. So definitely a trend, we think back over the past 17 years, there’s a growing universe of independent sponsors, for sure. And I think from if I put myself in a founder’s seat who’s seeking liquidity, I think that’s both a good thing and a bad thing, I think it’s a good thing because it provides another option. And there’s very high quality people out there in the independent sponsor universe. And then maybe on the on the challenging side, or something to look out for as a founder is not everyone’s created equally, right. And it’s difficult. When you’re getting to know somebody who doesn’t have a track record, they don’t have a portfolio of companies where they’ve been through the transaction process many times.
And if this is the first time they’re going through a transaction, there’s a lot of getting to know one another. And so there’s some work that goes in on the founder side to get to know the people involved, make sure that everyone understands the source of capital, and that the person sort of can successfully navigate the transaction process so that a founder who’s built a successful company, over 20, 30 years, is going to have a relatively smooth positive experience with highly emotional once in a lifetime opportunity. So growing universe, and lots of variety in terms of the folks that are competing within that space. But certainly for us, we’re very interested in doing more deals where we’re providing equity, to independent sponsors to help them close transactions.
Patrick: I think is fantastic. It’s a nice matchup with the pooled resources, like you said, if you’ve got an independent sponsor, you’re just looking at that individuals, the owner or founder of an organization with a track record, like you have, you know, backing them up all sudden, it gives a lot more credibility to the the opportunity for success.
Jordan: Absolutely great. So there’s a good compliment there, particularly when that independent sponsor plans to step in and take an operational role in the business. So sometimes, if I’m a founder, I’ve built a successful company, I don’t have necessarily a successor internally. But I’m seeking liquidity. I need both a capital provider to provide the liquidity but I also need a solution in terms of who’s going to step into that leadership role. And in a scenario where there’s an independent sponsor involved, who plans to step into that leadership role. And there’s good rapport between the founder and that individual. And then we can step in with the capital. So solving for the capital that’s going to provide liquidity as well as support growth initiatives, also speak to the track record, and then bring the shared services resources from our team. That’s a good combination, and it sort of rounds out the solution for the the founder who’s got a lot at stake.
Patrick: You haven’t done this yesterday. So I mean, the number of private equity firms, you know, when when Montage Partners started was a lot smaller than that universe now. And I’m just curious as you’ve got this long track record, how are you having gone up market for bigger and bigger deals? Explain explain your preferences, staying in the lower middle market?
Jordan: Yeah. So you’re right, we have stuck to our lane, there’s not much that’s changed with respect to our investment strategy, or size, or the qualities that we look for in companies or people that we’re going to invest in, over the past 17 years. So we haven’t drifted up market that’s been intentional. One of the reasons is, we have a lot of fun doing what we’re doing. So we like this category. It’s large, there’s a lot to do. And we love the founder transition story. We think where a founder is willing to invest the time to get to know the people and where the founder knows what market is in terms of purchase price or multiple.
And so there’s confidence going into the transaction that they’re going to be paid that price, regardless of who the buyer is. And once that box is checked, that they’re getting the liquidity they’re looking for, they’re getting a full fair purchase price for the business, then other things matter a lot. So for founders who really care about the integrity of the people Who’s going to be involved? Who’s going to represent the company on the board from that private equity firm? What’s the post close plan? And what resources can that private equity firm bring to bear? What’s the track record of that firm, and we’re the founder can jump on reference calls from other folks who had sat in their seat before. Hugely important, hugely powerful. And we like this this size, and the dynamic changes as you go up market, it gets a little less personal.
Patrick: Yeah, well, I think that when owners and founders, they get to an inflection point, and they’re looking for an exit, or they’re looking for, you know, that next step, because they are either, you know, and they’re, they’re too too big for being small, but they’re too small to be enterprise. And, you know, they’re at that point, they have to make some kind of change. And if they don’t know any better, a lot of these owners and founders just default to an institution or to have some brand name out there, or they fall over to a strategic that may not have their their interests, you know, at heart. And that’s why it’s very important that we highlight organizations like montage partners, because you offer a way out that is a real positive. And the more choice they have, particularly for these people who have, you know, taken started with nothing, and then develop, you know, build great value is great to know that there’s organizations like yours out there that can get them to that next chapter.
Jordan: As you know very well, if there’s a great strategic buyer, that is a great fit for the particular company, that could be a good option for the founder, if that’s not the case, or they’re concerned about competitive sensitivity with sharing information during a diligence process, or there’s not a great cultural fit with the organization that they’ve built. And that potential acquire, and or the founder cares deeply about that leadership team. And the folks that are going to carry the torch after they start to step out of a day to day role. aligning with a private equity firm can solve for all of those things.
Because if you’re doing your homework, getting to know the people at that private equity firm, and you’re partnering with high integrity, high quality people, and you can do those reference calls, the culture at your company is not going to change, there shouldn’t be renewed energy, but the fundamental culture is not going to change. Now you’ve got stronger balance sheet capital to support growth initiatives, potentially help upgrading finance and accounting infrastructure, help standing up pull based marketing initiatives. Help recruiting to round out the leadership team, if that’s helpful. And then uniquely one differentiator for a founder and choosing private equity as a path towards liquidity versus a strategic buyer is the ability to roll equity, if they’re interested in maintaining a stake in the business.
So for a lot of founders, you built a business 20, 25, 30 years of sacrifice, blood, sweat, and tears, and you want to take substantial cash out of the business. But at a certain threshold, once you’ve met some certain dollar amounts of liquidity, it’s oftentimes very appealing to maintain a stake in the company through that next phase of growth over the next 5, 6, 7 years. And that usually that opportunity doesn’t exist most often with a strategic buyer. But with the right private equity firm, that opportunity to maintain a stake in the business and accomplish the upfront liquidity objective is sometimes very attractive.
Patrick: Yeah, one and also that rollover, that can happen, you could end up that rollover ends up being worth more than the original liquidity event as possible, as possible. Yeah. So that I mean, what a great way, you’ve just, you’ve just gone through just all the types of things that you bring to bear. When you come into the company, you’re showing them how to scale, bring in new talent, improve processes, probably get economies of scale, in terms of costs, and so forth. The four areas that you like to invest where you have business services, consumer products, light manufacturing, and technology. Give us on each one of those buckets. Could you give us a brief profile on your ideal target note in those fields, other than other than just size?
Jordan: Sure. So maybe what I’ll do to try to be succinct and in the interest of time is this talk about the common threads that that we would look for that apply across all four of those verticals. So even though we’re investing in companies that might compete in very different industries, there are kind of fundamental common threads that we’re looking for. And so those include things like customer retention. So we’ll go back in time and we’ll review spend patterns and understand when customers were lost. What happened there? When new customers were won? How did that happen? How sticky are those relationships, so both on dollar revenue retention, and then the retention of the relationship that’s really important, regardless of which of those four verticals, we’re looking at.
Margin stability. So there certainly has to be an actionable growth opportunity, we’re not the right fit. But we’re also not chasing sort of the shiny object, the next new thing, we’re looking for companies that have a fundamental value proposition, they have high revenue retention, sticky customer relationships, ability to generate consistent a consistent margin profile. So that means when say for a manufacturing company material prices, right now are going up across the board, the ability for that company, on balance to pass through those price increases to their customer shows up in gross margins, right, and it says a lot about the value add of that company and the relationships they have with the customer base. So those things are important things like competitive position within the industry.
But then at the end of the day, past all those quantitative metrics, ultimately, the biggest driver of our decisions to wire funds that close are the people we want to work with people we like and trust. High integrity is high integrity, whether we’re talking about a manufacturing company, a consumer products company, a professional services company, or a software company. So at the end of the day, there are quantitative metrics that we look for. And they’re common threads across those four verticals. But ultimately, it’s it’s the the integrity and the personal fit the culture of the company and the enjoyment working together that should be there for both sides. Otherwise, it’s probably not the right solution.
Patrick: Well, you touch on one area, on that key thing with the integrity that I consistently see with everybody I speak with, and that’s you cannot eliminate the human element in mergers and acquisitions. Okay, there, there is not, you know, the news where Amazon buys Whole Foods. It’s not Company A, Company B. It is a group of people choosing to partner with another group of people. And if everything works, you know, one plus one equals six. And so that’s something that resonates for everybody I’ve spoken with it, that’s the determining, determining factor is the people.
Jordan: 100% agree. And I think the best outcomes are those where both parties spend sufficient time, which doesn’t mean a transaction needs to drag on for months on end, but spend sufficient time getting to know one another, beyond walking through the line items on an income statement, but really getting to know one another, getting to know one another’s goals, and confirming that if it’s a founder that’s seeking a full exit, I’ve poured a lot of cases my entire life into building this company. Are these the stewards of my business that I’m going to be proud to hand the keys over to? Or if if somebody who’s doing a majority recap and is going to stay involved?
Do I like these people? Do I enjoy working with these people? Am I gonna have fun at board meetings, it’s just gonna be a fun process over the coming years, or am I just looking for liquidity at close, and I’m going to dread every conversation with my new partner post close. In those situations, we’re typically not going to be interested. So we really do want there to be a good two way fit. And that sets up a win win partnership. And the most attractive opportunities for us are those where the seller is spending as much time being selective, doing reverse due diligence during those reference calls getting to know us, and vice versa. And we confirm that there’s just great alignment, and it’s going to be a fun partnership post close.
Patrick: One of the things that struck me, you’d mentioned through the process as your research, I would just think as your owner and founder, in most cases, your attention all your focus is on your company and getting out there just day to day, getting sales done serving customers, things like that. But then you get through go through the diligence process. And you’ve got the opportunity where somebody else is looking at your numbers and looking at him with a different perspective. And I’m just curious, when you’re talking about customer retention and things like that. I imagine if I were going through that process, I would probably have an epiphany or two about my firm, and by somebody else coming in as a partner with me, say, hey, here’s some areas for you of opportunity. Did you know this and they could be right in front of me, but I didn’t see him. I’m just curious. Have you experienced that with your investments where you just created these aha moments with with your targets and all of a sudden they were just really excited because oh, I didn’t even see this. We can do this tomorrow.
Jordan: Absolutely, it does happen. So there are situations during the due diligence process, when that post goes plan is starting to be formulated, and everyone’s collaborating on for the areas of focus and where the investment is going to go post close. And it’s fairly common for. So we’ll do playback sessions where we’ll take our analysis, we’ve cut up the data, and we’ll play back our conclusions. Hey, here’s what we think we’re seeing in the information. Here’s our conclusions we’re drawing, tell us where we’re right, tell us where we’re off. And that’s part of our process of getting educated on the business during due diligence. But I think as a byproduct of that, what you’re describing absolutely plays out where the founders saying, well, intuitively, I knew that, but I’ve never seen it sort of quantified. I’ve never seen it presented that way. And that then leads to additional ideas. And it’s a fun collaborative process.
Patrick: I just think that hits the ground running where and outside of M&A they’re the people say, well, somebody’s got a big liquidity event. So they’re probably just going to kick back now and stay, you know, run out their time. But I think this is just invigorates management, saying here are these new options, we never realized, and they’re right at our fingertips.
Jordan: They can go both ways. Yeah, depending on the founder’s objective there, we have certainly invested in companies where the founder was very transparent that my goal is 100% liquidity. And I want to step away from the business as soon as possible. And depending on the composition of the leadership team that’s there, we can come up with a plan, whether it’s immediately at close or over some transition period for the founder to do that. But there are a lot of other cases where the founders objective is to take out a significant amount of liquidity.
But they are energized about the future, they do want to help scale the company to the next level, they want to partner to support the company with capital, but they also want a partner who’s going to be value add and roll up their sleeves and help execute on that roadmap. And both situations are fine. But certainly that situation where the founder is checking the box on the liquidity objective, but is re energized in the business about taking it through its next phase of growth. Those are really fun situations. And that’s part of why we love doing what we’re doing.
Patrick: I can imagine, you probably have a case or two where owner was going to check out after 24 months and things are going so much funny, just you know, I’m gonna stick around a little longer.
Jordan: That can happen.
Patrick: Okay, great. With with deals down the lower middle market, you’re dealing with owners and founders, and I mentioned the human element in mergers and acquisitions. And one of the things that comes up is, is fear. And it happens to there’s a lot of stress and a lot of drama, in mergers and acquisitions, because you get a lot of money at stake. And also this is, you know, a once in a lifetime or generational event for these owners and founders. And there’s a conflict there and is created not because there’s anything bad, it’s just you have one experienced party, which is the buyer who’s going through these events many times. And then the seller where this is their first this is their first time and it’s with their own money it’s their own, you know, business online.
So there’s a lot of tension to make sure that things go smoothly. And just things start coming up that probably the the owner founder didn’t expect. And that creates stress and you go through the diligence process. And then you get to this area called the indemnification conversation where what the with the buyer says is look, you know, we’re making a bet on this, we just need to protect ourselves. You know, if if something goes wrong post closing that we didn’t know about, we need some way to get remedy we need some way to just you know, limit our exposure on this this is market this happens everywhere. It also we need to go through this process.
But what the seller hears is okay after I told you everything I know, I cooperated in diligence. And now you’re telling me that even though I told you everything I know, I can be on the hook for something I didn’t know about? Why should I pay for something you missed? So you can get attention in their what’s been nice as the development in the insurance industry of what’s called rep and warranty insurance. And it’s an insurance policy, it literally steps in the shoes of the seller that says okay, based on the buyer’s diligence of the seller reps, if any of those reps end up, you know not being accurate and that inaccuracy costs the buyer buyer instead of going to the seller to pull back escrow funds or get remedy come to the insurance company, the insurance company will come in there and pay your loss.
Buyers like this because they get certainty of collection if there is a breach without you know, much, much waiting time. Sellers love it because they get a clean exit. They don’t have to worry about a clawback. They don’t have to worry about a large escrow the insurance policy covers most of the action escrow or if not, you know, there’s not gonna be a further clawback beyond that. And so it’s been a nice, elegant solution that removes the tension and removes the conflict, particularly when you want to start transitioning into integration, you know, post closing, and so forth. So it doesn’t step in in that way. And so it’s been nice.
The news is, in the last year, this product rep and warranty insurance is available for deals as low as $15 million in transaction value. It was usually reserved for nine figure deals. And the more that parties are aware of the availability of this, the more active they can get it and engage in the perception now pre COVID was only for the big guys it’ss not for our lower middle market. Not the case. And this is right, right in your area, Jordan. I’m not sure you know, good, bad or indifferent. I mean, don’t listen to me, good, bad or indifferent. What experience have you had with rep and warranty?
Jordan: That well, you summarized it well. And we can empathize with being on both sides of the table. Because we as a seller, we’ve been in that seat before. And certainly as a buyer, that’s what we do every day. So fully appreciate the value that reps and warranties policy brings to the seller in particular, but both parties in terms of smoothing the way to not wrangling too much within the reps and warranties section of the purchase agreement, which is where absent of reps and warranties policy, the majority of the time is often spent negotiating specific wording within that reps and warranties section.
So going back, so we’ve been investing 17 years now, going back 10 1215 years ago, the introduction of reps and warranties coverage was really suited towards transactions that were significantly upmarket, from where we’re investing. And so more recently, like you mentioned, it’s become more common. And it’s also become more common in our internal dialogue. So we have not purchased a policy yet. But it’s, it’s becoming increasingly common for that to be part of the discussion. And I suspect as reps and warranties policies become more widely available for the size of transactions that we’re investing in, which generally are in the five to $30 million enterprise value transactions. It’s only a matter of time before we’ll introduce that, as a solution.
Patrick: Jordan, as we’re going through, we’re recording this right about midpoint of 2021. And I it’s safe to say we’re probably at the beginning of the end of the pandemic, and there’s activity going on and everything. From your perspective, what do you see either M&A in general or Montage Partners in particular on, you know, what are your thoughts on trends going into end of year 2021?
Jordan: Yeah, interesting. So a couple things. One, high valuations is a very widely covered topic right now. So it’s a good time to sell if you’re a founder. But I’m not going to focus on that one. Because I think that’s pretty, pretty widely covered out there in the media, the potential likelihood of a capital gains increase is also pretty widely covered and expected. So many more, two more interesting trends that I’ll comment on are one you touched on earlier, which is the growing universe of independent sponsors. So like we talked about, that creates another option for a founder seeking liquidity, but it also creates some homework in the sense that you got to be careful. There are folks within that universe who aren’t as experienced as others who compete in that universe.
So you got to get to know the people and understand the source of funds. And that takes time to invest. And then the other interesting trend is, I would say, over the past 17 years, since the inception of our firm, within the lower middle market, sellers have become more sophisticated. And what I mean by that is looking beyond price. So when when a seller truly has a good sense for what’s market, how the transaction process works, whether that’s because they’ve done their own homework independently, or whether that’s because they have a great M&A attorney or an investment banker involved, somebody who’s giving him good advice. They know where companies like there’s trade on a multiple basis, they know where purchase price should be.
And so as long as they’re checking that box and accomplishing their liquidity goal and getting a full fair purchase price, becoming more sophisticated about that next layer of getting to know the people like we talked about earlier, so we see founders increasingly spending more time getting to know us as buyers, which is great. Doing reference calls asking for introductions to other founders who have entrusted us with their baby that they’ve built. And devoting a lot of time to talking about the post close plan, evaluating things like is there a good cultural fit so even though as a investor, we’re different from a strategic buyer that’s going to come in and integrate the company.
We have our own culture at our firm, and the founder who is concerned about making sure that there’s a good cultural fit among the people who are going to be on the board representing that private equity firm at their company, that that meshes well with the culture of the people who are at their company that they care deeply about, in most cases. That’s time well spent. And we’re seeing that become increasingly common. So beyond high valuations, the potential for increasing capital gains. The two things that come to mind there that are maybe more interesting are sophistication of sellers and the time spent evaluating the people who are involved, and then also the growing universe of independent sponsors.
Patrick: That’s real interesting. This is the first time I’ve heard that with, you know, the sophistication, the education of sellers. And I think that’s probably their sophistication of their knowledge base growth is leading to more successful mergers now.
Jordan: I think that’s right, I think there’s better information out there, it’s more easily accessed. And therefore, relative to 15 years ago, if I’m a founder who’s built a successful company in my industry, but I’ve never been through an M&A transaction before, I can learn much faster today than I think was easy to do 15 years ago, because of the prevalence of information that’s out there.
Patrick: And also news gets out within the M&A community, if you’re an organization is making acquisitions, and they and you’re, you’re not as good at integrating post closing, that word gets around, people learn about that. And so sellers aren’t necessarily looking at the top number on on the LOI. They’re they’re looking deeper, which that’s very, very encouraging.
Jordan: Absolutely, you hit the nail on the head, I mean, one of those areas to be cautious for as a seller is sure you get that indication of interest, you get the indicative terms, you get the LOI. And headline, enterprise value says this, you’re comparing one against another. Look at the structure, and then also get to know the people involved. And back to that integrity point. And the track record point. Does the firm you’re talking to have a history of retracing or changing purchase price or really grinding later during the purchase agreement. And some firms do and some firms don’t.
And some firms like we pride ourselves on taking a long term relationship oriented approach where we can serve up reference calls with anyone we’ve bought a business from before, because we pride ourselves on doing what we said we’re going to do treating people well. And 5, 6, 7 years post closing, we want to have a positive relationship with that founder. Because we take very seriously the fact that it is an emotional once in a lifetime event. And we take our stewardship of that company very seriously. Not everyone does. And so spending the time to investigate that I think will it’ll end up paying off in the long term because of the importance of the event and ultimately be worthwhile and make for a smoother transaction and a better partnership post flows for everybody.
Patrick: Well, that’s no surprise that Montage Partners has been doing this for 17 years. Very, very clear. Jordan, you’ve got a great story. Montage Partners has a great story. How can our audience members find you?
Jordan: Sure. So it’d be firstly on our website, which is montagepartners.com. So that’s www.m o n t a g e p a r t n e r s dot com. www.montagepartners.com. There’s a contact form there. We have team bios there so it’s easy to find contact details for anyone on our team and reach out directly. You can also find us on social media. So LinkedIn, Twitter, Facebook, and reach out that way as well.
Patrick: Well, Jordan Tate of Montage Partners in Arizona is our first private equity firm in Arizona that we’ve met. Real pleasure having you Jordan, and I wish you all the success as we go forward.
Jordan: Thanks, Patrick. Appreciate you having me on, and good to speak again.
On this week’s episode of M&A Masters, we are joined by Ryan Milligan, Partner of ParkerGale. Guided by their principle – “products that matter, cultures that last” – ParkerGale is a small private equity firm that focuses on profitable, lower middle market technology companies and the convergence of private equity and software.
“Let’s just be transparent, and let’s just give everyone the answers to the test,” Ryan says of the empathy he has learned in the market – take the competitive advantage off the table and make it about the people.
We chat with Ryan about his journey to building a successful company and culture in ParkerGale, as well as:
Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Service. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Ryan Milligan, partner of ParkerGale. ParkerGale, is a Chicago based private equity firm that focuses on lower middle market technology companies, and is guided by their principal: products that matter, cultures that last. And on a personal level, I’m especially pleased to have Ryan here today because it was ParkerGale’s podcast, which is entitled The Private Equity Funcast that opened the entire private equity world to me four and a half, five years ago. And I’m eternally grateful for that. So Ryan, welcome to the show.
Ryan Milligan: Thank you so much, saying thank you so much for having me. It’s always fun to hear. Hear that. And we get in the history of that a little bit. But no, this is a treat. So thank you for having us.
Patrick: Now, we’ll get we’ll get into the funcast and ParkerGale, and just a lot of groundbreaking things that you started doing years ago ahead ahead of other private equity firms on a lot of levels. So I’m really looking forward to it. But before we do that, let’s talk about you. What brought you to this point your career?
Ryan: Yeah, good question. Um, yeah, a lot, a lot of a lot of things along the way. But no, I mean, I’ve always I had always, you know, for us for kind of software, or things are software and private equity, you know, in the in the convergence of those things. And, and then, you know with ParkerGale became more and more is becoming more and more the convergence of how do you run, having a perspective on how you run a small software company as well. So, you know, kind of the convergence of those things, I always had an interest in software and tech, I mean, back to, I went to Boston College, and I worked at the help desk. So my job and my job and in college, just to pay for, you know, for meals, I guess I’d call it was cleaning out antiviral and anti spyware and all that stuff from you know, unknowing, fellow students’ computers and things like that.
But then, I was a finance degree and went into went into investment banking blindly, you know, not really understanding what that was, and that was drinking from the firehose, but, you know, kind of horrible at the same time, so that had that cocktail for a couple couple years. But then I joined it, you know, a group that became the software team at, at a larger private equity firm, and we were having fun together, over really, for me eight years, was kind of my tenure at that spot. And that’s really when we decided that, you know, we like this thing, we’re doing these small software businesses and how you run them and, and having a perspective on that, and how you how you build a company, how you build a culture, you find people you want to work with, and live with for five, six years, and hopefully do good things.
And that manifested itself in forming ParkerGale, and then those are the things that you know, he referenced the funcast, but that’s those are the types of things that we spend every day talking about in our walls outside our walls publicly, privately. And now we feel like we’ve got something going on at ParkerGale, that we’re just trying to do things a little differently every day and be really good at the types of things that we’re looking for. So that’s that’s what led me to this in a nutshell.
Patrick: Well, what really is striking is your first introduction with software is working on a help desk. So a lot of the goal of companies and folks both in and outside of technology, if you’re trying to help customers, you’re trying to solve problems. And you were at the granule granular level, then of solving people’s problems. And you’re, you know, a technologist dealing with non tech people. So that must have been real impressionable for you.
Ryan: Yeah, I get you know, we talk a lot about empathy. So, yeah, it definitely helped me build empathy for for people’s problems. And then also the people trying to solve those problems and things like that. So for sure.
Patrick: Well, let’s transition over at ParkerGale, and I always ask my guests, you know, to get a feel about culture of a firm and so for this kind of come up, find out why they came up with the name they came up with because unlike law firms and insurance firms that name their firm after their founder, there was no Parker and there has been no Gale at ParkerGale.
Ryan: Yep, that’s correct. No, it’s funny, and I appreciate you asking us because it’s actually been it’s probably been three years since since we kind of told this. I’ve told this story. So takes us back. So a nice little trip down memory memory lane. But yeah, we did have a few rules. You kind of already went there. You know, we said no bodies of water, no ski, ski hills, no cross streets, you know, things like that. And we actually, you know, we had a lot of internal discussions. There’s, so story a little bit, but one of my partners so Jim Milberry, who you know, well, was the godfather of the PE funcast and and then Devin, he pulled Devin in and they kind of got that whole thing started. But Jim is a boxer.
So you know, we were, Jim is I was a professional boxer, I boxed on the amateur level. But you know, we were thrown around things like Dempsey Capital for Jack Dempsey, and lots of different names. But what actually exists in our bones is, you know, we do these personality tests, and actually a lot of us like in aesthetics, of all things, if you can believe that. And Devin, actually, my partner kind of came up with this idea, but it was based in Chicago, and Frank Lloyd Wright, the architect has Chicago roots. And he had a career that was going well, but he kind of saw what he was doing. He wanted to do more of it and do it independently. So he kind of branched off and started his own thing.
And we were looking at ways to kind of play off of that. And in Chicago, in the Chicagoland area, there’s a couple houses still even two are ones called the Parker House. And then there’s one called the Gale House. And those names kind of jelled off each other well enough, and ParkerGale.com was available. That’s always important to check before you solidify your name. But we kind of made that our thing. And it was it was a little bit of the attitude, a little bit of the aesthetics, a little bit of the Chicago roots. And all that kind of came together that said, this was something we came up with together, not on the backs of just one name, or one idea and things like that. And it’s kind of stuck with us ever since. So that’s that’s where we came in. That’s how ParkerGale was born.
Patrick: You know, I think is a great iconic reference because is homage, to your area of Chicago. And also, I mean, I would tell you coming from California here that is the most trendy style of architecture now by state of California in the last maybe seven, eight years. So you went from, you know, the mission style to the Mediterranean style, you know, and and now it’s a Frank Lloyd Wright, which which is there and I would say that the little history note nugget for you on Frank Lloyd Wright is he designed the city hall for the city of San Rafael people outside of California called San Rafael but it’s San Rafael. So it was highlighted in the movie Gatica. So I know you guys like doing a lot of movie references in your thing. So that’s mine, to Jim Milberry is getting that good.
Ryan: No it’s great. It actually and it paid off. So I’ll expand on the story a little bit. It’s already it’s already paid off. You know, you talk about karma and stuff like that. So I grew up in Iowa. I grew up in Des Moines, Iowa. I was born in Chicago grew up in Iowa, though, and we were looking at we own a company called DealerBuilt now. DealerBuilt is based based in Mason City, Iowa. Like 10s of 1000s of people not very small town. Okay. My dad had a lake house in Clear Lake which is attached to Mason City. So I’ve been to Mason City. Nobody’s, been amazing city. Well, so I go to visit DealerBuilt, Jim and I drive to DeakerBuilt offices. Turns out the only hotel in town is the last Frank Lloyd Wright standing hotel in the country. So we’re meeting with the founder and the CEO. We breakfast in the restaurant at the last standing Frank Frank Lloyd Wright Hotel in the country. So that was like, we’re just everybody sitting there. Both sides like huh, okay, like this, this is probably supposed to happen. So anyway, it’s fun when things like that come together.
Patrick: It is really nice how they circle around. Give me a little bit more background with regard to ParkerGale. You’ve got the passion and in capability and skills, and the appetite for technology, you can get a hardware software. Why the lower middle market avenue because you’ve been around for a few years, you haven’t ramped up, tell me about your commitment to the lower middle market and your targets there.
Ryan: Yeah, it’s just yeah, we like again, it comes back to the convergence of software, which we like and we think that’s a trend that is just a good one, it’s a good space to be involved in. Obviously, the last 12 months has pushed the world to a place where we’re relying more and more on software every day, to do the work that we’re all trying to do. So that existed, you know, we do like getting involved in these, you know, it’s for us, it’s either a founder own situation where there’s a transition, or corporate carve outs, or maybe a consolidation and bringing things together. But for all of those there’s a certain level of business building and scaling and kind of work that needs to be done where there’s products you know, it’s products that matter cultures that last we’re kind of adding process sticks to that as well because we’ve been expanding our our ops team.
But we just like that work that we you know, we like we like the space we like companies that are doing well but need resource. And that’s what we bring to the table resource in a perspective. For companies that are succeeding, but to continue to succeed, there’s a certain either level of resource and some perspective that they need to continue on. And we’re looking for the convergence of those things. So we think we’ve built a firm that knows how to find those, how to engage in those conversations the right way, in a way that is received while on the other end. And people feel like, we care. And this is all we do. And this is what we’re looking for, that we have credibility, to get that deal done, we have credibility to make that transition the right way. And that gets into how you do it in the culture that you’re building and how you take care of people and things like that.
But then also, like harder skills, perspective about products and how products are built and what customers are looking for, and how you learn from your customers and build that back into the product and all those feedback loops. So we do come into this with an operational bend that we think is fun to engage in and and help and and bring all those things to the table. So and then for us, yeah, we it’s hard to do all that stuff. If you get too big, because there’s, you know, private equity firms, private equity, by its nature is kind of their the incentive is to get bigger and bigger and bigger, because there’s fees and things like that. So there’s kind of a gravitational pull out of this space. And we, because I think we’d a lot of conversations about it in the formation of our firm, are we ever religion to stay where we’re at, within reason, and keep doing just more of this thing better? That makes sense. So yeah, that’s kind of where we’re at why we operate where we do?
Patrick: Well I appreciate how you fight that temptation to scale up as things get bigger. And I also appreciate the commitment you have to the lower middle market, because quite frankly, if you’re an owner and founder, you’re not doing this, I’m gonna we’ll talk about this over and over again. But they’re not experienced in doing M&A they’re experiencing experience in doing what they do. And when they come to some inflection point, they don’t know where to turn. And unfortunately, what will happen is, if they’re uninformed, they don’t know where to look, then they’re going to default to either a strategic that may not have their best interests at heart, or they’re going to look at an institution, and it’s just brand name, I heard about them, let’s go there.
And they will, you know, be underserved. They’ll get overlooked. And I think they’ll get overcharged. And the more that we can highlight organizations like yours, that it not only, you know, know what you’re doing, you can deliver on execution. But you’ve got the passion, you really want to do this. And you’ve had the experience, because I’ve heard this on your podcast, where you’ll have recommendations, you’re dealing with owner owners and founders that built something from nothing, but they did it their way. And that’s that whole learning curve and new experience they have as they bring in outsiders to come and get them to that next level. And you’re so experienced in that.
Ryan: Yeah, I think and and that is yes, that’s and it’s finding that balance of understanding what got them there. And then Brent, how you how you bring your perspective to the table in that way. But even before that point, I mean, that is a good that you kind of just described why the funcast exists. And if you look at our website, we try to be we try to do a lot of writing. And when it really comes down to is transparency. So yeah, we do think our strategy, our approach to all that was, you know, I think private equity was getting to a point where it was trading, you said it, they haven’t done this before, they don’t understand what it is they don’t understand what they’re getting into, necessarily, because they haven’t been through it before.
And some private equity folks, I do think treat that information gap as a competitive advantage. Well, we kind of said, let’s just be transparent. And let’s give everybody the answers to the test. Like just put it out there. The lemons problem, the fact that you understand more than the person you’re selling to and all that like that, just put it out there, explain to them what it means explain to them what it how it’s going to be have, you know, forecast what a tough conversation looks like. Forecast what you’re trying to accomplish, and why. You know, the more people have heard exactly what the deal is, before a decision is made, the faster you can go because there’s no surprises and people know what they’re getting into.
So it’s kind of do that lead with our lead with our implied you know, competitive advantage. Just take that off the table. Talk about what we’re going to do and and then you got to be able to back it up and then do that do those things over five or six years and then you know, we’re now you know, we’ve been doing this for a while so then we can refer back to the people that heard it at the beginning. They’ve now been through a full cycle and a success story and say they call them. So that’s that’s kind of been our approach.
Patrick: All now since you’ve opened ParkerGale. I learned about private equity and mergers and acquisitions. Well, I mean, the number of PE firms has just exploded. We’re we’re an account of north of 4000, private equity firms in the US. Majority of them are targeting middle and lower middle market. And so they’re as, as more competitors come into this space, what I like about a space filling up as it becomes sustainable, because you have to have innovation, and services, quality wise go up, costs go down, things get more efficient, a lot of good benefits come out, you know, for competitive advantage. And ParkerGale is unique in this and that you have made some innovations in focusing years ahead of the competition. I’d like you to talk about this, because in this modern era, now, people are talking about the importance of culture.
And they’ve been paying lip service to culture, you know, the last 10 years, but there’s a competitive advantage to it. And so now, people are talking about it more, but it’s still more art than science. And your organization, you’ve spoken about this. I invite you to go and take a look at private equity funcast episodes with you’re actively working to measure culture, and not only identify it, or define it, but measure it. And so why don’t you talk about that, because that’s something that you bring to the table that, you know, everybody’s all into closing a deal. But it’s it’s the it’s the post acquisition, you know, that’s where real magic needs to happen. And so talk about the efforts you have done in the strides you you’ve taken.
Ryan: Sure, yeah, I think it for us, yeah, it comes down to yeah, it’s taking care of your people, which are really the assets of the company. And, you know, and we’ve we’ve invested in that we, you know, I talked about the the taglines that we come up with, you know, we have, you know, two full time resources basically just focused on the talent practices of our companies and bringing more of those talent practices into our companies. But, yeah, culture is kind of a stew that’s created from a whole list of things that we’re doing that wouldn’t you know, what it comes down to is, you know, within companies communication, you know, consistency, feedback, alignment, you know, all these different things.
But yeah, culture specifically, you know, the combination of communication and the consistency and then listening to your organization, I mean, that just comes down to a process that you put in place that goes out into the company on a regular basis, we use a tool called culture IQ, that full disclosure is a portfolio company of ours. So that’s fortuitous, you know, creating this listening organization, that you create a baseline, it basically comes through a survey process, that you go out into the company, and you invite them to respond to a bunch of different attributes and react perspectives and things like that about the company. And that ends up in scores that are baseline metrics for the company and how you’re doing on different parameters.
So that might be alignment, that might be communication, that might be innovation, you know, things like that. And you can look at it by team and by a group or manager and things like that direct reports. So if you open up that conversation, and you measure it, you’re listening, and then you look at it, and then usually the best practice for companies is to then look at where you’re strong look at where you want to be stronger. And then they basically commit, create committees to address those things. And a lot of times, we would recommend that the executive team, you know, not even make it it’s not like the CEO is the chair of each committee, you kind of push some of the control of those decisions further down in the organization. You got committees to give some of your star people some authority to work on how do we improve this thing? And what are the actionable insights that would come out of this to increase those scores?
And then you do follow up, you know, pulse, checks, from time to time, and you measure it. And our CEOs, actually, it’s kind of fun. Sometimes we’ll put, you know, line graphs of how they’re doing on different attributes, and you show them how they’re doing versus the other leaders of the companies and things like that. And it just turns out that turns out the CEOs tend to be a little competitive. And that’ll get their attention. But then you can ask yourself, Well, why is this one doing this? Why is this one doing this? And you can start to you know, apply pain medicine or things like that to, to each company situation. But yeah, that’s that’s, that is kind of like an overall management, or just measuring tool of the ether that exists in a company, I think.
Of all the things that we bring to the table, whether it’s leader, you know, org design or leadership development or manager training, or how you hire, you know, how you onboard all those things are in support of culture as much as the analytical side of measuring culture, I think. So that’s been something that and we’ve been doing this long enough where eventually, you know, I think, through time, then we can actually start to look at some harder data because we haven’t really gone through the exercise yet, but we will have, you look at a p&l and try to Is there any correlation between these improvements and how that performs or this margin or a top line or and things like that. So overall, that’s just kind of been our approach. And the nice thing about that is the intangible that I think is a tangible benefit.
But the intangible is that if you are focused on that, you’re actually making those companies a better place to work for the people that are in. So if that’s not, you know, if, as a backdrop, the rest of your career, if all these things that you’re doing to try to generate better returns for your investors, I also happen to make the 40, 60 hours a week that everybody takes away from their family to go spend it a company more enjoyable and better and more fulfilling. Then, you know, I don’t know what’s better than that. If we can kind of converge those two things. So that is a fun and nice thing that we kind of have in the back of our mind. And try to live to is we’re as we’re doing this work in private equity.
Patrick: And I think with most of the target companies, you’re dealing with owners and founders, how, what percentage maybe, are just looking for an exit? And what percentage are rolling over and saying, hey, I want to I want to see this story play out. So I’m staying I’d like to stay what’s what’s the ratio?
Ryan: Yes, it’s it’s across the board, it’s probably seven, I’m going from gut 70. Like 75% are maintaining some participation, and to go forward. Oftentimes, an ongoing advisory board type role. In some instances, there’s either a family situation or just something going on where they want a clean break, and there’s a transition usually do an heir apparent that type of thing. But yeah, when we can, we try to at least maintain relationship and contact in contact with the founder. And that’s probably the split.
Patrick: I think it’s just another value add that you’re you’re delivering, as it look, owner and founder you’re rolling over, we’re not changing your company, you know, ground wise, we’re gonna sit there and we’re going to watch as the culture, we’re going to maintain it, protect the good stuff, and just see how it evolves. And that’s gotta give them peace of mind. Gives you an advantage over other organizations that may be sitting there saying, oh, we’re the best we’re gonna get you big, you’re gonna make this kind of returning, you know, come on with us because we’re bigger, faster, wider, all that other stuff.
Ryan: Yeah, we can’t we kind of, we relieve the burden of we caught. Somebody came up with this phrase, the chief worry officer. So there’s a point where you build a business and you’ve kind of done it, you lead the way you lead by example, you’re doing a couple different jobs, you’re now making 10, 15 million in revenue, and it’s profitable. And it’s a good thing, and you feel like you made it you did. But there’s a point where then you start every opportunity you chase feels like a risk to you, you know, every new hire giving up some control, and you start feeling like every of every, then every risk in your mind that you take is yours.
Like I’m taking this risk. So that’s the chief worry officer. And we come in and we say, well, let’s, what if you just took that, what if we took that burden on we’ll call it opportunity not risk. And, you know, companies at a point need a hand at their backs and keep going, keep going got to progress. Got to make that hire, make the wrong one, we’ll do it again. You know, that’s, yeah, try to push that train forward. Because if not, there’s somebody else hungry. That was where they were 10 years ago, they’re gonna try to get you know, get back to where you are. And if you’re not pushing that train forward, then then something’s gonna happen.
So, so yeah, that’s, that is a dynamic that we kind of sell into and say, hey, you want you wanna just go off into the sunset, we will, you will convince you that you’ve left it in good hands. If you want to maintain involvement. You can put the bag of worries down and ride along and do the stuff you enjoy doing, and have some fun with and not feel like every incremental investment we make is from your pocketbook, you know, that type of thing. So yeah, that’s that is a dynamic that we we often see. And then I think we built our firm well to work with.
Patrick: I think, I think that that post integration focus that you have here is a real competitive advantage for. Profile wise, give me give me the profile of what your ideal target company is. What are you looking for?
Ryan: Yeah, I mean, there’s, it’s, it’s kind of, you know, I mean, so software, right, so that’s tons of those that are out there. We’re control investors. So that just means we buy majority only. So that can be 51% in a buy out. Buying out a founder that’s a partial buy can be 80%, it could be 100%. So that’s kind of a buyout. The smaller ones are more but you know, it can be kind of a recap. We can do carve outs from you know, sometimes businesses get embedded in in lost in larger companies. We’ve done carve outs as well. But that’s kind of what we’re looking for. Size wise, you know, 10 to 30 million in revenue, you know, you reference the amount of private equity firms out there.
So we’ve started to think through more, hey, should we work with an executive and put a couple things together out of the gate, you know, starting to play play more in that regard and try to create a formidable companies, that might be a couple smaller ones, before they come together. And we’ve kind of built our ops team to be able to support that type of initiative. But anyway, those are the overall parameters for our business they are, they’re probably number in a lot of cash, or at least profitable, they can be loosely profitable. But we don’t want to have a big burn position. They’re nice products that are standing on their own. And there’s a situation where there’s some sort of transition needed transition from a fall founder transition to a CEO, passing it down to an heir apparent.
Transition, where somebody wants to step out and somebody else needs to come in. Transition to a carve out that needs a company stood up and needs a lot of resources brought to the table to then have that kind of operating on its own without constraints and doing its own thing. So at the end of the day, that’s what we’re looking for. And then we kind of do our thing with it. And, you know, hopefully have a fun next five or six years.
Patrick: So and yeah, you’re based in Chicago, but you’re looking at things, opportunities all over the country.
Ryan: Yeah, really North American. Our headquarters are all currently based in the US. But we do have a lot of satellite offices in either Canada or Europe today. And some effort, you know, there’ll be satellite things that could be overseas and things like that. But yes, really domestically focused for us.
Patrick: Well, I want to circle around to something you’ve mentioned, where and what’s crazy, we’re talking about the transparency, which is really important to me, because for the longest time, private equity was a members only type of sector and the financial, institutional sections, because if you didn’t know about it, it was really hard to learn if you weren’t in the club, I mean, forget about learning, you couldn’t even reach out to people. And you could, you could demonstrate that by looking at websites and private equity firms where the old days, you couldn’t get any information about team members or anything. Now at least you’ve got not only pictures, but the contact information and stuff like that, which, you know, is a nice development out there.
But you also talk about transparency when you’re in negotiations with, you know, these inexperienced M&A counterparts. Yeah, you know, I, I believe that I mean, they’re not, they’re not naive, and, and just not experienced in doing deals, particularly when it’s their own, you know, their own firm, and you can’t remove the human element from M&A is not in a vacuum, there are risks out there. And, you know, you’ve got to lay those out. And there are a lot of times, if you can understand you’re dealing with an inexperienced owner and founder who’s just gone through a very rigorous due diligence process, we will call a thorough, but you know, they go through that process, and then they’re there through that. And then their attorney sits down with them, they have to talk about the indemnification provision, and not everybody explains to them upfront what that is and how it works.
But essentially, it’s in to be very simplistic is where the buyer tells the seller, I’ll tell you what, I know, we’ve done this due diligence, but in case we missed anything, and it costs us money, you got to pay that tip. And the response from you know, the very understandable responses. Well, wait a minute, I’m selling the company, you did the diligence, you can’t hold me responsible for something I didn’t know about, particularly years after this happens. And then the experienced buyer is going to have an immediate response is just going to say, yeah, well, I’m betting 10s of millions of dollars, that your memory is perfect. And you’ve told me everything, just not going to do that. And immediately that collaborative environment is at risk of becoming, you know, adversarial and worst case scenario. And the tragedy about that, is that all that can be avoided.
And the way you can avoid it is if there’s some risk out there, why don’t we put an insurance policy, the insurance industry came up with a product called reps and warranties insurance, which essentially looks at the diligence the buyer performed over the sellers reps. And for a couple bucks, the insurance company says I’ll tell you what, buyer, if you have if there’s a breach and you lose any money because of the breach, come to us we’ll give you a check. So the buyer has certainty that they can collect seller, two major benefits. Okay, first of all, the policy comes in and is going to replace it some if not all of an escrow. Those are the money that was going to be held back at purchase time, you know, and held for 12 to 18 months. Well now that’s released because you got an insurance policy there. So seller gets more cash at closing. Even better though, they get the peace of mind knowing that they get to keep all their cash because there’s no risk or variable Little risk of a clawback because if something bad happens, buyer goes to the insurance company, not to the seller, and that’s what we call a clean exit.
And I would tell you that if it’s done, right, this costs zero to a buyer, because the buyer simply offers this up, you know, this process rather than an escrow or reduced escrow. And the seller 99 times out of 100, in our experience, 99 times out of 100, they’ll go with it, and they’ll embrace it. And that speeds, you know, the process and negotiations, it lowers the temperature in the room, and you will avoid, you know, they may forgive the process, but they’ll never forget that feeling. And you can avoid all that, you know, but I you don’t take my my word for this. Ryan, good, bad or indifferent? What’s been your experience with rep and warranty on your deals?
Ryan: Yeah, it’s been, you know, it’s a tool, it’s kind of part of the, you know, it’s it’s just part of the process at this point for us, honestly. And I would say overall, in a good way, for sure. It’s, I mean, you described it, well, I’ll kind of just take it from the top and give my perspective on it. Because yeah, I think, so much of the time, and attention and angst, in a negotiation does come through these reps and warranties. And my experience has always, they seem like a big deal. In the negotiation, you know, once you’re in the legal docs, and have spent 60, 70% of your time on them, and money, and worry. And just thinking through hypotheticals, and honestly, in our experience, outside of like, you know, certain taxes or things like that, that come up, they’re not ever really touched again, or used to, like, but at the time, it seemed like a really big deal. very stressful, and just gets a lot of time and attention and all that.
So yeah, I do think, you know, I was probably a little skeptical at the start when it came up, because I was a little worried about, you know, seller then not feeling like they have skin in the game or, you know, for what they’re saying or doing and that type of thing. But you know, it’s been around for five, six years now, pretty ubiquitous. And I’ve never had an issue. It’s not, I mean, it’s not something I think a lot about, you know, once the deal’s done, it’s part of our process and things like that, and it does exactly what I think you do. You’re talking about you want to if you want to have a tough conversation, let’s have it be about what’s your role is going to be what’s your compensation going to be? What’s this going to be? What’s that going to be?
How are we going to work together going forward, you know, tell us a lot of political capital on a knowledge rep for some mundane, you know, employment law, or exhaustive diligence around that this thing that I didn’t even know what it was until the lawyer explained it to me, and why this three page paragraph, you know, needs to be adhere to having that the risk of that spread across kind of every deal, which gets the cost of these things down pretty meaningfully and take all of that stickiness out of what is the deal, which is a lot of work and angsty and a big, emotional moment for a seller and a big commitment on a buyers part.
Yeah, yeah, removing all that, from the conversation, I think has been, you know, a nice enabler for M&A transactions in particular, in my sector of the market, for people that are learning about these things for the first time.
So anything you can, you know, it’s kind of like a big release valve on the pressure on a seller for sure. For all that type of thing. So now we have good experience, we use them pretty much pretty much in every deal. And and yeah, why would why should somebody have to let millions of dollars sit still for 12 or 18 months when, you know, is when when you look at I think the history of reps being paid out on the the actual risk is quite low. So that’s, that’s just kind of my general perspective on it’s been positive.
Patrick: Yeah, I think the great development in why you’re really trying to speak about this from the rooftops is that rep and warranty was not available for deals under $100 million 18 to 20 months ago. And there are so many of these lower middle market deals, I mean, as low as $13 million, $12 million that are now eligible for rep and warranty and that’s a real big deal if you can save somebody a million dollars on a $15, $16 million deal and and the only way the word gets out about that is through the these kinds of conversations. And so I appreciate what you have there. And that’s the next you know, foray for us is not only just getting on the checklist for acquisitions, but for add ons and now it makes sense when not only you’re doing the big you know, platform but then you get the add ons and so that it you know, people don’t know about unless we put it out there.
So you know, I appreciate your perspective on this. Now Ryan, as we’re, you know, talking about now we’re getting I mean, we’re blinking it, we’re going to be in the mid part of 2021 where Clearly, I think at the beginning of the end of the pandemic, I probably won’t be eligible for a shot for another four months, the way things are going California, but, you know, give me a perspective on what trends do you see out there for the rest of the year? And this is technology, ParkerGale, what do you see?
Ryan: Yeah, I think so I’ll start with just kind of the software side of things. Yeah, I think software has been a good place to be. You know, it’s more important than ever, for everybody to do their jobs, you know, at the end of the day, so. So that’s a good thing. And that’s gonna sustain. Now with that, there’s gonna be more competition, more capital, more firms and all that. So it’s a good time to be a seller of a software business, you know, as well. So that’s something that we need to get navigated. But underneath all that, just talking about what, what I think, is interesting, you know, people want data at their fingertips.
And that’s kind of right data at the right time. So I think there’s been more, we invest a lot in b2b enterprise software, those are a lot of there’s a lot of data and systems of record, and you have to go find it, things like that. But I do think just thinking about right data, right place, right time, and the efficiency and getting to that whatever it is, you need, you know, even in your even you can tell Microsoft even as Apple, you know, people use email and phone every day, when you see autofills and it guessing about things and stuff like that, like that, that all gets and that’s not easy stuff that’s going into long histories of databases and things like that, kind of bring it into the surface. So that’s that really is kind of an analytic trend.
Patrick: Real helpful for passwords, though.
Ryan: No passwords, that’s a whole other topic. Well, I’m gonna stop talking about passwords. Everybody needs to, yes, security is a big thing. Um, but um, that gets also into automation. So, machine learning, and AI is an overused term. But it is becoming much more practically important. I do think and necessary. So loosely speaking, automation, automating tasks, having things just happen in the background, things that happen again, and again, taking the human element out of it, and having a machine do something for you learn and then do it again. Building that into your technology, I think can really help a user and that’ll be all finished up with kind of my lap. But that that theme of a user is a big theme, I think for software as well. Dashboarding. So that’s another way of just saying like bringing to the surface.
So having one place to go to just see the things that you care about. That’s something that we’re trying to embed a lot into, into a lot of our software solutions, and things like that. So I think dashboarding is is a big topic around how you present data in an eloquent way. But really what all these things are, there’s a theme here, what it kind of comes down to, I think, is UI and UX. So you know, user interface, user experience, how it looks and feels, and the front end of that is just more and more important. And then so late, that’s where the pandemic really comes in. So, quick aside, my dad’s in his 60s, and he was one of those holdouts that he probably didn’t have his email on his phone until about two years ago, okay, like he fought it tooth and nail.
He had a flip phone, all that stuff. Well, he uses zoom now. Okay. So he’s familiar, and usability and that interface. And so it basically did a couple things. One that is becoming more and more important every year as people that are used to phones and how how easy that is to use, get graduated and, you know, leadership positions. At the same time, we just forced people that were less comfortable with technology to get comfortable. So I think there’s like this big convergence of people who care, we’re going to use more technology and care more about usability. So I’m less focused on like new uses of software, but more of the execution of the software that I bring into market and how users experience that software, if that makes sense.
Patrick: So you’re going there going from can we do it to? How do we make the experience better?
Ryan: Yeah, how do you do it? And we do like that, because that’s an that gets into an exit. So we don’t need to like recreate the world, or do sciency stuff, we can bring some science elements into it, but it’s really about understanding how that is how they want. It’s not creating new technology. It’s it’s changing the way people interact with it, which is less revolutionary, but it is, I think it is making people’s experience and their lives better and how they interact with that. So those bringing that into older spaces, or more tired spaces are ones that weren’t given attention. Because it’s kind of boring and stuff like that, I think is an interesting trend.
For us to go re examine and think about how the companies we own even that’s a big topic is how do we listen to our customers, learn from our customers, not guess what they want, or just let them figure it out? How do we create that feedback loop, filter that into our product owners and our developers and then give that back to them in a better way. I think that’ll be important. So those overall, those are the big trends. We like to space overall. You know, I wish there were less people like me looking at it. But we like where we are. And that’s how we’re kind of playing.
Patrick: Well, there’s no shortage of opportunities out there, because there’s a lot out there. And there’s, you know, everything is easier. I mean, you see is the website and they were tracking that when you did, you know, ecommerce, and purchasing online and so forth. So yeah, that’s gonna keep evolving. So you know, very, very well done. Ryan Milligan of ParkerGale, our audience members find you.
Ryan: Yeah, we try to be easy to find. Yeah, I mean, anybody can send me an email to ryan@ParkerGale.com. Our website is ParkerGale.com. We do have blogs, and we publish on our LinkedIn, you know, our perspectives and thoughts and things like that. So we try to be open to receive people however they want to reach out. Don’t be a stranger. We tried it, we say, you know, karma, like we try to just be I’ll take any conversation, we try to be as helpful as we can to as many people as we can. Because we all view ourselves as having at least 20-30 year careers left and something I do today, might pay off in 15 years. So if we can be helpful down the road, even if it’s not, you, we’ll get introduced to somebody that helps us get introduced to somebody and that’ll be cool for us too. So happy to help, happy to listen, happy to engage and reach out anytime.
Patrick: If anybody wanted to go in an anonymous low profile insight to really get a feel for this organization, its members, its culture and everything. Highly recommend Private Equity Funcast and is everywhere that the podcasts are available, but highly recommended great stuff. There’s no shortage.
Ryan: Yeah, it’s on Apple, and Google Play and you know, all that stuff. And yeah, there’s a fun one going on right now. It’s that date this but the there’s a March Madness, business books edition, where our ops team are all debating the best business books and people can engage with that. So yeah, check us out. We try not to take ourselves too seriously and have some fun from time to time as well.
Patrick: Fantastic. Well, Ryan, thanks again for joining us and best of luck to you guys the rest of the year.
Ryan: Thank you. You know, I appreciate you being a listener and engaging with us. So best of luck to you.
Our guest for this week’s episode of M&A Masters is Scott MacLaren, Partner of The Sterling Group in Houston. The Sterling Group is a private equity firm, one of the oldest in the country, and currently has $4 billion of assets under management.
Scott did not start off in private equity – he studied at the United States Military Academy at West Point, started business school after serving in the Army, and then finally found his private equity calling after working as a consultant. He started recruiting heavily for the middle market, and has now been with Sterling for seven years making investments in the industrial sector.
We chat with Scott about his path to The Sterling Group, as well as:
Patrick Stroth: Hello there I’m Patrick Stroth, 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 Scott MacLaren, Partner of The Sterling Group. Based in Houston, Texas, The Sterling Group is a middle market private equity firm that builds winning businesses for customers, employees and investors, and Scott it’s just a real great pleasure to have you here. Welcome to the show.
Scott MacLaren: Thanks, Patrick. Appreciate you having me on.
Patrick: Now I’m looking for I’m looking forward to talking about Sterling and your approach to a lot of things, but before we get into that let’s set the table. Why don’t you talk about yourself. Tell us what got you to this point in your career.
Scott: Yeah, no absolutely. And you know my path to private equity was fairly non traditional. So I did my undergrad at the United States Military Academy at West Point. I went there because I wanted to get a good a good education but also wanted to serve my country. And I entered before nine 911 so that definition of serving the country certainly evolved over time. I graduated went to US Army Ranger School and met my platoon. Served as a platoon leader, spent 15 months deployed to Iraq during the now famous Troop Surge. And while I enjoyed leading soldiers and I liked the Army, it wasn’t what I wanted to do forever.
So after completing company commander in the army I applied to business school and went to Wharton and you know to be honest entering business school, I didn’t really know exactly what private equity was. I went into business school with the intention of being a management consultant or an investment banker or one of those you know traditional jobs you would think about in business school. It was probably my second year before I fully grasped what private equity was and that’s when I really started to focus and shift my efforts that way. The tough part was getting hired in private equity straight out of business school when you have a military background and no banking or consulting experience, it was really difficult.
So I decided to go to BCG and do consulting immediately after business school and get some of those hard skills that I felt like I needed to make a transition into private equity. And you know I enjoyed working at BCG and I enjoyed the projects that I worked on. Most of my clients were Fortune 500 companies and I thought about staying but you know what I didn’t like was it there was no ownership. You know you you work a lot of clients that are Fortune 500 companies. You run into middle managers there who are very risk averse and a lot of them you know we’re just trying to continue their career, so they could get to that retirement point. Collect that pension or you know maybe they weren’t risk averse and they liked your proposal and you liked your ideas but as a consultant you’re just too expensive to keep off from implementation.
So you never get to see a finished product or even if you do get to see the finished product, you personally don’t have upside in that. And so as I was thinking through where I wanted my career to go I really focused back on private equity and started recruiting heavily for PE in the middle market where I felt that my skill set that I had developed both those soft skills that I learned leading in the military which I think are directly applicable to leading and driving improvement in the company. And then those hard skills that I picked up and consulting. And so after two years you know I started applying and started to talk to firms and fortunately for me Sterling Group took a bet on me and I’ve been here for over seven years now. Have closed almost 30 transactions, which a handful of which has been platform investments. And then the vast majority or a large portion have been add on acquisitions of various sizes.
Patrick: Well I hope you never get tired of hearing this but first of all and from the bottom of my heart thank you very much for your service and good for you to see how you managed to progress through this from zero background into creating opportunities for yourself. And I completely understand if you get to a point where you want to have passion and you want to make a change or make a difference or at least have some kind of impact that you could feel. You just kept looking you didn’t just settle down on it so that brings you over to The Sterling Group and as you, let’s talk about Sterling Group from from what you and I gathered in our first conversation, it’s among, if not the oldest, private equity firm in the country so tell us about Sterling
Scott: Sure so The Sterling Group we are a Houston, Texas based operationally focused middle market private equity firm. We make control investments in the industrial sector. We define industrial is manufacturing, distribution or services companies. We’re investing out of our fifth fund which is a $2 billion fund that we raised last year. A typical target for us is 100 million to 750 million total enterprise value company, and we primarily invest in founder or family owned businesses or corporate carve outs. We also occasionally buy assets from other institutional investors, but that is less prevalent compared to the other two types of companies. And we currently have 10 portfolio companies. Sterling was started in 1982, as you pointed out, one of the oldest private equity firms in the country. And the gentleman that started his name is Gordon Cain.
Gordon was an operator and he had run chemical plants for many years. And in his 70s, he decided he wanted to be an entrepreneur. So there’s there’s hope for all of us to be an entrepreneur eventually. So he started buying businesses in in spaces that he knew well. And, you know, this was the 1980s. So it was sort of a wild west era of leveraged buyouts. And it was a newer concept, the LBO was, you know, very new to a lot of folks. And there were certainly a lot less firms doing it versus today. And in 1987, Gordon acquired several chemical plants and grouped them together and called them Cain Chemical. He paid about a billion dollars at the time, got 97.5% leverage from bank on the deal. Something you could never do in today’s LBO market as things have progressed, but again, sort of the wild west era, and he put 25 million of equity on top of that, for the for the total purchase price.
They bought the companies. Gordon, obviously being an operator knew how to operate the companies. He implemented an esop an employee stock ownership program, so that the employees, 1300 of them, could participate in the upside of the investment and really got the employees together and on board with driving improvement in the company and increasing the profitability. Less than a year later, they sold the business for 2 billion to Occidental. So they made 44 times their original investment. More than 1000 employees made $100,000. 57 became millionaires. And keep in mind, that’s a 1988 dolllars, when when those amounts were were fairly significant. Not that they are not significant now, but but that’s big money, for sure.
Patrick: Yeah, that’s real money. Yes.
Scott: Yep. You know, the employees, it’s funny employees took out a full page ad in the Wall Street Journal thanking him a Harvard Business School case was written about his team. But that was really the most notable point beginning of Sterling Group. And they continue to operate and do deals all the way up until 2001, in sort of what I would call past the hat fashion. So you know, they would go talk to a company about buying them doing an LBO. And, you know, to get the equity, they would pass the hat around to friends, collect it up and get the deal done. And that worked for them. And they were quite successful with it for a number of years, until a point where the number of private equity firms had increased in the space. Competition was more significant.
And other private equity firms had raised institutional dollars in committed funds. And so then that pitch changed a little bit in the sense of, if you’re a seller, are you going to sell to the person says, don’t worry about it, I’m gonna pass the hat around and get the money or some of that has committed institutional dollars, saying no, my investors are contractually obligated, and we have this money. And so that is when Sterling started raising committed funds. Raised the first one in 2001. I joined in fund three, and it was an 825 million fund, we did fund four, which was a billion and a quarter, and now we’re on fund five, a $2 billion fund.
Patrick: Clearly, you’ve got a track record of success, and you’ve got the longevity. You’re flexible, flexible enough to make a change as the market and, you know, keep keep a step ahead of the competition. So well done for you and Sterling. But Scott, as you know, there are over 4000 private equity firms out there today. You know, what does the Sterling Group bring other, you know, in addition to its legacy, what do they bring to the table that the others may not be doing?
Scott: Yeah, in 4000 is the first time I’ve heard that number, but that is a big number. So I’m gonna tell you just in the seven years that I’ve been in the industry, the number of new firms that come every single year, it clearly is an industry that continues to grow. But you know, what we do, we have been around for nearly four decades. In the big three differentiators, I always point folks to one, we are operationally focused, and I’ll talk about that in a minute. Two, we push incentives deep within an organization, and we are a true partner. I’ll talk about that a little bit more in a minute. And then lastly, we have 40 years, almost 40 years of experience. And through those 40 years, we’ve interacted with a variety of different companies on a variety of different initiatives.
And we have a playbook that we can bring to the table that we know helps to generate and create value. Just on that first point operationally focused. I think a lot of private equity firms like to say they’re operationally focused. And you know, folks say, Well, what does that mean? In you know, the firm saying, are they actually truly operationally focused? And I’ll tell you what that means to us at Sterling. And look, we invest in industries that that are inherently not sexy. And we find that exciting. I mean, we we own companies that make trailer axles that that make bathtubs, I mean, things that you just don’t think about, but we all love it. We’re all operators at heart. We roll up our sleeves and we get to work right alongside our management team. You know, just an example of this, we have a program that we call The Year Away. And this is a little unique compared to all of our peers. I don’t know anybody else that does it. But every, every investment professional that joins us out of their MBA program, we send a portfolio company for a year, where they embed with a management team. And they work on the most important initiatives at the company, and report to that CEO at the management team.
And we do this for a variety of reasons. But we think it’s a very invaluable experience, because allows our people to learn how to drive change, improve an organization and create value at a middle market industrial company, which is an environment, I can tell you, as I spent my year away, it is different than the Army, it is different than certainly working in investment bank in New York, it is different than being a consultant for a Fortune 500 company. And it’s an experience as an investor, if you’re out there looking and partnering with middle market, industrial companies, you ought to have that on your resume in order to be really a true partner, and understand the companies and the way they function. And what is feasible to get done with those companies, when you invest in partner with them.
Patrick: I think before you get to the next part I clearly operational is in your DNA just from the founder story, okay, and to incorporate and inculcate your investment executives in there, where you’re embedding them for a year, that only, you know, builds familiarity for the professionals in there that get familiarity from the management team that’s working with them. And it just shows you’re going to some additional loyalty and commitment that’s in there, both sides because of that year away. So I would picture you know, the the physician being sent off to Alaska, you know, once once he got his degree, and he stuck there for a year, but I think is a very, very positive and unique way, and you’re walking the walk with your own people. So I think that’s fantastic.
Scott: Agree. No, it’s everybody that’s done the year away comes back, I think with a completely different perspective about what is feasible, and you’ll never look at investment the same way. You’ll never look at a middle market company the same way. And we’ve never had a CEO turn down the opportunity to have a you know, post MBA quality investment professional join their team and report to him for a year. Could be because we pay for it. But it also could be because they know that person’s driving value. But it’s been a really successful program for us in developing our folks here at Sterling.
Patrick: Great. Now your next point, the second one.
Scott: Yeah. So we push incentives deep within the organization, because we want to be a true partner, you know, just like Gordon did in the 80s, with the esop. And of course, we don’t do esop’s now there’s some tax implications to that. But one of our big tenants is to push options and equity, deep in our portfolio company so the employees can participate in the upside. We think managers who are owners operate with a different mentality, and they’re able to embrace improvement initiatives, and incentivize to grow profitability. And option payouts at our companies can be, you know, quite large, how to deal that, that we exited recently that I was involved in, we had over 80 option holders, in those 80 option holders made more than $30 million in option proceeds.
And so, you know, for some of these managers, it could be a life changing amount of money, it can pay off mortgages. And you see people understand that at the beginning of your investment, and they will work hard and drive toward that goal of an exit of growing the business of improving the business to get an exit in order to achieve that. And it’s a that is probably one of my favorite parts of the job, to be honest.
Patrick: I think it’s also real generous move. I mean, it’s it’s strategically brilliant. Because if you’ve got buy in from the rank and file, okay, and you’re all going in the same direction, you’ve got, you know, communists of purpose, what better way to do it, and then you get the the outcome. I think the other thing that you touch on this, and I sincerely believe this is that mergers and acquisitions represent the most exciting business event out there. Some people would argue it’s IPOs. I think nothing has a greater chance of being a life changing or even generational change than a M&A transaction. I’ll tell you, you know, Scott, if you and I are doing our jobs, these life changing events happen. They happen faster, they happen cheaper, they happen simpler, and they’re happier. And who wouldn’t want to be part of that?
Scott: Agreed. Couldn’t agree more, Patrick. Absolutely. And then just lastly, so 40 years of experience, here at Sterling in it’s certainly what we have what’s called our seven levers, which are the seven areas over the last 35 to 40 years where we’ve learned there are opportunities to drive value creation. And so we sit down with the companies that we partner with, and we go through an entire strategic plan and layout when we’re gonna pull each one of these seven levers throughout the lifecycle of that investment, and get the employees and the managers on board with doing that. And we have experience from other companies where we’ve done this and can leverage that experience from the past, to help the companies that we’re working with now, to increase the probability of success on pulling each one of those levers successfully and growing the business. And so for me, those are the three big areas where I think we differentiate ourselves. You talk to other people, they may have different opinions, but those are the three that we certainly focus on.
Patrick: Well, tell me, you know, as we talk about mergers and acquisitions, usually, you know, the folks on the outside of M&A think they think of M&A as what they read in the newspaper, where you have Amazon buys Whole Foods. And in reality, it is a group of people choosing to work with another group of people. And the objective is one plus one equals five or six. However, these deals don’t happen in a vacuum, there’s risk. And when you got human beings involved, you got you know, fear, greed, worry, a lot of a lot of these elements out there that that the outside world doesn’t know about. And you know, quite frankly, a lot of the target owners and founders who don’t go through M&A day in and day out, they get surprised when they go through a due diligence process. And then at the end of that they get informed by their attorney.
Well, here’s this indemnification provision we need to talk about. And then they learn, wait a minute, I’m personally liable financially to my buyer, if something I have no idea about, and they didn’t find in diligence, will cost them money post deal. Wait a minute. You know, and all of a sudden, you get that injection, that you’re not able to hide behind a corporate veil. Your future, your wealth is at risk. And that can create not only worry and fear, but some distrust. And the tragedy is, you know, these types of interruptions and so forth. You know, they’re they’re reasonable, but they’re avoidable. I mean, on the buyer side, look, they don’t want to be stuck holding a lemon.
And on the seller side, they want to be, you know, on the hook indefinitely for things that are out of their control. And they’ll they’ll protest, but an experienced buyer is going to say, well, you know, you’re asking me to bet 10s of millions of dollars that your memory is perfect. And I just can’t do that. Well, what’s been nice is that the insurance industry came in a few years ago, and introduced a product called reps and warranties insurance. And what it does is it looks at the seller reps in the purchase sale agreement, polls the buyer to find out what diligence the buyer did to make sure those reps was accurate as possible. And then they say, hey, for a couple bucks. If something blows up, and buyer you suffer financially, don’t go to the seller come to us, we will give you a check. Just show us the loss. And we will go in. Buyer has certainty of recovery.
So their downside is now been hedged. They also avoid the real uncomfortable situation of having to claw back funds from their their seller. On the sell side. Number one, they have more cash at closing because rather than having a large chunk of funds being set aside in an escrow account for cash on hand, the insurance policy covers 90% of that. So not only does the seller get 90, 90 plus percent cash at closing, they’ve got the peace of mind when they get to keep it because that risk of a clawback is now gone. It’s out with the insurance industry. And it’s it’s revolutionized mergers and acquisitions to the point where well your targets are in for your platforms are 100 million dollar transaction value and up, you’ve been very, very active in add ons, deals that are way under 100 million probably isn’t as low as 15 to 20 million. This product rep and warranty wasn’t available for those until now.
That’s now been something that’s been coming along now, in the same benefits for the larger transactions are now being available to the smaller ones. Which is great because saving two or $3 million for an owner and founder on a small deal. That’s a huge, huge difference. You know, but you don’t have to take my word for it. You know, Scott, good, bad or indifferent, tell us about your experience with rep and warranty.
Scott: Yeah, so over the past seven years, it was funny when I started in private equity, you know, rep and warranty insurance. It wasn’t it wasn’t that prevalent, you know, certainly it’s existed. It was used on select deals. But over the past, you know, five or so years, it’s really evolved. And I’ll tell you now, we’re at a point where I can’t think of the last deal I did where we didn’t have a rep and warranty policy. And as you mentioned, even on the smaller deals, it used to be you would have difficulty finding underwriters, to quote the smaller deals. People would say 20 million TV was kind of the mark, and now we’re at a point we quoted, we had, you know, put one out to market a bit ago and we have four different underwriters quote a deal that was under $20 million of TV, which is just really impressive and tells you how far this market has come.
But to your point in terms of what it’s allowed us to do, it creates doing a deal, particularly with um, I wouldn’t say it’s sellers, who aren’t normal sellers. So, you know, founder and family of businesses, they may only do one transaction in their entire life. And that transaction they’re looking at, and they’re looking at that, you know, the the purchase agreement, which is 100, you know, 120 page document. And lawyers, and I love lawyers, and we can’t do our job without lawyers, but they’re very good about making you think about that 1% scenario. And so you’ll get founders and family owned businesses that think of that purchase agreement, talk to the lawyer, and just get so petrified of, well, okay, I’m gonna sell the business and you’re gonna give me money.
But if there’s a clawback scenario, or a large portion of my money is going to get put in this escrow account, which earns, you know, very little to no interest and we don’t have access to it, it creates friction. In thinking back to before rep and warranty was as prevalent as it is, the conversations that we would have with sellers at that point in time. We’re fortunate to not have those conversations anymore, in the sense that we can have an insurance policy that backs them up on that it says, look, you were on define how much you were on the hook for you are on the hook for an ordinary rep amount of X. And anything beyond that the insurance company is going to pick up. And oh, by the way, your escrow is only going to be this many dollars versus in the past, you saw escrows that were 5%, maybe 10% total enterprise value.
Patrick: Yeah. 10% we saw.
Scott: Yeah, really big numbers that you when you’re thinking about calculating your proceeds, in your mind as all sellers do. Especially if they’re rolling in the deal and putting equity in incremental deal go for that was a large portion of the proceeds that we’re going to take off the table, right. And so the progression of rep and warranty insurance has alleviated a lot of those burdens. And like I said, I don’t see it going away. If anything, I just see it becoming more and more prevalent, more and more underwriters out there. And it continuing to be a part of of every single M&A transaction.
Patrick: Yeah, I mean, we’ve been really striving to get this on the checklist, if you got rep and warranty, at least is on the checklist. Now it’s something that you know, can get addressed on each deal. May not be a perfect fit for every particular deal. But the fact that it’s there is something to look up look at and and quite frankly, I mean, it is a tragedy if you’ve got avoidable situations where you’re taking wear and tear on people’s soul, because they get so fearful. It can be avoided. And here’s how it goes. And I would say on this on the on the buyer side, my goodness, the in a lot of cases, particularly where the buyer has leverage reps and warranties at no cost because 99 out of 100 sellers will pay the entire cost just to get the benefit of the of the indemnity indemnity transfer. They really really do appreciate it. Scott, now tell me because I had referenced this slightly, but we are talking about industrials, because you’re in Houston. So you’ve got the energy sector over there.
Patrick: Give me give me a profile of your ideal client. What is Sterling Group looking for now?
Scott: And be very clear. We don’t we don’t touch anything in energy. So it’s odd to be done here in Houston, and be one of the few private equity firms that that doesn’t touch the energy space, we touch the downstream a little bit but midstream, upstream, different types of investing different firms. It’s just, you know, Houston’s where the firm started. And we’ve stayed here, but the vast majority of our companies are outside of Houston, and certainly you know, most outside the state of Texas. But an ideal partner for us and ideal company, that would be a target is a good business. In a consistent industry. Typically, like I said earlier, usually not a sexy industry, usually an industry that folks don’t typically think about, that has a management team, whether it’s a founder or a family of corporate carve out management team that wants a partner that can help make a step change in their business and work with them to make that step change.
Or that has a you know, an industry that they know well that wants to partner with someone and go out. And can you continue to acquire competitors continue to grow through acquisition, we do many buy and builds. And oftentimes we’ll bump into founders in industries that think that they’ve created the best mousetrap. And oftentimes they have, and that allows them to go out there and swallow up competitors, or get the competitors to join the team. And then continue to grow and get the benefits of scale. And we’d like that playbook just as well. And we’ve partnered with with many folks in doing that.
Patrick: So they the partners, you’re looking for our management teams where they’re looking to, you know, they’ve reached perhaps an inflection point. And they want to stay on and see this through or do you have other situations where owner, founder, they just want out?
Scott: Yeah, we have we see both, probably equally as much. There are certain situations where you have bounders that have run the business for forever, and we’re looking for retirement. And and that’s fine. And oftentimes we’ll have those individuals sit on a board of directors and continue to help and advise and find a CEO that we all trust can run and grow business. But equally as much we see folks out there management teams that have gotten their business and grown it to a point where they know that that next level is a complexity that they’re uncomfortable with, and they want some help navigating that and growing the business. Or that next level requires capital that they may not have access to. Like I gave the example of out there doing a buy and build in an industry and that’s something that we can help them with and put in place a program that helps them do those add on acquisitions in an efficient manner. You know we’ll have portfolio companies that have made 12 13 14 acquisitions in their lifecycle with us.
Patrick: It’s just I can imagine the inflection point for them is they’re they’re too big to be small but they’re too small to be enterprise.
Scott: That’s a good way to put it. Agreed. Agreed. In looking at enterprise it can be daunting sometimes.
Patrick: And that’s the resource the private equity provides on that so that that’s fantastic not to mention the second bite of the apple for owners and founders. So there’s a real great value proposition which is why you’ve got the big growth in these PE firms by numbers so forth. Scott we’re well into 2021 right now we can see only the beginning of the end of the pandemic. Give me your thoughts or what trends do you see for manufacturers or for the industrials for Sterling Group as we go through into the next year or two. What do you see down the road?
Scott: Yeah, no it’s a good question. Yeah we’ll see I can make some predictions who knows if we’ll be right. I would say in the deal making environment first, I think we see a return to in person meetings. You know we have been doing deals throughout the pandemic, closed a couple last year, we’ve closed a couple of the beginning of this year. And started off a lot of Zoom meetings and folks but it’s really hard to get to know management team over zoom and it’s there’s not a replacement for an in person meeting when you’re getting to know a management team and getting to know a partner that’s going to be a significant partner for the next 5, 6, 7 years of your company’s of your company’s life.
So I see us returning back to these in person management meetings and we’ll see how that goes. I think there are other folks who disagree, but we’ll see. And I think the pace of deals right now it’s already back to I think pre pandemic levels. The number of deals out in the market right now it’s been surprising. From a more macro perspective um I can tell you what I’d really like to see. I really like to see us get an infrastructure bill done investment in infrastructure would be very beneficial to some our companies that we own in the space and I think much needed for us. So we’ll see how that turns out but it would be a nice tailwind to the the current environment we’re seeing with our businesses.
Patrick: For any of you out there that are in the industrial sector and you’re looking for some way to partner up and get past that inflection point really should look at The Sterling Group. Scott MacLaren how can our audience members reach you? How can they find you?
Scott: Yeah so our web pages www.sterling-group.com and I’m on there. My email’s on there. Feel free to reach out. Happy to talk to anybody and certainly always happy to talk to any potential companies out there thinking of partnership.
Patrick: Yeah let me highlight that also with the website because there’s more than one Sterling out there in the financial sector so it is sterling-group.com. And Scott absolute pleasure meeting you. Great to hear about the story. Again thanks for your service, and we wish you all the best going forward okay. Thank you.
Scott: Thank you. You, too, Patrick. Take care.
On this week’s episode of M&A Masters, we speak with Ed Bryant, President and CEO of Sampford Advisors. Sampford Advisors is the most active investment banking firm in Canada, focusing on the lower middle market tech sector, specifically software M&A. Sampford now has offices here in Austin, Texas, and was recently named by Axial as a member of the Top 20 Thought Leaders in the lower middle market for 2020.
We chat about the trends toward software investing, as well as:
Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters, where we speak with the leading experts in mergers and acquisitions, and we’re all about one thing here, that’s as a clean exit for owners, founders and their investors. Today I’m joined by Ed Bryant, President and CEO of Sampford Advisors. Sampford Advisors is the most active investment banking firm in Canada, focusing on the lower middle market tech sector, specifically software M&A. Sampford also has an office here in Austin, Texas. Ed was recently named by Axial as a member of the top 20 thought leaders in the lower middle market for 2020. So as we get into 2021, who better to have on to talk about M&A in the software space. Ed, thanks for joining me. Thanks for coming along.
Ed Bryant: Thanks, Patrick. Thanks for having me. I’m excited to talk today.
Patrick: Now, before we get into Sampford Advisors in in the tech, the tech sector, let’s set the table with our audience and give them a little context with you. How did you get to this point in your career?
Ed: Yeah, it’s, it’s involved a few continents and a few countries. So I grew up in the UK and graduated in 1996. So just before the first kind of real tech wave, I went and joined Morgan Stanley investment banking, focus on tech media telecom in the Hong Kong office, and then got poached by Deutsche Bank to move to Singapore. And then Deutsche Bank said you want to go to New York and every investment banker’s dream is working in New York like that, in terms of the deal flow and everything. It’s, it’s the investment banking Mecca, if that if that exists. So I jumped at that chance.
And I’ve always been kind of, you know, very flexible about where I moved to right, just really open minded about that. I was in New York for a total of about 12 years. Unfortunately, New York is great for investment banking, it’s not so great for family life. And so and balancing young kids and that sort of stuff. And randomly out of the blue in 2012, I got a call from a headhunter asking me if I wanted to be VP of m&a for a technology company, in Ottawa, Canada, of all places, and most people can’t find Ottawa, Canada on a map, even though it’s the capital. And I’d been here once before in the in the summer, and it was a beautiful city, and no one tells you how bad the winter is, and, but we jumped to the chance.
My wife is American, we don’t have any relations in Canada at all. I did that job for a bit, I got promoted to CFO, it was in the mid market tech sector, and there really wasn’t anyone doing what we do. So that’s when I made the leap five years ago, to say, I’ll start my own firm, and focus on mid market tech.
Patrick: And when you were coming around on there was Sampford. Obviously, you didn’t name it Ed Bryant Advisors at Sampford. And I always like asking this to get a feel for the cultures, you can tell a lot about a company by how it’s named. How did that come about?
Ed: Yes, it’s a good story, I was of the school of thought that I didn’t want it to sound like a one man band, right? Like, if you sounds bigger than you are, then you usually win better business than you. You can especially started off no one knew who we were or anything and, and so I spent a lot of time thinking about the name, all the names that I came up with, you know, you go search for the web address or the URL, and it’s unavailable, right. You can’t get a.com on anything these days. And then I heard a story about an Ottawa, a billionaire entrepreneur here who started nearly 100 companies and he names a lot of his companies after places from his childhood.
And so I thought that was kind of cool. It kind of had a little bit of personal meaning to it. So I, I was born in a village called Great Sampford in England, like a village of about 50 people I think it is, is a population. And as kind of saying Sampford Advisors that I just I was literally like, had GoDaddy up to look for the URL, and I just had punched in Sampford Advisors. And it was available in a.com. And I’m like, okay, Sampford Advisors it is. So it’s got lots of good personal meaning to me, and everything, but it also, it just sounded right. It sounded like an M&A advisory firm.
Patrick: So well, and also also you’re coming from that, that that real small setting, and then now you’re in focusing on the lower middle market. Let’s talk about that real quick, because it’s very easy for companies that start small and then as they grow their clients and their focus grows with it, and that’s not that’s not the case for you guys. So why the lower middle market? I’ve got my reasons I’d love to hear yours.
Ed: Yeah, I think it’s the most underserved. So I’m sitting there in that technology company, we were doing about 100 million in revenue. And there was one banker that called on me. And, and I thought initially, I was like, you know, maybe it’s just an Ottawa thing, like auto was a, you know, not Toronto. It’s not, you know, a big city. And but there’s a lot of technology companies here. It’s like they, they they nickname it the Silicon Valley of the North, but it’s not, I don’t know whether it’s justified or not, but and so I was just kind of left me kind of saying, like, Is there a gap in the market that matches up with what I do, I’m a, my heart, I’m a deal junkie, I love doing transactions.
But then also, the other side of the coin was that the middle market is the most active part of the market, there’s like, you know, especially in Canada, right. So there’s not really enough business for the big banks to go around, right. And they’re hyper competitive around all the big mandates and everything. And so we just found that focusing on the middle market, it was less competitive. We didn’t face You know, we faced really no competition in Canada from specialist technology firms. And so we just said, we’re going to do one thing, when and do it really well, we’re going to just focus on technology, we’re just going to focus on m&a and not capital raises or anything like that.
And we’re just going to focus on the middle market. And that laser focus, you know, five years on is really led us to significantly outperform any of our competitors, just because they don’t specialize like we do. And therefore, they can’t talk about the transactions the way we do, they can’t talk about the buyer universe, the way we do, they just are not well versed in valuation. So that is really paid dividends focusing on the middle market, rather than trying to focus on really large transactions.
Patrick: Yeah, and that’s a real special skill set is dealing with the M&A as opposed to capital raises because M&A I like to think about is the most exciting event in business. Okay, and unlike others would argue that maybe an IPO is a bigger deal or more exciting than than an M&A. But M&A has the potential to be a life changing event. And sometimes, in some cases, generational. And there are a lot of moving parts to it, there are a lot of unique things that happened, there’s a lot of stress, because again, you have this life changing event hanging in the balance. And that just adds to the complexity of the deals.
And the worry that’s out there and to be an organization focuses just on that transaction element, as opposed to the other services, you can help a client raise to three rounds. And that’s nice. But once you get to the real big, rubber meets the road on those M&A, you need someone that can handle that and knows all the ins and outs. And I think it’s also particularly great that you’ve got these great focus and services and expertise that you find in an institution like Goldman Sachs. But at the low at the lower middle market, targeting Goldman and the large institutions that are fabulous, we need them to handle Apple and Microsoft and all that. But, you know, the lower middle market is underserved where they have huge needs. And it doesn’t take a lot to get those meet needs met.
And to have somebody that has not only the bandwidth to handle it, the experience and the focus, but the desire. I mean, that’s what we’re trying to do is find organizations and shout out about organizations like Sampford, to say to people in the lower middle market in the middle market, hey, everything you need is right here. And had we not talked about it, they probably never would have heard about it. And unfortunately, they get underserved and overcharged if they just default to the brand names and the institution’s why I’m just so excited to meet more organizations like yours, that are helping these people with literally, again, life changing events.
Ed: And yeah, and and that is especially true in the mid market, right? Because a lot of the entrepreneurs that we help their life savings are tied up in their businesses, so they don’t have you know, they’ve poured everything into their business, not only their capital, but also their all their time. And so even for the middle market, it’s even more life changing, then, you know, for some of the large companies. And then you mentioned a good point, obviously, Goldman Sachs, obviously here in Toronto, like others are really good at M&A, but they can’t make enough money to cover their costs below $150 million deal size. And really, we find ourselves we never go up against the big guys on any of our deals. We’re going up against Deloitte or KPMG or PWC. And they don’t do enough technology deals to understand especially software to understand the market to understand the buyers and how how to think about valuation.
Patrick: So now you mentioned you’ve got the experience, the familiarity, and the focus particularly with that niche in the software, because technology just like healthcare, it’s more than software hardware is all these different, you know, buckets that can be filled. What else besides those three I just mentioned are the things that Sampford Advisors brings to the table?
Ed: Well, so you know, it’s understanding the business model and how to sell it is very important. So just really understanding like, how does the money flow? How does the company make money? Where do they sit in the marketplace, where what’s the competitive landscape look like? That’s really important. Because if you don’t understand that, you can’t sell it, right, you can’t sell it to someone, if you don’t understand what you’re selling. The other thing is that we know, you know, we made a big deal about pushing the private equity relationships.
So when I was at Deutsche Bank, we used to deal with all the big tier one, you know, private equity guys like Blackstone and Apollo and KKR, and all those guys. But they’re not the kind of folks that are buying businesses of sub $150 million in deal size. So we made a big push very early on seeing that the private equity wave was coming into tech. And so we have 500, plus middle market private equity relationships. And we we foster those very actively, just like we do our prospects, but then also the connectivity that we have. So we’re in Canada, but we have tons of connectivity into the US because myself, I was in the US for 12 years. My other senior guy in Texas has been there for a number of years.
And so we have strategic relationships as well that we can bring to the table for our clients. So I think that’s kind of you know, sector focus is really important, obviously, when thinking through this sort of stuff, but it’s also important when thinking through who’s the who you matchmaking with? And why, why should they care about buying a company out of Toronto for 20 million bucks or 30 million bucks or whatever it is? Really thinking through that. And that level of expertise is critical.
Patrick: Can you give us an idea of just how much because this is largely a US market here for us. But also I can say you’ve actually bridged Rubicon now, so we’re now International. Thanks to you guys. What percentage of your business deal either deal flow or sellers or buyers, give us a feel on how much work you’re doing Canada versus the US.
Ed: So most of the time, we’re representing Canadians but in honesty with selling them to Americans. So Americans have the most money, like both on the financial side, but also on the strategic side, the depth of the market capital markets is that so I would say last year 80, 90% of our deals were cross border representing a Canadian selling to an American. And at about the same percentage were private equity or private equity backed companies as well. So that’s, especially in the mid market. Like if you look at the overall M&A market, private equity makes up about 35-40% of software M&A deals, but in the mid market is much higher. I think it’s probably 60-70%. Because they do an add on acquisitions. So yeah, that’s that’s been an important kind of trend for us. But then most of our stuff is cross border.
Patrick: Is a lot of that, and we might address this later. But you know, since we’re on the subject right now, is is the idea of the lower middle market the volume of deals out there. Is it because software as an industry is just so fragmented?
Ed: Yes, yeah. So that really is like, either, you know, and there’s been so much more money, early stage money going into technology and software over the last 10-20 years. So and we see every day on the private equity side, private equity firms that have never invested in a software business are calling us and saying, we want to do our first software acquisition, what do you what do you have that you could show us? Because everyone realizes in you know, tech is outperforming and and they need exposure to that that piece. So yeah, it’s a very fragmented market across multiple different sub verticals within within software. And that lends itself to a lot of software companies that have kind of between five and 25 million of revenue, which is kind of our sweet spot.
Patrick: You roll out your your profile of an ideal client for you where were you guys just do fabulous work?
Ed: Yeah, so north of 5 million of revenue for sure. Mostly software, but we do do some telecom and kind of new media like Internet stuff as well. Mostly like bootstrapped companies as well. So not VC backed companies, we find that you know, the VCs are typically trying to roll the dice for for outsized outcome. And that makes it a little bit more difficult to get deals done in the mid market. Right? So, yeah, most of our companies, I would say like, of the 10 deals we did last year, I think most of them if not all of them were bootstrapped companies. And that leads itself to different profiles.
While that because they’re bootstrapped, they’ve been conservative about their cash flow and everything like that, which is actually an important metric, right. In terms of not, especially with the private equity guys, the private equity guys will pay very good multiples, but they won’t pay very good multiples for software businesses losing a lot of money, they want it to be breakeven or better. Otherwise, they probably don’t look at it. So that’s that’s the typical profile. And then I would say, most of our clients are probably have been at it for five to 10 years or more. And and looking, you know, this is their nest egg and looking to monetize on their nest egg and potentially retire.
Patrick: One of the biggest developments has happened in the M&A space. And we can talk about COVID later, but the ability to remove a real tense element of the M&A negotiations and that’s usually involving the indemnification where, you know, sellers don’t realize until they actually start hammering out the deal terms with the prospective buyer that the owner and founder can be held personally liable to the buyer for a breach of the seller reps. That happened after closing where it’s beyond the owners knowledge, they don’t not aware of it, but it’s yet their money or their home or their future. That’s on the hook.
And so that gets to be a very sensitive part in negotiations on what’s happened, the big developer in the last 18 months has been the insurance industry has come in, and they have an insurance tool called rep a warranty insurance again, was reserved for the you know, 100 million dollar plus deals, that essentially takes the indemnity indemnification obligation away from the seller transfers it to an insurance company. And therefore if there is a breach and the buyer suffers financially, buyer doesn’t pursue the seller, the buyer comes after the insurance company and collects the check is great, because then the buyer knows they can be made whole, they have a peace of mind and security.
For the seller, they get a clean exit, they usually have little or no money held back in escrow. And that in depth, indemnification, you know, burden that’s hanging over them. Now, that’s all removed. And it’s a great win win out there. And, you know, the news about the availability of rep and warranty for deals as low as 15 million in transaction value really was interrupted and didn’t get out there because you know, of the pandemic. And usually this information is shared during conferences and stuff. So I’m just curious, from your perspective, you know, good, bad or indifferent. Tell me about any experience that you guys have had with your clients and rep and warranty?
Ed: Yes, it’s very interesting because that that timeframe very much lines up with my experience. So like three or four years ago, none of our clients even considered it. And more recently, like, so we haven’t done a deal with reps and warranties insurance we’ve had, in the last 12 months, we’ve had a couple of clients get quotes for it, to kind of see where it kind of laid out versus the risk and then they made a determination that they didn’t need it. But we’ve actually got our first deal right now that has reps and warranties insurance. And from an M&A banker;s perspective, I would love all my deals to be done with reps and warranties insurance.
It makes my life a lot easier than haggling over some of the reps and warranties and the indemnifications. Especially now business around IP intellectual property is the biggest one that everyone always gets hung up on. And if you can’t have a knowledge qualifier, like, you know, you don’t you don’t know if you’re infringing someone’s patent, right, like how do you know your small Toronto based software company? How do you know if you’ve you’re infringing a competitor’s patent or someone else’s patent.
And when you get acquired by a big buyer, the spotlight gets thrown on you a little bit and then maybe attention from patent trolls or, or whatever it is. So this one that we’re doing right now like a few weeks away from closing and it will have reps and warranties insurance, but so far, I think I’m pretty encouraged by using it more and more. And people get more and more comfortable with that. And especially the on the buyer buyers side, like the buyers getting comfortable that they go to insurance company instead of the sellers, but I think it’s a great tool and I’d love to see more of it ,to be honest.
Patrick: What another investment banking firm shared with me is over a year ago, but I think it’s still pretty consistent is their observation was internally if a deal is insured is eight times more likely to close successfully than uninsured deals. So I think you got all that positive momentum going there. I would also emphasize that, when it comes to the cost of the insurance is often split evenly between buyer and seller. However, I have as we’re having conversations with strategics, now, where we essentially explain to them look, you can go to your target company and say, you have this much of an escrow and this size of an endemic indemnification. Or we will get insurance which will need you to cover the costs, you’ll now have either a tiny or no indemnity exposure, and the escrow is now the deductible of the policy, which is a fraction, okay, which way do you want to go?
I would tell you from experience that I’ve done this many deals, but 99 out of 100 deals, the seller will take that option to be insured, they just they do that move on. It’s just nice, because there are so many of these transactions happening in this now eligible part of the marketplace. So we’re very, very excited about that. I’m also reminded as you were talking about software a little while ago about a comment that I heard where somebody said, you know, software isn’t limited to just other technology firms. In the wake of McDonald’s buying an artificial intelligence firm a few years ago for a couple billion. You know, what, everybody is now a technology firm? Are you seeing are you seeing that? And, you know, share with me some other trends that you’ve seen with regard to software since the COVID, and so forth?
Ed: Yeah, I think, is financial and strategic buyers that haven’t historically bought software companies are realizing that everything is becoming technology enabled. So like you brought up a good point, McDonald’s, most of their recent acquisitions have not been of restaurants or anything to do with supply chain around food. They’re all around technology, you know, and they’re all about how do they, you know, serve their customers better through the use of technology. So McDonald’s is a great example. And I think, you know, we’re seeing more and more in our process is talking to non technology companies about buying our clients. And I think that’s, that’s very encouraging.
I would say, like I mentioned earlier, on the private equity side, we’re getting more and more calls, like every couple of weeks from private equity firm that has no, you know, we had one from any, you know, pretty much dominated energy private equity firm the other week that said, we need technology in our portfolio help us think through how do we do it? What should we buy that sort of stuff? What should our exposure be, but it’s so it’s clear that not only on the financial side, but also on the strategic side. Everyone’s very focused on tech. And I think that’s going to make tech M&A, you know, give it real tail winds behind it over the next few years as as not only technology companies buy technology companies, but non technology companies buy technology companies as well.
Patrick: Well Ed we’re now in a new year, and I love talking to thought leaders and you’re you’re recognized as a top 20 thought leader by Axial for lower middle market. Why don’t you share with the audience, what trends do you see either on a macro M&A sideboard for Sampford Advisors?
Ed: So I think we’re gonna be even busier than we were last year. So we, you know, we, we, you know, three x three x four x our business last year did 10 deals. I think we’re gonna do 20 plus deals this year. And I think, I think there’s a couple of things that are really fueling that, right. Our focus exclusively on tech, I think that helps a lot, right, the M&A market in general is, is is pretty hot. But with it within that tech is the hottest sector and maybe, maybe healthcare along with it, right. But like most of the other sectors are not experienced anywhere, like the volume or increase of transactions. I think the other thing as well is like, really what’s fueling a lot of the mid market now. Now, as I mentioned earlier, is the add on acquisitions that private equity guys are doing for their portfolio companies, and they’re getting more and more aggressive.
They’re doing them at a greater velocity. And so I think you’re going to see even more private equity backed M&A deals in the software space next year, or this year. Sorry, for sure. So I wouldn’t be surprised if we, you know, hit a new record in terms of the amount of tech and software m&a this year. The only, you know, nervousness for me is just like, you know, is there a more macro shock that could change that right? You know, the the equity markets are pretty strong. Right now and the valuations, especially for technology companies or public technology companies are really high. And the IPO market is really hot. So, you know, at some point, the the, the music stops and things slow down.
But I would think we’ve got enough legs on this, this momentum to kind of keep us, you know, carrying on through this year at peak kind of M&A volumes. So I think that’s, that’s my view, like more of this more of the same, like, really, if you look at last year, last year was a record in terms of the dollar volume going into software M&A. But we missed a quarter like we only read like, the second quarter was a terrible quarter for M&A. Right. And so really, that record number was hitting three quarters. And so I think, like, if the volume continues at the pace that it did in the fourth quarter will be way, way ahead of what we were last year.
Patrick: So has anything changed in in tech or software as a result of COVID? I mean, we always default and think of zoom. But, you know, any any observations you have on that front?
Ed: I think there’s a real bifurcation because there is a whole swath of technology companies that have been impacted by COVID. So like, if you like, we know, companies that do software for airports or software for travel agents, and anything that’s been economically exposed, those businesses, even though they’re software, or technology, companies are struggling as well. And so that’s actually then taken, I don’t know, how much percent of the market is taken out. But is it 20% 30% of technology companies that can’t be sold in this this environment?
So it’s almost like the same amount of capital is going off, the less opportunities, right. But the good software companies are still growing, I think they did have a bit of a pause right in terms of signing up new customers and that sort of stuff in in 2020. But that seems to have recovered a lot in the fourth quarter of last year. And so good software companies that are still growing and still getting sold. And if anything because of that scarcity, and the money, the amount of money that’s chasing them, valuations have increased through COVID. Which I, you know, as I sat here last March, you I wouldn’t have expected that for sure.
Patrick: Yeah, I would think that as people go to embrace technology that’s been around like zoom, and become more familiar, they’re more open to do other technological solutions for outsource and remote work and so forth. So I see a lot a lot of resources there that have been on the sideline that people just weren’t familiar with, were forced to learn and forced to get comfortable with. And now they’re their standard operating procedure.
Ed: Yeah, in any of those sectors that are remote work, or, you know, cybersecurity, anything that like, touches on facilitating a distributed workforce is is so hot right now is it’s crazy. And I wouldn’t under emphasize like, even like in the background, some of the network and security and cybersecurity, that sort of stuff that you don’t necessarily tie like zoom, you can look at and say okay, I get it, like zoom’s going through through the roof, because everyone’s doing video calls. But there’s all these other applications and software companies in the background that are really benefiting from from this newly distributed workforce. And and those valuations have gone pretty crazy.
Patrick: Well, Ed this has been real helpful, and very, very informative. I really appreciate this. And again, thanks for helping us step cross border ourselves here with this. How can our audience find you?
Ed: So I’m very active, and so is our firm on LinkedIn. So that’s probably the best place to find us. Google Sampford Advisors, and you’ll find us remember the P. But even if you or if you Google, Canada, tech, M&A we’ll come up in a lot of different places, but it’s yeah, Samfordadvisors.com. And then on LinkedIn, under Sampford Advisors, as well.
Patrick: While you’re number one in Canada, let’s see what you do with your outposts in Texas and see how you can grow that area because Texas is actually considered the Silicon Valley of the energy industry. And they’re going tech like you said, so. Best of luck. Thank you very much, Ed.
Ed: Thanks, Patrick. I really appreciate it.
On this week’s episode of M&A Masters, we chat with Ben Mimmack and Andy Waltman, Director of Investor Relations and Director, respectively, of private equity firm Baymark Partners.
Ben got his start in banking in London before coming to the US to attend SMU in Dallas. After completing business school, he went on to work in finance at American Airways before ultimately being brought on at Baymark Partners. Andy got his start in accounting, earning a CPA before moving into private equity at Energy Spectrum. He also went on to attend SMU, where he earned an MBA before being presented with the opportunity to work with Baymark.
We chat about private equity and working in the lower middle market, as well as…
Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today, I’m joined by Ben Mimmack, director of investor relations, and director Andy Waltman of Baymark Partners. Baymark Partners is a Dallas-based growth-oriented private equity firm acquiring growing middle market companies, providing owners with liquidity and resources to accelerate growth. Gentlemen, welcome to the podcast. Thanks for joining me today.
Andy Waltman: Thanks for having us.
Patrick: Now, before we get into Baymark Partners, let’s set the table and get a little context for our listeners. We can start with Ben here, but Ben and then Andy, tell us what led you to this point in your career?
Ben Mimmack: Well, Patrick, I grew up in the UK. You may be able to tell from my accent. Although I’ve been in the US for 10 years now. So I feel like it’s starting to disappear, but I did grow up in the UK. I went to university and law school. I was very briefly a practicing attorney. And then I worked in banking in London for several years before I came to the US and went to business school in Dallas at SMU. You’ll find there’s a very strong SMU presence at Baymark Partners. And in fact, when I was at business school, I interned with David and Tony at Baymark Partners in the early days of the life of the firm.
After business school, I went and worked in finance at American Airlines and spent the last five years of my time at American in the investor relations team there. And then when I was looking to do something a little bit different than big company, public company investor relations, the guys at Baymark called me up and said would you be interested in doing some work for us? And I jumped at the chance and I’ve been in Baymark since November of 2019. So I’m still relatively new to the PE space, but I think it’s fascinating. The kind of work we do is really very interesting. And I’m delighted to be on board.
Patrick: So it was a safe change from loss of airline miles you were getting to having your feet on the ground.
Ben: Yes, it’s more like real life, I would say. But given what’s happening with the airlines right now, you could say it was a very lucky escape.
Patrick: Very good. Andy.
Andy: Sure, sure. So, I would say I have a not a very typical background for private equity. I started my career, I came out of Trinity University about 11 years ago now. I came out with more of a typical accounting degree. Went down the Big Four path. I started at Price Waterhouse Cooper. Spent two years there in the audit and tax departments. Got my CPA, but I realized that public accounting world was just not for me. I was very fortunate. I got an opportunity early with an oil and gas private equity firm, Energy Spectrum here in Dallas, which was a fantastic firm.
I was there for five years. That was a smaller, about a billion, about $2 billion of assets under management, smaller firm and employee size. So I think we had about 20 professionals and I was in the financial reporting group there, but because of the size of the firm, I was able to do a lot there. And after a good again, five years there, I decided I kind of wanted to get out and do a little bit more of a wide range of investments rather than just purely midstream oil and gas.
And so I also went to SMU while I was still at Energy Spectrum. I got my MBA there. And then I went and found the opportunity with Baymark. And I’ve been with Baymark now for just over four years at the director level and I’ve been helping from everything from due diligence, acquiring companies to continue to work with those companies and our kind of portfolio development process.
Patrick: One of the things that I like to learn about what I’m meeting private equity firms is the founders are a lot more creative than in other industries such as the law or insurance. In those companies, they usually name their firms after the founders. It’s very boring. No creativity whatsoever. You can tell a lot about a firm by how they named itself. So, you know, tell us about Baymark Partners, how did it come up with its name. Give us a quick profile.
Ben: Sure. Well, Andy and I had to go back to our founders, David Hook and Tony Ludlow and ask them because we weren’t around when the company was named. You know, I think the true process might even be lost to history. They had to think about it for a bit, but I think it’s connected to the fact that David Hook, one of our founders grew up in Bay Village, Ohio.
So that’s probably where the bay came from. And he spent a lot of time in the Bay Area when he was a VC investor in the 80s and 90s. So it’s kind of a reference to those two. And I think, you know, they just wanted to make their mark when they set out. So you know, that’s where Baymark came from.
Patrick: And then the area that you guys are focusing largely is middle, lower middle market. Tell me about the area that you target there?
Ben: Yeah, I mean, I would say we’re a middle market firm. Probably if you want to refine it further, more of the lower middle market side then true middle middle market. But any company that two to $10 million EBITDA ranges is really in our sweet spot. We like margins of north of 10%. And, you know, really in terms of what we’re looking for in industries, we love services companies, we love tech-enabled companies, distribution companies, light manufacturing companies, you know, health care, anything in that kind of region.
But really, we’ve pretty industry agnostic. I’d say the only things we really want to take a look at our hospitality, restaurants and brick and mortar retail. Everything else we’ll at least take a look at. And I think, you know, certainly, David is very much a deal-focused individual. There’s no company out there that he at least at first glance doesn’t think he can make something interesting or do something interesting with. so we look at a lot of potential transactions, we throw them back and forth to each other and spitball whether we can make something happen.
And that’s, for a lot of us, probably the most interesting part of what we do. And, you know, we like the lower middle market for a number of reasons. You know, the companies that are populating in the middle market really are the bedrock of the US economy. You know, these companies that just provide 10, to, you know, 20 to 30 jobs in their communities that that do very interesting work to fill, you know, unheralded niches, a lot of times that you don’t even think that companies are required to fulfill. They do this work and in many cases, they’re entrepreneur-owned businesses that are looking to take the next step.
The people who run these companies, they know that they need to expand and grow and diversify, but they just don’t know how to do it. We love those. We love those kinds of companies because they have a lot of potential. And in many cases, they’re small enough that the inflation, the valuations are not as inflated as they are in other parts of the market. So we feel our knowledge and markets we look at, we can get some very, very interesting and good deals in the segments that we plan.
Patrick: Well, and there’s also a lot more lower middle market companies and unicorns out there. There are a lot more unicorns that people think.
Ben: That’s very true.
Patrick: I sincerely believe, and the reason why I reached out to you specifically is because if you want to make a difference, okay, the place to do it is in the lower middle market. And it’s sizable and it does as you say, it’s filling a lot of needs out there that otherwise wouldn’t be filled. People won’t even know they were there.
But they play key roles in their communities. They play big contributions for the lives of a lot more people than you realize. And it’s just not fair because if these smaller firms, they hit a ceiling, they don’t know where to go. And what happens often is they’re going to default and pick up the phone or reach out to a brand name or the institutions out there. And that is just a recipe for failure for them.
And, you know, and I mean that in a big way, because what happens is the larger institutions are scaled up, they’ll have limited solutions for smaller clients, they’re going to overlook them, they’re not going to be responsive. Whatever solutions they do provide may not be a fit because they don’t have the bandwidth to offer multiple solutions that could help fit a smaller firm’s individual needs. On top of all that, they’re going to overcharge them.
And so they will get less and pay more. And I have a real passion for the entrepreneurs out there and the people that started with nothing and created tremendous value. So anybody that’s out there to help get them to the next level and make them multiples of where they wanted to be, that does nothing but good. And the more that we can go ahead and highlight the presence of organizations like Baymark Partners, all the better. And so we’re both on the same page there. Let’s talk about some of the things that a private equity firm can do for an owner or founder versus what a strategic perspective suitor might bring.
Andy: Sure, sure. So this is, again, this is Andy. To talk about that, you know, we’re usually, I’ll kind of talk about what Baymark can bring and, you know, each private equity firm is going to be slightly different. And I think where Baymark is unique in relation to other private equity firms is our background. We just have for such a small firm, we have a very eclectic group of different backgrounds. I think we might have mentioned one of our founders, David Hook, had a lot of success out in the venture capital world.
He spent 25 years investing in companies out there. I think he invested in about 50 startup companies from sometime around the mid-80s to the mid-2000s, the OSS, I guess they’re called. And about 14 of those ended up going IPO and going public. So he has a lot of experience of, you know, those are even earlier than, you know, lower middle market.
Those are even smaller, you know, startup venture deals. And so he has a lot of experience, you know, growing companies, looking at the big picture saying, Hey, we’re here now, you know, how can we quadruple that in five years? And so, you know, we’ve had, you know, one company that had a great management team in place. We’ve had, you know, some companies that really need some other pieces, but we had one company we bought that had a really great management team in place. We don’t really have to make any tweaks there. The big thing that was missing there is just the vision.
They just didn’t have the imagination. We bought this company, they were about, you know, 12, 13 million dollars in sales and $2 million of EBITDA. And today they are closer to 60 million in sales and six and a half million of EBITDA. So I wish I could say all of our deals look like that. But that was an instance where they would say, okay, what’s the plan? What’s the vision? And now let’s actually go out and execute that. And while I’ll give David and Baymark credit for helping with the vision, I will say that company had a great team and they executed it very well. So that’s one example.
Our other founder, Tony Ludlow, he has a very eclectic background he has, he was an attorney for some time. He’s also a CPA. I think what really made him ideal for this world is he has a lot of operational experience. So he knows what it’s like to have a team of people working for him. You know, what it means to, you know, have to fire people whether they deserve it or not, whether it’s just something that has to be done, we have to cut 10% even if they don’t deserve it, you know?
So he’s had to live through that. He really has had that hands-on experience that a lot of entrepreneurs face on a day to day basis. And so he doesn’t have that just kind of pure spreadsheet mentality of like, Okay, this is what the spreadsheet does, we’re going to do. He knows, he understands that there’s a human element to this. And so I think starting with those two guys, that’s kind of spread through the culture of our firm that we don’t just have a spreadsheet mentality.
That we really try to understand what these entrepreneurs are trying to do and help them achieve those goals. But back to some more about kind of what the, what we can bring as a private equity firm, I think it depends on the company. We’ve had some companies where, a lot of the companies we work with we see this, where we have an entrepreneur who’s trying to wear every single hat in the business.
You know, when we want to talk to the accountant, we talk to the owner. When we want to talk to the operations manager, we talk to the owner. When we want to talk to the CEO, it’s the owner. And so, you know, we try to come in and say okay, what are you passionate about? What are you good at? You’re obviously a sales guy. You know how to sell. You love working with customers. And every time I talk to you about the accounting you, I can see you pulling your hair out. So let us help you.
We’re gonna bring in an accounting person, a CFO, you know, someone that can augment you, help your company, but we’re not looking to replace the entrepreneur. We’re not looking to bring in a whole bunch of people to kind of replace what he’s trying to do. It’s more of a, let’s take some things off that entrepreneur’s plate and really, you know, build out his team so he can focus on what he’s good on and we can have other skilled people in position to help build that company. Some of the things we’ve done with companies, we, you know, we obviously have kind of some of the typical benefits.
We have, obviously, access to financing, we have good relationships with banking. And Patrick, as you mentioned, you know, while we’re not a big firm at Baymark, we do work with I think, right now we have about nine portfolio companies in total that we work with. You know, we have scale in that regard, right? If we’re trying to negotiate new insurance terms we say Hey, we, you know, we’re looking to make these changes for a lot of our portfolio companies. And so that’s something, you know, we can get better deals because it’s not just a single small company doing it.
Sometimes it’s a whole portfolio companies who are looking to make a change. Or also act as an outsourced m&a department for our companies. We think the best way to grow a company if the owner thinks that we need to go out and make some acquisitions, we go out, we work with the brokers. Our network of brokers, business intermediary, then try to go find those acquisitions that fit the goals that we’re trying to do with our company. So each company is different, depending on what that company is, we try to help fill that hole, whether it be us or with adding people. So
Patrick: What I see there is you’re flexible enough where the portfolio company, particularly if they’ve got good management or whatever, if they need some day to day help, you’ve got resources there, or if they just want to be left alone, just get him some capital so they can execute more and then find other targets for growth. You can do that?
Andy: Yes, yes, while we do have operational experience and we’re comfortable in that role, that’s never what we’re looking to do because we have such a small firm, you know, our goal is to kind of set the plan and, and have the management teams execute that plan. But we do have the comfort to go in and be more hands-on if that’s what’s required. But again, it’s usually the ideal if we can, you know, help with the vision, help with the strategy, get the right people in place and then we try not to micromanage and let the companies execute the plan.
Patrick: Describe your ideal target. What are you looking for either, you know, as a portfolio company or for, you know, a partner to exit one of your portfolio companies? Either way.
Ben: Yeah, I mean, I can take this one and I think I addressed it earlier a little bit when I said, you know, we like the services, tech-enabled, distribution, manufacturing part of the world. You know, I can kind of go into a little more depth on that, but we like what everyone else likes. We’d like established and recurring revenue streams, we like to diversified customer base and higher retention rates and a competitive advantage, a nice moat, company based in part of the world that’s easy to get to. So all the usual requirements that everyone wants, but certainly I think we are willing to look past perhaps some issues that other firms may not be.
We certainly, as David is certainly more than once, we like companies with a little bit of hair on them for a couple of reasons. One, I think, as Andy mentioned, we have the expertise in our firm, I think to deal with issues that maybe other firms aren’t comfortable dealing with. And second, you know, you can often buy a good company for a very reasonable price if there is some issues that, you know, other people have been a little bit scared of. So, you know, and we’ll look at any of those companies that we think we can do something interesting with.
And I think one of the things that Baymark does a little bit differently than other companies and one of the other reasons we play in the lower middle spaces, if you can buy a company with a good multiple, then you don’t have to load it up with a huge amount of debt and then spend your whole time trying to pay the debt off before you exit the investment. We like to grow our companies. And it’s a lot easier to grow a company if you bought it for a more reasonable multiple and haven’t had to load it up with debt. So we’re certainly always looking for companies we can grow.
That’s how we like to make money is to increase revenues, increase profitability of our portfolio of companies. And then, you know, we like to send out companies on the way into the world, in better shape than we bought them. We’re not interested in buying a company that someone has spent years and years building up and then, you know, taking all profit and leaving it in a bad state. We want to buy a company, improve it, grow it and then sell it. And if we can make money doing that, then we’re very happy and if the company is better for having been owned by us, then that’s great.
Patrick: One of the big trends that’s out there nowadays is deals are now being, the rest is being transferred out through the use of rep and warranty insurance. I’m just curious because now the eligibility requirements for rep and warranty have come down from middle market down to lower middle market deals are now eligible. Tell me good, bad or indifferent, what kind of experience has Baymark Partners have with rep and warranty on any of their deals?
Ben: So we’ve used it on one occasion with a deal that we did actually quite early in the life of Baymark. And the reason we used it is because there was a kind of an asymmetric risk profile between the sellers, one of the sellers was going to take a lot more risk with the representations and warranties. And he wasn’t comfortable kind of being point man for some of these reps. And so we use the insurance as a way to kind of even the playing field amongst all the sellers.
So, you know, in those circumstances where you have a kind of asymmetric risk profile, then it works out very well. One of the other reasons we like it is, you know, it removes the escrow requirement. So that can be a way of getting a deal done that can be something that stands in the way otherwise. So, yeah, absolutely. We think there’s a place for it, where appropriately, we absolutely will use it. And certainly, you know, have had positive experiences with it in the past.
Patrick: Now, that was my second deal I ever did. That’s the exact scenario we had. We had a tech company that was being acquired by a publicly-traded company. And the tech company, you had one investor that had the lion’s share of the risk and you had 10 other investors, but their shares were so much smaller that that one lead investor, he was the deep pockets.
And so he was directing that. And fortunately for us, we had a very affable working buyer that agreed to go forward with rep and warranty to help out the seller because they wanted to make them happy. And, you know, it was simple. The seller paid for the premium, was happy to do it, the buyer was happy to not have to cover that expense but had a very happy acquisition target and the team came over. And it went very well.
So we can see that was been fortunate. The development that we’ve seen come through is not only is rep and warranty available for the sizeable deals but now it’s gotten to the price point where it’s not a bad idea for add ons. And so now as more frequent transactions are happening with add ons, if there’s that tool for an add on and that brings, you know, some cost benefits there’s another usage for it. So we like to trend as it’s going and we expect to see it become about as common as title insurance in real estate.
So as we record this today, we’re hopefully on the downside of the COVID-19, settle in place. You’re based in Texas and you’re on the verge of opening up. We’re in California. We hope to open up sometime next year, the way things are going. So give us your thoughts in the next 60 to 90 days and next quarter, what do you see is M&A trends either for Baymark partners or you guys, you know, getting yourself all geared up to get, you know, hit the race, or get out and start unboxing sprint or wait and see. What are you seeing out there?
Andy: Oh, that’s a good question. Right that, we’ve heard that question a lot. And we’ve been asking ourselves. We kind of talk about it weekly. And I would say it’s still early. We’ve actually had we’ve had to had kind of some deals in all parts of the pipeline that have been affected by this. And so we’ve had a couple that we were pretty far along in the process and we’re still trying to complete those deals, even with some of the uncertainty, we’ve been trying to monitor the company’s performance in this time and just trying to get an understanding of the core business and what, and how it’s, you know, how it’s navigating these times.
And so I would say right now, a lot of the lenders have been slow to react, or have been kind of, I guess, getting a little tense and a little tighter, which is understandable and something we would expect to see in this market. But we are working with some lenders who are still doing deals.
And another thing that slowed down some of the lenders we work with is obviously some of the banks we work with have been kind of underwater, trying to process some of these cares, PPP loans. So a lot of factors that have been, I would definitely say slowed the process down. But we still have, I would say pretty good visibility on a couple opportunities that we think will close over the next few months. You know, as far as new opportunities that we’re looking at, we do see some sellers who are still very interested in selling. They’re very confident in our business.
And I think the private equity firms that are going to do the best are going to have the ability to get a little creative, you know, build relationships in this time. I think, starting a deal from today and trying to buy it, it’s going to take a little more time than it normally would, but it’s important. You know, we’re really trying to build relationships with the companies, with the owners, try to keep expectations in line and do what we can to, if the company does go off and has a blip because of this, because of the Coronavirus, we try to do what we can to say, okay, we’re going to give it some time, see if it comes back.
Or, you know, develop some kind of creative structure where, you know, the seller’s still getting kind of what they wanted for their business even if they’re being slightly affected by what’s going on. So, you know, I think for now, it’s going to be a little bit of a slower process, but we’ve definitely been talking with again, other firms, other lenders. And deals are still going through, deals are still happening, just a little bit of a slower pace.
Patrick: With the result of this pandemic, it wasn’t a situation where we had a structural fiscal problem or something with the banking and the financial infrastructure here as opposed to 2008, 2009. So I think that even though you’ve got this headwind of all this activity for lenders right now, I think eventually they’re going to get back to what they usually do. They’ve got the resources to do it. I think that the one thing that’s been said about private equity for the last four years is they’ve got their stack of dry powder and it hasn’t gotten any smaller.
So I think as target prices start coming down and valuations come down a little bit, there could be some opportunities to move quickly if organizations are clear in their thing and what they want, and they’ve got a willing partner on the other side of the deal. I think we could see an uptick in activity. Maybe not immediately. However, I think as things start coming back to normal, there are some that are going to lead the trend and lead the activities and then others are going to be needing to catch up. And so that kind of activity can kind of build upon itself and get us a little momentum. So that’s an optimistic side from my perspective.
Ben: I know for one Baymark is very, very keen to continue doing deals. So, you know, we certainly see, you know, an opportunity in the next few months.
Patrick: Well, there are people out there that maybe wanting to reach out you to have that kind of conversation. Ben, Andy, how can our listeners find you?
Ben: So we’re on the web at baymarkpartners.com and we’re very easy to contact by email. I’m email@example.com. Andy is Andy@baymarkpartners.com. So, you know, we are always available to chat, to have an email exchange if you are interested in what we do and want to learn more. We’re happy to talk.
Patrick: Gentlemen, thank you very much. Absolute pleasure meeting you. And ladies and gentlemen, please look out for Baymark partners.
Ben: Thank you.
Andy: Thanks a lot, Patrick.
Drew Caylor, managing director, and the rest of the team at private equity firm WILsquare Capital have a passion for helping lower middle market companies grow bigger and better.
He says it’s all about the leaders at these companies and their commitment to making a difference to their people and the communities they’re in.
At WILsquare, they help create value through hands-on work with carefully selected businesses. It’s a level of service you won’t get at “brand-name” PE firms.
We take a deep dive into that topic, the post-pandemic M&A scene, and…
Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Drew Caylor, managing director of the private equity firm WILsquare Capital. Based in St. Louis, WILsquare was established by private equity and operational executives dedicated to provide financial capital and operating experience to lower middle market companies in the Midwest and South. Drew, thanks for joining me. Welcome to the show.
Drew Caylor: Yeah, thanks a lot, Patrick. Appreciate you having me too.
Patrick: Before we get into WILsquare, let’s start with you. Just give our audience a little bit of a context. How did you get to this point in your career at Wilsquare?
Drew: Great question. So my path to a career in private equity is not one that I think many in the industry would consider typical. You know, I think a lot of people begin their careers and fields like ibanking or public accounting and make their way to private equity. Instead, I started my career in football. My first job out of college was playing for the Pittsburgh Steelers.
And after a short stint in the NFL, I ended up moving to St. Louis and working for a wealthy family that was making direct investments in lower middle market companies. Along the way, was asked to be president of one of their portfolio companies. And at the age of 28, I suddenly had 65 employees and had no idea what to do. At that point in my life, I was really better prepared to read defensive friends that I was to manage people.
But after six years of operating the company, we lucky enough to sell the business to a strategic acquire and all things had a happy ending. So, you know, that experience of operating that business has provided a really nice foundation for me when I think about my career in mergers and acquisitions. Following the sale of that business, I resumed my career making direct investments in lower middle market companies. And in 2019, I was lucky enough to join the talented team at Wilsquare.
Patrick: Well, let’s go on to WILsquare. By the way, as we record this, we just completed the draft for the NFL and I can’t let this go without asking you. So you were drafted by the Steelers. Where were you drafted?
Drew: So I was drafted in the sixth round. And I always like to tell people that I was selected a few picks before Tom Brady. He was drafted in a different year, but I was drafted slightly higher in the NFL Draft. So that’s something I suppose,
Patrick: Well, there, that’s something a lot more of us cannot say, so good for you. Tell me about a WILsquare Capital. Before we get into that, I always like to learn a little bit about a firm by how it’s named. Because if you’re in the legal community or insurance, you’re boring. You just name your firm after yourself or the names of the founders. Tell me about WILsquare and, you know, its focus and so forth.
Drew: Yeah, so, you know, WILsquare’s name isn’t that innovative, but it’s really the first syllable in the two founders’ last names, Wilhite and Wilson, hence the name WILsquare. But, you know, more important than the shared syllables of the name is really, I think the values and the commitment to the lower middle market that I think everyone on our team shares. You know, we just really love this space and we do for a number of reasons.
You know, for me, I had the opportunity to operate a lower middle market business. And that gave me a profound appreciation for the challenges that leaders of businesses in this space face. It also taught me that, you know, value creation isn’t really achieved through simply buying low and selling high. It’s really more about rolling up your sleeves and doing the things that are necessary in order to build bigger and better businesses.
And so, you know, I really got to experience firsthand the responsibility that I think leaders of lower middle market companies have for their people and the importance that stewardship, when it comes to selecting the right partner for your business has. And so, you know, I just decided early in my career, this is where I wanted to spend my time. These are the businesses where I think there’s talented people and all kinds of opportunity. And I think everyone at our firm has a story like mine for why they fell in love with the lower middle market and the people in this industry.
Patrick: Well, I’m not a millennial, but there’s no doubt the belief of a lot of millennials is rather than just going out and finding a career and contributing, they want to make a difference. That’s a big focus for them. And when I think about that, if you really want to make a difference out there in American business, I think you’ll look to the lower middle market because there’s a vast number of these organizations out here. They are the biggest employers in terms of overall aggregate number of employees.
They are oftentimes the soul of a community that, where they serve. And it’s a shame because if you’re in the lower middle market, you’re not involved with mergers and acquisitions on a daily basis. You don’t have in house court dev facilities and resources. So when the off tuning comes or the idea comes to think about an acquisition, and everybody thinks about acquisitions either to be acquired or to acquire. They default to the brand names and the institutions out there.
They don’t know any better because they haven’t been around. And so unfortunately, when they turn to the larger institutions, what ends up happening is they’ll go to an institution who will overlook them. So they won’t be as responsive. The institution’s nothing wrong with them, but they don’t have the bandwidth to order, deliver a variety of different solutions that fit those little lower middle market companies.
And they may not be able to just roll up their sleeves and get in on a day to day basis and so forth. So they’re not going to be served there. But on the contrast side, also, the lower middle market company is going to end up either losing money or spending a lot more going to the institutions. And I think where they really get the true value is going to be with organizations like WILsquare, where you’re focused on that.
That is your passion and it’s where the best fit is. You have the resources available. The more the companies are aware of the great access to solutions that are provided by you that they didn’t even know existed, I think they’re better served. So any way that we can go ahead to promote and highlight organizations like WILsquare Capital that serve this community, I think is a win-win. So I really do appreciate that. Drew, tell us a couple of things on how WILsquare provides solutions on that lower middle market. What can a lower middle market company get from you that they couldn’t get elsewhere?
Drew: Great question, Patrick. You know, I think what they get from WILsquare is really a diverse set of perspectives. You know, our team is comprised of, you know, not only finance experts, but, you know, also people with operating backgrounds like myself. And I think there is a collective willingness to roll up our sleeves to actually add value to these businesses. We’re not financial engineers. Most importantly, I think cost is not our focus. You know, we look for opportunities to play offense and opportunities to invest in these businesses. We just think philosophically, a focus on costs is not an enduring strategy.
You can only cut so much cost. What is an enduring strategy is focusing on growth and that’s what we do. Sales and marketing is the first place we look for future investment in a business that we buy. We think about what new products, what new capabilities should this company have? How can it access new markets? And then, you know, we are lucky enough to have a pool of capital to put to work and so we also contemplate, you know, what acquisitions for a particular company could make sense?
And is there a value-creating combination that can be formed? And, you know, I think the other thing that’s important is a lot of operators of lower middle market businesses like to operate their business. And they don’t want to do it with someone looking over their shoulder. And I think that’s not what we’re about. I think we’re really about being a resource for these operators. And, quite frankly, we think if something makes sense to do in a business, we just ought to do it. There shouldn’t be a lot of bureaucracy. If it’s for the benefit of the business, we just ought to do it.
So when you think about private equity firms, I think there’s really a spectrum of firm involvement. There are some that are heavily involved in the operations of a company. There are some that are not involved at all. You only hear from them, you know, once a year. And then there are those who are somewhere in between. You know, I think we’re probably in that middle portion. We’re somewhere in between, who we think it’s important to invest in the management teams and ultimately let them run the business that they are the experts in. Truly, we simply aspire to be a resource for these management teams going forward,
Patrick: So you’re not fund it and forget it and you’re not micromanaging. So two extremes. You’re in the middle. And I’m sure it just varies from company to company, right?
Drew: Yeah, I think that’s right. I mean, I think we would never buy a business without having some sense for what we can bring to the table. So I think our swim lanes are generally well defined going in and we try and communicate that well with the management teams that we seek to partner with.
Patrick: Tell us what’s your ideal profile for a target company?
Drew: Sure. So as a firm, we focus on businesses generating between three and 10 million of EBITDA. And we like businesses that are situated in markets that are less cyclical and in industries that are growing, I would say we’re simply not a turnaround shop. You know, we’re not out there looking for bargains. We’re truly looking for healthy businesses that are growing and businesses that we can help continue to grow.
One of the variables we think is truly important is human capital. You know, it’s just a key variable in unlocking the value in any company. And so chemistry really matters to us. We found really great companies that are run by people where there just wasn’t a chemical fit and we opted to move on. But we just think it’s important that we all be able to row the boat in the same direction with the management team. And so we call ourselves a firm with Midwestern values because that’s the truth.
We don’t view ourselves as very fancy people. We really probably rather eat in a sports bar than a steak house. And I think we really feel a shared responsibility for others and humility to know what we don’t know. And to us, that’s just a simple way of characterizing people in the Midwest. And so that’s how we market ourselves. That’s how we think about ourselves. Are folks that care about others and have a humble sense about them along the way.
Patrick: That personifies the view I’ve always had had when I first came into M&A on my front was that it’s not Company A buying Company B, it is a group of people over here choosing to work and combine forces with a group of people over here. And to the degree that they can successfully integrate, get along, get their culture moving and handle those human skills, they’re going to successfully move forward. And the ideal is one plus one equals three. The whole is greater than the sum of its parts.
So it always comes down to people. And I think that anybody that overlooks that aspect and just focuses on either the financial or the technology is really missing something. Drew, tell us what experience have you had one of the tools that we use out here for mergers and acquisitions from the insurance world is a product called rep and warranty insurance. That has gained quite a bit of traction in the last couple of years, driven largely by private equity. And so I’m curious as your thoughts, good, bad or indifferent. Your thoughts on rep and warranty for deals.
Drew: You know, it really only takes one experience to make you a believer in rep and warranty insurance. And I was lucky enough or perhaps unlucky enough to have that experience quite early in my career. There was a breach wrapped in a small deal I was involved in where it led to a costly legal battle that distracted the management team and cost the business all kinds of opportunities.
Yeah, I think it’s pretty easy for a lot of people to view rep and warranty insurance as expensive. It is relative to very small deal sizes. But even if you aren’t a believer in the value that these policies can bring, more and more I think providers are being pretty innovative and generating products and policies that are a lot more affordable and tailored to the lower middle market. So, as a firm we view rep and warranty insurance as imperative.
Patrick: Now as we record this, we’re hopefully on the tail end of the Coronavirus pandemic sell in place process. We’re now beginning to start seeing states not only begin to open but having long-range plans for so. Hopefully, this will be over. But in light of how this is literally touched all the lives of people across the country here, give us your perspective on either for you or WILsquare Capital on deals you’re looking at or where you see the M&A environment going forward. Choose short-term long-term. Give us your thoughts.
Drew: Yeah, sure thing. First, I have to acknowledge I don’t have a crystal ball, so I’m not sure I have a ton of insight into what the world will look like. But I can tell you the way that we’re thinking about it is we think that the health of an industry is critical to look at. And we’re focused not only on how long will it take these industries to recover. I think we’re focused on a more important question, which is, how will these industries change?
What will be different? And that is where I think there is a ton of opportunity. It’s not about, you know, how long will it take people to get on planes again? It’s what will they be doing instead? Every industry has a has a different answer to that question. But that’s the question we’re focused on as we review new opportunities.
Patrick: I agree that it’s just going to be different. I think the other thing that people are really accepting is that things can change from week to week and you got to be okay with that. And if you’re okay with that, then you’re less encumbered in looking at opportunities out there. And I sincerely believe there are going to be quite a few of them. There is going to be a much more buyer-friendly market going forward.
And private equity firms have the dry powder. It never went away, to my knowledge. And there are firms like yours that have been most likely taking very, very good care of their portfolio companies and handling their concerns through this process. And the next step is going to be, you know, have an abundance mentality and look for opportunities out there. I think that there’s just quite a bit and just like you said, it won’t be the same, but it won’t be bad.
So hopefully, all of us optimists will be proven right. Of course, I also projected a month ago that Disneyland would be open the first week of May, so I might have been, yeah, I might have been a little optimistic there. But, you know, we’ll see about some other times though. Drew, how can our audience reach you?
Patrick: Drew, it’s been fantastic. Thanks again. It was just a lot of fun talking to you and I really deeply encourage folks to look for WILsquare Capital. They are a firm out there in the Midwest, but they’re not stuck there. They’re looking at a lot of stuff and couldn’t be happier to have you with us today.
Drew: Thanks a lot, Patrick. Appreciate it.
News came across the wire recently about a major lawsuit targeting a well-known Private Equity firm due to a post-closing dispute in a substantial M&A deal.
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